Transcript Unit 7 Trade and the Business Cycle

Promoting and Protecting
Competition
How does the government work to ensure
that free markets are free and that
consumers benefit from competition?
Government Regulation of
Competition
 Maintaining Economic Competition: Markets work the best
when there are lots of buyers and lots of sellers. This
fosters competition which is good for consumers.
 Monopolies – market controlled by one business.
Often
results in high prices and low quality products
.
- Sherman Anti-trust Act (1890) – banned illegal
business combinations and monopolies
- The government has used the Sherman Anti-trust Act several times to
prevent a single business owner from controlling prices and products.
JP Morgan’s Northern Securities in 1904
John D. Rockefeller’s Standard Oil in 1911
AT&T in 1974
Microsoft in 2004
Government Regulation of
Competition
 Natural monopolies –
LEGAL: Local utilities like
water, electricity, natural
gas, cable, etc. –
Competition isn’t efficient,
so businesses are allowed
to be monopolies but are
heavily regulated by the
govt. to ensure proper
market practices.
 Oligopolies – market
control by a few – LEGAL
- Car manufacturers, oil
companies, etc.
Government Regulation of
Competition
 Mergers – combination of
businesses – LEGAL as long as
the merger does not create a
monopoly. The govt. can prevent
a merger that will cause one.
(Food Lion in NC)
- Vertical- merge different
levels/stages of production.
Ex: Hog farm & trucking company
- Horizontal – merger of “like”
companies for efficiency.
Ex:
BellSouth/Cingular/SBC/AT&T
- Conglomerates – merger of
various businesses for profit
Ex: GE – electricity, insurance,
real estate, NBC
International Trade
 One way for the government to promote
competition is ensure easy interstate and
international trade.
 When there are more available products and
more businesses, consumers are usually
better off.
 Why do countries specialize?


Certain countries are very good at producing
certain products and terrible with others.
The US can’t produce bananas. Most
developing countries can’t produce airplanes
and cars.
International Trade
 Economic Interdependence: No person or
nation is truly self-sufficient. We must rely on
each other (people and nations) to produce
all of the things we want and need.
 Effects of Interdependence:


Environmental and Political problems in one
country can cause economic problems in
many other countries.
Governments must enact policies that allow
their citizens access to products made in other
countries.
International Trade Policies
 Free Trade Agreements:
Nations can legally agree
that they will limit or prevent
trade between the two
nations.
 NAFTA
 EU
 Free Trade Issues:
Companies can more easily
move their factories to
another country. Domestic
businesses my be hindered
by increased trade with
foreign companies
International Trade Policies
 Protectionist Trade
Policies: Many nations
limit imports to protect
domestic producers of
the same product.


Tariffs: Taxes on
imports - Make prices
for the imported goods
more expensive
Quotas: Limits on the
number of specific
goods that can be
imported. Ex:
Japanese Cars
National, State, and
Local Economy
Essential Questions: What are the major
industries in the United States and the
local economy? What steps can the
government take to protect the local,
state, and national economies?
United States’ Economy
World’s richest country the USA finished third in exporting last year. America
shipped $1.48 trillion worth of goods around the globe, led by the top 10 items in
the list below.
 Major US Industries:
North Carolina Major Industries
 Agriculture (Aquaculture)
 Forestry
 Industrial – manufacturing
 Furniture
 Textiles (cloth)
 Government Sector – specifically defense industry
State Economy - Agriculture
 North Carolina is considered to be a high
producer of tobacco, cotton, corn, soybeans,
peanuts, and wheat.
 Our agricultural industry along with food, fiber
and forestry contributes $70 billion annually to
the state’s economy.
 It is also responsible for employing 17% of
residents and 18% of the overall state income
State Economy - Industrial
 North Carolina over the past 20 years has
become home to some thriving industries.

