Chapter 23 Government and the Economy

Roles of the Government in the Economy

1. Providing Public Goods privategoods Most goods and services are private goods- once consumed by one individual no other individual can use it. exclusionprinciple subject to the exclusion principle- you only can use it if you pay for it. public goods 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. Providing Public Goods (continued) non-exclusionprinciple 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 externality 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 2. Dealing with Externalities (continued) Gov’ts provide public goods to create positive externalities. EX: Good roads increase inter- state 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 monopolies  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 mergers  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

 Not all monopolies are prevented natural monopoly  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 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

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

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

Other Economic Indicators  Unemployment  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  Fiscalpolicy  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 inflation  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  Inflation consumer price index deflation  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 capitalgain  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 bull  If prices tend to rise, this is a “bull” market bear  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. Education 2. Family wealth 3. 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!

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

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