Transcript Chapter 23 Govt and the Economy

Chapter
23
Government
and the
Economy
Roles
of the
Government
in the
Economy
Roles of the Government in the
Economy
1.
Providing Public Goods
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Most goods and services are private goodsonce consumed by one individual no other
individual can use it.
subject to the exclusion principle- you only
can use it if you pay for it.
gov’t has the responsibility to provide public
goods-goods anyone can use. EX: roads,
parks, libraries
Roles of the Government in the
Economy
1.
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Providing Public Goods (continued)
This follows the non-exclusion principle use by one person does not prevent others
from using it.
If the government didn’t provide these, they
probably would not exist due to the cost and
lack of profit potential
These are paid for through taxes and user
fees
Roles of the Government in the
Economy
2. Dealing with Externalities
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An externality is the unintended side affect
of an action that affects someone not
involved in that action
These may be both positive or negative
EX: A company gives it’s workers a holiday
bonus, which has the side effect of increasing
the level of Christmas shopping in the local
stores
Roles of the Government in the
Economy
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2. Dealing with Externalities (continued)
Gov’ts provide public goods to create positive
externalities. EX: Good roads increase interstate trade
Sometimes these are unintended EX: Putting a
man on the moon led to the development of
modern computers
The gov’t also tries to prevent negative
externalities EX: Laws against chemical
dumping which in turn pollutes water supplies
Roles of the Government in the
Economy
3. Maintaining Competition
 The gov’t tries to keep high levels of
competition to allow the laws of supply
and demand to work
 It must prevent monopolies-when a
sole provider of a product can control the
market
 The gov’t does this through antitrust laws
EX: Sherman Antitrust Act of 1890, and
the Clayton Antitrust Act
Roles of the Government in the
Economy
3. Maintaining Competition (continued)
 These laws were designed to prevent any
business combination that prevented competition
 These laws especially watch mergers-when two
companies join together. As long as the merger
doesn’t take up too much of the market they are
allowed
 Sometimes if the merger will wipe out too much
competition, either the Justice Department or The
Federal Trade Commission can prevent it. EX:
OfficeMax and Staples
Roles of the Government in the
Economy
4. Regulating Market Activity
 The gov’t has created many agencies to
watch over the business world
Roles of the Government in the
Economy
Not all monopolies are prevented
 A natural monopoly is where it makes
sense to have only one company provide a
certain service EX: Cable, local phone,
water, sewer, natural gas, electricity
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Roles of the Government in the
Economy
4. Regulating Market Activity(con’td)
 In exchange for allowing these
monopolies, the gov’t has the right to
regulate these closely. EX: The gov’t must
approve all rate hikes
 The gov’t also regulates the information
that companies give out
 All products have to label their ingredients
Roles of the Government in the
Economy
4. Regulating Market Activity (con’td)
 The FTC regulates all advertising claims
for truth in advertising
 The FDA makes sure food and drugs are
safe
 The Consumer Product Safety Commission
makes sure the products you use are safe
Business Cycle
Can be graphed as a continuous wave
 We know the pattern, just not the length
of each stage
 This graph uses real GDP to measure the
state of health of the economy
 When real GDP rises, the economy is good
 When the real GDP drops, the economy is
doing poorly
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The Business Cycle
Stages of the Business Cycle
Expansion:
When real GDP goes up
 Normally last longer than recessions
 Eventually peaks and then goes down
 This is when people are getting jobs and
raises
 Longest ever was from March 1991 to
March 2001
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Stages of the Business Cycle
Recession/ Contraction:
When real GDP goes down for 6 straight
months
 Tend to be shorter than expansions
 This is when people lose jobs and the
economy declines
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Other Economic Indicators
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Unemployment-Measures the amount of people
over 16 that are out of work and actively seeking
a new job
Tends to rise in recessions and drop in
expansions
Anything under 3% is a good thing
A 1% rise in unemployment rate results in a 2%
drop in the total income of the economy EX: In
2001 a 1% rise was a loss of $204 Billion in total
income
As this rate rises, there is less activity in the
economy, which leads to even more
unemployment
Other Economic Indicators
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Fiscal policy-how the gov’t spends it’s money
and taxes it’s citizens
In times of recession, the gov’t tries to get
money back in people’s pockets, therefore it will
cut taxes in a recession
It will also increase gov’t contracts to encourage
the hiring of new workers
In times of expansion, the gov’t needs to slow
spending to stop inflation-a general rise in
prices
It will also cut back on gov’t contracts and raise
taxes
Other Economic Indicators
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Inflation
This is measured by the consumer price index
(CPI) which takes the average price for 400
products each month, if it increases we have
inflation, if it decreases we have deflation-a
drop in prices
Inflation hurts people on a fixed budget the most
It reduces the value of savings accounts, as they
now will buy less
Also distorts the value of products, leading to
over speculation and a lack of investment in
factors of production
Stocks and the Stock Market
Why Stock Prices Change
 Investors want to buy stock that will get
them profits either through dividends or a
capital gain-selling the stock for a profit
 Stock prices are determined by supply and
demand
 Factors such as changes in sales, profits,
rumors of a takeover, or a new product
can change the value of the stock
Stocks and the Stock Market
Stock Market Indexes
 A stock index is a statistical measure that tracks
stock prices over time
 The Dow Jones Industrial Average measures 30
major stocks each day. If it goes up, the value of
stocks in general are said to be better.
 Standard and Poor’s (S & P) tracks 500 stocks
daily
 Not only tell us the volume, but the overall
expectations of investors
 If prices tend to rise, this is a “bull” market
 If prices fall, it is a “bear” market
Stocks and the Stock Market
Stock Exchanges
 Where stocks are bought and sold
 Done through a stock broker or on the
internet
 Most famous is the New York Stock
Exchange (NYSE)
 There is also the American stock Exchange
or the electronic exchange called NASDAQ
 Also major exchanges in Sydney, Tokyo,
Singapore, Moscow, and London
Government and Poverty
Three influences on Income
1.
2.
3.
Education
Family wealth
Discrimination
Government and Poverty
Poverty
In 2006, a single person who made less
than $9,800 a year ($27 dollars a day)
was in poverty
 Today there are 37 million people who fall
in this category and are considered in
poverty. This number is growing
everyday!
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Welfare Programs
Food stamps
 Designed to eliminate hunger and promote
healthier diets
 Give people electronic debit cards to
purchase approved items
Women Infants and Children (WIC)
 Designed for single women with children
 Helps with nutrition and basic health care
Income Assistance
Supplemental Security Income (SSI)
 Payments to people over 65 to help with
retirement
 Also gives payments to disabled citizens no
matter what age
 Payments to children who have lost their parents
Temporary Assistance to Needy Families
(TANF)
 Aide to families that have lost their incomes due
to death, disability, or other type of tragedy
 Number of months are limited, only meant to be
a short term solution
Workfare
Term to describe programs that require
welfare recipients to exchange some labor
to receive any benefits
 Also teach people necessary skills to find
permanent work
 Done at the state level
 Usually some form of community service
work
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Tax Policies
Progressive Income Tax
 The tax rate is lower for people with lower
incomes
 Gives families more of their income to
spend on the necessities of life
Earned Income Tax Credit (EITC)
 Tax credits to families in low income
brackets
 Also tax breaks for the number of children
you have