Information and software technology, defense, automotive,
financial services, green and sustainable energy,
aerospace and aviation, biotechnology and
pharmaceuticals.
 NC is now considered to be more of a global
economy than our previous traditional economy
 GDP is the 9th highest in the U.S. at $424.9
billion
 There are more bank headquarters are located in
Charlotte than all but 1 other U.S. city
Local Economy: Wake County
 Out of all 100 counties, Wake
county ranks 47 in overall
agricultural sales.
 Corn, tobacco, wheat, and
soybeans are some of the
largest industries in Wake
County
 Aside from agriculture, Wake
County is also home to RTP
 RTP is a major industrial hub
including industries such as
Biotechnology and Life
Sciences, Clean and Green
Energy, Banking, Gaming,
Information Technologies, and
Wireless Communications.
Impact of Outsourcing
 Outsourcing – when companies move
jobs to other countries (or states) where
labor is cheaper in order to reduce
production costs.

Negatives for NC industries – As more NC
industries outsource their jobs to countries
with lower labor costs, our citizens lose
their jobs and incomes. As individuals lose
their incomes, the government loses out on
collecting income taxes, therefore the overall
NC economy suffers.

Positives for NC – (very few) – some states
with higher costs of living/production have
outsourced their manufacturing jobs to the
South, and states like NC, because they
can pay their workers lower fees

NC is a Right to Work State – so we do not
have Unions which often drive up the
wages/salaries for employees
Business Cycle
Essential Questions: Which indicators should
members of the government look at when
making economic policies? Why? How do we
know how the economy is doing?
Gross Domestic Product
 Gross Domestic Product – the total amount of new/final goods
and services produced by a nation in a given year (If GDP is
increasing, it means the economy is good.)
G
D
P
2
1
3
4
TIME
1. Expansion - GDP is increasing;
a. Inflation - increase in prices of goods and services over time.
(People have more $ to spend, therefore demand for all goods and
services increases, which causes prices to rise as well.)
2. Peak - end of a period of expansion; the highest point of economic
output
Business Cycle
3. Contraction - After a peak, business activity begins to slow or contract
a. If this becomes severe, it becomes a recession – businesses fail, people lose
jobs, and profits fall
b. Recession – no growth in GDP for at least 6 months
c. Depression – an extended recession; very rare
d. Deflation - decrease in prices of goods and services over time. (People have
less $ to spend, therefore demand for all goods and services decreases, which
causes prices to drop.)
4.
Trough - Lowest point in a the economic cycle
a. High unemployment; people can’t buy goods and services
b. Government intervention necessary
c. When GDP begins to grow again, we call it a recovery
Economic Indicators
How do we know how our economy is
doing?
Economic Indicator
Description
Gross Domestic Product
(GDP)
If GDP is increasing, economy is doing well;
If GDP is decreasing, economy is not doing
well.
Consumer Price Index
A measure of the average change over time
in prices paid by consumers for goods and
services (measures inflation – if prices are
going up – the economy is doing well.)
Producer Price Index
A measure in the average change over time
in the prices that producers earn when
selling their goods and services (if PPI is
going up, producers are making more
profits, the economy is doing well.)
Unemployment Rate
A measure of people that cannot find work –
if the unemployment rate is increasing, the
economy is bad
Review Questions
For each of the following scenarios, indicate
whether the situation is describing a time of
economic expansion, contraction,
depression, or recovery.
Economic Scenarios
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Stock prices plummet and unemployment is wide spread.
Stores continue to place large orders to keep up with growing
demand.
The number of banks loaning money to prospective
homeowners reaches an all-time high.
Business surpluses accumulate because demand has
decreased.
New high-tech businesses begin hiring many of the unemployed.
Lowered prices lead to an increase demand for certain goods
and services.
Consumers begin to cut back on spending on luxuries such as
entertainment.
There is a boom in vacation real estate investments.
A large number of major corporations go out of business.
Car dealers lower prices and offer rebates to attract customers.
Economic Scenarios Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Stock prices drop suddenly and unemployment is wide spread.
Contraction
Stores continue to place large orders to keep up with growing
demand. Expansion
The number of banks loaning money to prospective homeowners
reaches an all-time high. Expansion
Business surpluses accumulate because demand has decreased.
Contraction
New high-tech businesses begin hiring many of the unemployed.
Recovery
Lowered prices lead to an increase demand for certain goods and
services. Recovery
Consumers begin to cut back on spending on luxuries such as
entertainment. Contraction
There is a boom in vacation real estate investments. Expansion
A large number of major corporations go out of business.
Depression
Car dealers lower prices and offer rebates to attract customers.
Contraction
Measuring the Economy
and Economic Indicators
How can we determine how the economy is
doing overall, and what does the government do
to try to help when things are not going well?
The Business Cycle
 Phases of the business
cycle: The economy goes
through regular fluctuations
where sometimes things are
very good, and sometimes
they are very bad.
 Peak: highest phase prosperity and low
unemployment. Economy
“expands”more goods and
services produced
 Trough: lowest phase high unemployment /
decreased business activity.
Economy
“Recedes/shrinks” fewer
goods and services
produced
Business Cycle continued…
 Recession: Downward
phase; declining GDP
for at least 6 months/ 2
quarters.
 Depression: prolonged
(several years) period of
no growth or decline.
No specific definition.
Causes of business
cycles
 Political and social
upheavals (war,
election, etc.)
 Increase or decrease in
consumer confidence
Economic Indicators
 Forecasting business cycles:
 Gross domestic product: the total value of all goods and




