7. Gross Domestic Product (GDP)
Gross National Income (GNI)
Purchasing Power Parity (PPP)
Unemployment
Inflation
8.
9. LAISSEZ-FAIRE CAPITALISM
Government has no
economic role in economy
REGULATED CAPITALISM
Government may step in
and regulate economy to
safeguard individual rights
13. Sound fiscal policy
Emphasis on deficit
spending
Borrowing money
Result?
People have $
Purchase goods/services
Economy reboundJohn Maynard Keynes
14. Politically Desirable
New Programs = Re-Election withoutTaxes!
Scrutinized by 1970s
Western nations facing stagflation
Mo Money, Mo Problems?
15.
16. Milton Friedman
Fiscal policy does NOT
stimulate growth
Emphasis on monetary policy
Justification for move to
free-market economy
Known as neoliberalism
“Conventional wisdom” until
“Great Recession” of 2008-
2009
17.
18. Appreciation vs. Depreciation
Fixed vs. Floating Exchange Rate
Fixed: Stable currency; International interests
Floating: Fluctuating currency; Domestic interests
19. Appreciation vs. Depreciation
Fixed vs. Floating Exchange Rate
Fixed: Stable currency; International interests
Floating: Fluctuating currency; Domestic interests
Editor's Notes
The following lecture slides and notes are the sole materials of Austin Trantham.
You may NOT copy or reproduce this material in any form without express permission from the author.
Chapter Four centers on the issue of political economy.
One definition of political economy is the study of how the relationship between politics and economics shapes the balance of freedom and equality.
This diagram details the interrelationships between political and economic institutions and processes. A country’s political system may very well affect their economic structure, and vice versa. Democracies operate under a capitalist philosophy while authoritarian nations may embrace socialism.
So-called “Z”-variables can modify or directly affect a cause-and-effect relationship between the “X” (independent) variable and the “Y” (dependent) variable. In this case, geography and culture could play a role in determining the political or economic path a given country may take.
We turn now to understanding how to characterize the issue of political economy.
Based on our discussions so far in class, how would you answer this question?
This slide lists a few important economic factors that can serve to answer the preceding question:
Gross Domestic Product (GDP): Total value of goods and services produced within a given set of borders.
Gross National Income (GNI): Total income of certain country, whether produced at home or abroad.
Purchasing Power Parity (PPP): Income adjusted to account for cost of living changes.
Unemployment: Lack of access to steady work.
Inflation: Increase in prices of goods and services.
Please also study the differences between:
1) Employment vs. Underemployment vs. Unemployment
2) Inflation vs. Deflation vs. Hyperinflation
Table 4.3 in your textbook (p. 81) discusses the State-Market Debate.
How much authority should the government have over economic decisions versus individuals?
Understand both sides of this important argument.
How much authority should the government have over economic decisions versus individuals?
This slide answers this question by addressing the two main forms of capitalism.
After learning about the two main sides to this debate, which do you favor?
Prior to the Great Depression, Western nations engaged in minimal economic intervention.
The cycle would proceed as follows:
(1) Unemployment would first occur due to economic downturn.
(2) Wages would go low enough to hire cheap labor.
(3) Business begin investing and hiring people again.
(4) New cycle of economic growth eventually created.
Keynesian theory was proposed by British economist John Maynard Keynes.
He believed that a sound fiscal policy could help a government revive demand and re-stimulate the economy.
This goal would be achieved through deficit spending, or government spending more than is collected through revenue. You could also achieve economic growth through increased spending by borrowing money. This money would create new programs and employment opportunities.
Theoretically, people would have money. They could then purchase goods and services. This, in turn, would lead to an economic rebound. Once downturn concluded, government could pay off debt it had occurred while deficit spending.
Keynesianism offered governments a way out of Great Depression.
The theory became politically desirable, because politicians could create new programs for their constituents which could help them win re-election--without having to raise taxes.
However, the notion came under scrutiny by the 1970s as Western nations faced simultaneous levels of high unemployment and high inflation—a situation called stagflation.
Borrowing more and more money seemed foolish, as it just would lead to more economic problems in the future.
Monetarist theory was developed by American economist Milton Friedman.
Argued that fiscal policy does NOT stimulate economic growth. Instead, excessing government borrowing crowds out private sector borrowing. Businesses cannot invest, and as a result, long-term growth is stifled.
The key to economic growth is monetary policy. This is defined as amount of money in circulation and interest rate.
Inflation is caused by excessive money supply and high levels of govt. borrowing. These are two things Keynesian economics is based on.
Monetarism became a justification for move toward a free-market, business-friendly economic policy throughout world. It became known as neoliberalism. This idea reduces the role of government while supporting an openness to global trade.
The goals of a monetarist approach include maximizing efficiency and increasing growth.
Served as the conventional wisdom until “Great Recession” of 2008-2009.
What might have happened during this event to change economic thinking?
There are a few final terms related to political economy that you should know.
The exchange rate refers to the average price of a national currency relative to other national currencies.
Appreciation occurs when currency goes up in value against some other currency – appreciates/strengthens. This makes foreign goods cheaper.
Depreciation happens if the currency’s values goes down against that of another currency – depreciates/weakens/devalued. Foreign goods are more expensive.
Why should we care?
Exchange rate is crucial for a country’s international economic relations including trade, investment, tourism, and study abroad opportunities.
There are three decisions that a country can make regarding their exchange rate.
No National Currency Example: Euro (replaced Francs, Lira, etc.)
Facilitates trade/investment with anchor country
Loss of independent monetary policy
Loss of ability of country to produce its own money, and loss of national symbol
(2) Fixed Exchange Rate
Government promises to keep the national currency at a constant value
Provides stability – Facilitate international trade and investment—while restricts independent monetary policy.
Preferred by those with international interests
(3) Floating Exchange Rate
Currency value fluctuates freely
Driven by markets and other factors
Provides freedom in monetary policy—but also leads to greater uncertainly in trade and investment.
Provided by those with domestic interests
