What is Economics? The study of how we use limited resources to meet unlimited wants This means...

ECONOMICS IN DEBATE

What is Economics?

The study of how we use limited resources to meet unlimited wants

This means that SCARCITY is at the heart of our understanding of modern economics

“Invisible Hand”

Ascribed to Adam Smith (who was not necessarily a capitalist)

Claims that markets direct individual self-interest towards socially desirable outcomes

Has become the foundation of free market capitalism

“Capitalism”

Economic system based on the private ownership of the means of production

Is driven by the production of goods and services for a profit

Types of capitalism Mercantilism Free-market economy Social market economy State-ownership Mixed economy

“Socialism”

Economic system based on collective ownership of the means of production

Is driven by the production of goods and services to meet social needs

Covers a variety of sociopolitical systems Anarchism (libertarian socialism) Authoritarian communism Democratic socialism Syndicalism

“Supply & Demand”

Describes how many markets determine prices

If supply increases relative to demand, prices DECLINE…

If supply decreases relative to demand, prices INCREASE

If demand increases relative to supply, prices INCREASE

If demand decreases relative to supply, prices DECREASE

“Elasticity”

Describes the degree to which one economic variable affects others

ELASTIC variables exhibit large responses to relatively small changes in another variable

INELASTIC variables exhibit small responses to relatively large changes in another variable

“GDP”—Gross Domestic Product Value of expenditures on final goods and

services U.S. GDP has increased steadily—when you

hear about “economic growth”, they are usually referencing GDP

‘Recession’ means 6 months (2 quarters) of negative growth

GDP as a measure of economic performance can be misleading—non-monetarized labor, shift of non-monetarized labor into the market

“Keynesianism”

School of economic thought arising from the ideas of John Maynard Keynes

Claims that markets often produce inefficient outcomes that can/should be corrected by government intervention

Interventionary instruments include Fiscal policy Monetary policy

Debate about effectiveness usually centers on interpreting the effectiveness of FDRs response to the Great Depression

“Supply Side Economics”

Theory that economic growth should be stimulated by lowering barriers to production

Generally means lowering tax rates on income (individual and corporate) and capital gains

Strongly associated with “Ronald Reagan” and “trickle down economics”

“The Markets” Commodities: exchange, in bulk, of

everything from orange juice to petroleum—include both ‘spot’ and ‘futures’ contracts

Currency: exchange of different national currencies

Debt: issuance and trading of bonds (promises to pay in the future)

Equity: issuance and trading of stocks (shares in a company)

“Competitiveness”

Describes the ability of a particular group (company, sector, nation) to sell goods in a given market RELATIVE to other groups in the same market

Competitiveness expresses profitability, which is directly tied to income, wealth, etc.

EXP: Saudi vs. tar sand oil production

“Productivity”

Describes the efficiency of production

Productivity increases when greater output becomes possible with the same input

Often couched in terms of “worker productivity”, but is also a measure of technological efficiency

Growth rates of 1-2% are good

“Exchange Rates”

Rate at which one currency is exchanged for another and/or the value of one nation’s currency in terms of another currency

Appreciation: increase in value of a currency relative to others—benefits consumers and hurts producers, ceteris paribus

Depreciation: decrease in value of a currency relative to others—benefits producers and hurts consumers, ceteris paribus

Currencies typically are pegged, floating, or mixed

“Employment Rate”

Is usually expressed in terms of ‘unemployment’

The official unemployment rate is 8.2%--percentage of the workforce that is seeking employment but is unable to find a position

Including the number of people who are no longer actively seeking employment takes the rate up to 15%+

‘Normal’ unemployment levels are between 4 and 6 percent

“Inflation” & “Deflation”

Inflation: rise of general level of prices of goods and services over time

Deflation: decline of general level of prices of goods and services over time

PREDICTABILITY is key, although economies tend to do best with relatively low, steady inflation (1-4%)

Deflation, over any extended period, and hyper-inflation can quickly wreck economies

“Interest Rates”

Rate at which interest is paid by a borrower to a lender for the use of money

Are important because they directly affect consumer spending, the housing market, etc, and thus impact all financial markets

Key interest rates are: Federal funds rate (rate for overnight,

uncollateralized loans between banks) Prime rate—general FFR+3%

Are generally linked to inflation on an inverse basis

Stagflation!

“Confidence” Consumer confidence: expression of

consumer sentiment about the current and future status of the economy

Often used as a predictor of future consumer behavior

Particularly important because consumer spending makes up over two-thirds of the economy

Business confidence: expression of business sentiment about the current and future status of the economy

Often used as a predictor of future business behavior (hiring, tech investment)

“Income (in)Equality”

Expression of the relative distribution of income (and wealth) across the population

Is highly variable, both across time and between countries

Income inequality is growing rapidly in the U.S.

National Debt

Governments usually borrow through the use of bonds

U.S. national debt has two parts Public debt—securities held by non-

federal investors ($11T) Inter-Government debt—IOUs held by

federal accounts on other federal entities ($5T)

Influences interest rates, and more broadly, market sentiment

Oil Prices

Influence the economy—a little bit

Dedev

Premise 1: economic collapse is inevitable

Premise 2: collapse sooner is better than collapse later