services sold in a nation in a year. Does not measure
changes in quality
- 2010 US GDP: $14.62 Trillion
- China: $5.75 Trillion, Japan: $5.39 Trillion,, Germany:
$3.3 Trillion, India $1.43 Trillion
- Per Capita GDP: GDP per person good indicator of
Standard of Living. US: $47,100, China: $4,300
- Real GDP: adjusted for inflation (more on this later)
Housing starts/ Consumer spending: more new houses
means things are good. Less consumer spending means
things are bad
Unemployment rates
Inflation
Stock Market
Unemployment
 Measures of Employment
- employed: actively working
- unemployed: those who do not
have a job and ARE seeking
work.
- not in labor force: persons
without jobs NOT seeking work
- Civilian Labor Force: All
people 16 or older in a nation
who are working or looking for
work.
 Unemployment Rate:
Percentage of people in CLF who
are not working
- The unemployment rate tends
to rise quickly in recessions and
fall slowly in expansions.
Inflation/Deflation
 Measuring inflation -
Consumer Price
Index survey of the
change in price of 400
commonly bought
products in the country.
 If the price of items has
gone up on average, we
are experiencing
inflation - A general rise
in prices, meaning value
of the dollar decreases
Effects of Inflation
 creditors - paid back in
devalued dollars (BAD
for creditors)
 Wage/salary increases
– must match inflation
 cost of living increases
 People on a fixed
income, such as those
retired or on Social
Security, are hurt the
most by inflation
Stock Market
 Individuals buy pieces of ownership in corporations
called stocks
- Stockholders make money two ways
1) Receive a portion of the company’s profits based
on their percentage of ownership Dividends
2) Sell stocks at a higher price than they were
bought for capital gains
 Stocks go up or down in price because people are
willing to pay more or less money for them. This
decision is based on assumptions about how well
the business will do in the future.
 Stock Indexes: look at general trends of many stocks
Ex: Dow Jones Industrial Average; S&P 500
- Stock Indexes tend to be good indicators of how
confident people are in the economy.
The Government’s Role in the Economy
 Providing Public Goods: the
government provides many
goods and services to
consumers that are not
provided by private businesses.
 Private goods – consumed by
only 1 person, only bought by
one person. You must directly
pay for it to use it.
- Pizza, t-shirts, lamps
 Public goods – consumed by
many. You can use it without
paying for it each time. Govt.
provides these because they
are seen as necessary but it is
difficult to get people to pay for
them.
- Libraries, parks, street lights,
roads
More Government Involvement
 Government Safety Net
- Externalities – unexpected side
effects of economic activity
- Govt. provides public goods for
positive externalities. They also
unintentionally cause a positive
externality - Govt. also works to
prevent negative externalities,
especially pollution caused by
businesses

