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The Political Economy
“The Economy” It is not a monolithic institution – it is a
collection of billions of individual choices based on people’s incentives
The Political Economy – how politics and economics interact, and how they balance freedom and equality (conflicting values)
Components of Political Economy Every regime’s ideology determines the relationship
the state will play in regulating the economy Markets – interaction between supply and
demand that functions to allocate resources Freely allow individuals to buy, sell, and trade
what they produce for what they will consume Sets values, or “prices” for these goods and
services Markets arise spontaneously, and are difficult for the
state to control
Components of Political Economy Property – ownership of goods and services
State can choose to play a role in protecting property rights – the right to sell property freely, or to not have it taken away In LDCs, frequently property exists without a
fundamental protection of property rights, due to the state’s inability to monitor instances of fraud
Components of Political Economy Public Goods – goods provided and/or secured by
the state Examples (universal): Roads, lighthouses, the
military Examples (in some cases)
Health care in Britain, Canada Oil in Nigeria and Saudi Arabia Most businesses in Cuba
Components of Political Economy Social Expenditures
Commonly called “The Welfare State” – redistribution of wealth through government taxing some, and paying others
Typically provided to the elderly, the unemployed, the poor, and the disabled
Often a subject of political battle, due to the question of who benefits from expenditures
Components of Political Economy Taxation
Means to provide for public goods and social expenditures
Subject of political battles, determined partially by ideology toward the role of the state
Tax Rates as % of GDP (2008) Sweden: 54.2 % Denmark: 48.8 % Finland: 46.9 % Belgium: 45.6 % France: 45.3 % Austria: 43.7 % Italy: 42 % Netherlands: 41.4 % Norway: 40.3 % Germany: 37.9 % United Kingdom: 37.4 %
Russia: 36.9 % Canada: 35.8 % Switzerland: 35.7 % New Zealand: 35.1 % Australia: 31.5 % Ireland: 31.1 % United States: 29.6 % Japan: 27.1 % China: 17% Mexico: 9.7% Iran: 7.3% Nigeria: 6.1%
Components of Political Economy Money, Inflation, and Unemployment
States create and manage the money supply through a central bank
Money is created by the rate at which banks make loans Low interest rates encourage more creation High interest rates discourage creation
Creation of too much money in effort to stimulate the economy and reduce unemployment can cause inflation
Slowing the growth of money to control inflation can slow economic growth and cause unemployment to rise
Components of Political Economy Regulation – rules or orders to set the
boundaries of given procedures States can ban production or sale of goods, set
safety requirements, outlaw monopoly control, etc.
Trade – access to goods and services from foreign states States can allow open trade, or restrict it through
tariffs, quotas, and other non-tariff barriers
Arguments for and Against Trade Why Regulate Trade?
Generate state revenue Foster local industry Protect local jobs Keep wealth within the
country
Why Not? Promote competition Keep the cost of goods
and services low Stimulate domestic
innovation in areas of comparative advantage
Political-Economic Systems Liberalism – rooted in capitalist ideology of
private ownership, minimal state regulation and intervention beyond protection of property rights Emphasizes individual freedom Examples: U.S., Great Britain Laissez-Faire – philosophy claiming the economy
should be left to do what it wishes
Political-Economic Systems Social Democracy – eliminate extremes of too
much freedom, too much equality Accepts a role for both private property and
public ownership, freedom and regulation Examples: Most European countries
Political-Economic Systems Communism – believes freedom only comes
from total economic equality, uses the state to achieve that goal Rejects private ownership of property Nationalization – bringing private industries
under state control Examples: China (though there is a massive
transition ongoing), former Soviet Union
Political-Economic Systems Mercantilism – emphasizes needs of the state
to grow wealthy and powerful above the needs of society Emphasizes neither freedom nor equality Parastatals – industries nationalized based on
some perceived need for international competitiveness
Examples: Japan, India, South Korea
Measurements of Economic Performance GDP – Gross Domestic Product
Total dollar value of all goods and services GDP per capita shows standard of living of the
average person PPP – Purchasing Power Parity
Adjusts GDP for relative buying power in each country, since cost of living differs from place to place
Measurements of Economic Performance Gini Index
Formula to measure economic inequality in society
High Gini coefficient = more inequality, lower Gini coefficient = less inequality
HDI – Human Development Index Attempts to measure well-being, in addition to
wealth
GDP for the 6 Countries U.S. - $14.26 Trillion China - $4.4 Trillion United Kingdom - $2.67 Trillion Russia - $1.68 Trillion Mexico - $1.09 Trillion Iran - $0.34 Trillion Nigeria - $0.21 Trillion
GDP per capita (PPP) for the 6 Countries U.S. - $46,859 China - $5,693 United Kingdom - $36,523 Russia - $15,922 Mexico - $14,560 Iran - $11,250 Nigeria - $2,134
Gini Coefficient for the 6 Countries U.S. – 40.8 China – 44.7 United Kingdom – 36.0 Russia – 31.0 Mexico – 54.6 Iran – 43.0 Nigeria – 50.6
HDI Ranking for the 6 Countries U.S. – #8 China – #94 United Kingdom – #12 Russia – #57 Mexico – #53 Iran – #101 Nigeria – #151
Global Trends in Political Economy 2 MAJOR movements
Globalization – world is increasingly interconnected due to technology and trade
Liberalization – free markets are more prevalent than ever before in history, and developing nations often see liberalization as the key to growing wealth