Protecting consumers/environment
 Advertising/product safety: ensures
that companies are truthful (Federal
Trade Commission) and are
producing safe products (FDA)
- Recall – removing/changing a
dangerous product
Fiscal and Monetary
Policy
What actions can be taken by the
government to affect the economy?
Fiscal Policy
 Fiscal policy is how we collect and spend
money.
 In theory, the best thing to do in a recession
is to both cut taxes and increase govt.
spending. (Keynesian Economics)
 Why cut taxes? This gives people more
income to spend, which will hopefully
stimulate the economy due to increased
demand
 Why increase govt. spending? Provide more
jobs to unemployed people, so they have
more money to spend.
Fiscal Policy
 Cutting taxes AND increasing spending is
impossible without putting the nation into serious
debt.
 This issue is one major difference between
Democrats and Republicans.
- Democrats prefer to increase govt. spending
hoping to employ more people and encourage
them to spend their income. (FDR’s New Deal)
- Republicans prefer to cut taxes hoping to
stimulate investment in the economy from the
top which will result in more jobs being created.
(Reaganomics)
Problems with Fiscal Policy
 Because Fiscal policies are set by the
Congress, it often takes a long time for them
to take effect.
 The Congress often has trouble making quick
decisions because of the different
perspectives/interests of members.
 Both possible actions also assume that
people will spend the extra income that they
receive. If they choose to save their money
instead, the economy will not be stimulated.
The Federal Reserve and Monetary
Policy
 The Federal Reserve (Fed) serves as the
nation’s central bank.


It is designed to oversee the banking system.
It regulates the quantity of money in the
economy.
The Federal Reserve and Monetary
Policy
 Monetary policy affects the money itself


The money supply refers to the quantity of
money available in the economy.
Monetary policy is the setting of the money
supply by policymakers in the central bank.
 The Fed works to affect the economy by
changing the supply of money.


More money tends to stimulate the economy
Less money tends to slow the economy
The Fed’s 3 Tools of Monetary Control
1. Open-Market Operations (OMOs): the
purchase and sale of U.S. government bonds by
the Fed.
 To increase money supply, Fed buys govt bonds,
paying with new dollars.
…which are deposited in banks, increasing
reserves
…which banks use to make loans, causing the
money supply to expand.
 To reduce money supply, Fed sells govt bonds,
taking dollars out of circulation, and the process
works in reverse.
The Fed’s 3 Tools of Monetary Control
2. Reserve Requirements (RR).
Affect how much money banks can create by
making loans. The RR is how much of your
money the bank is required to keep on hand
and not loan out
 To increase money supply, Fed reduces RR.
Banks make more loans from each dollar of
reserves, which increases money multiplier and
money supply.
 To reduce money supply, Fed raises RR,
and the process works in reverse.
 Fed rarely uses reserve requirements to control
money supply: Frequent changes would disrupt
banking.
The Fed’s 3 Tools of Monetary Control
3. The Discount Rate:
the interest rate on loans the Fed makes to
banks
 When banks are running low on reserves,
they may borrow reserves from the Fed.
 To increase money supply,
Fed can lower discount rate, which encourages
banks to borrow more reserves from Fed.
 Banks can then make more loans, which
increases the money supply.
 To reduce money supply, Fed can raise discount
rate.
Effects of Monetary Policy
 The Fed most commonly uses Open Market
Operations (buying and selling bonds) to
affect the supply of money.
 If the economy is doing poorly, the Fed uses
Monetary policies to attempt to stimulate the
economy.
 If the economy is doing really well, the Fed
uses Monetary policies to slow things down.
This prevents inflation and hopefully prevents
a massive over-correction like we saw in
2008.
Effects of Monetary Policy
 Monetary Policy is often more effective then
Fiscal Policy in the short-term because the
Fed can enact policies immediately.
 The Fed is also independent of the
Congress, so they can make decisions that
are more unpopular with voters, because
they cannot be voted out of office.
 This is potentially good for the economy, but
not so good for a democracy.