Part 1: Resources and Sustainability Chapter 2: Governments, Markets and Economic Performance

next chapter 02slide 2 Three Basic Economic Questions What to produce? –an efficient combination of goods & services –product(s) that households, firms or governments will buy –a combination of consumption goods and capital goods How to produce –a technique that uses available resources efficiently –techniques may be intensive in labour, land or capital Who to produce for? –depends on the distribution of income, and the propensities of households to save and firms to invest –government taxes & benefits modify income distribution © Pearson 2009

next chapter 02slide 3 Economic Systems Fig 2.1 Traditional –tribal; collective ownership; decisions made by chiefs Market –resources privately owned, allocated by price signals Planned –resources government owned, allocated by governments Mixed –balance between government and private ownership –government policies address instances of market failure © Pearson 2009

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next chapter 02slide 5 National Economic Performance Fig 2.2 “Magic Square” of Performance Indicators –sustainable economic growth increasing output while maintaining environmental quality –full employment actual output should be on the production possibilities frontier unemployment has adverse social consequences –stable price level low inflation and no deflation –balance of payments’ current account keeping transactions with the rest of the world roughly in balance – especially exports and imports © Pearson 2009

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next chapter 02slide 7 Business Cycle Variations in the Rate of Economic Growth –growth fluctuations may or may not be regular Business Cycle Phases Fig 2.3Fig 2.3 –expansion growth faster than sustainable long term average peak: highest growth rate within an expansion –contraction growth slower than sustainable long term average output falls within production possibilities frontier trough: lowest growth rate within a contraction recession: negative growth, output actually falls –recovery © Pearson 2009

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next chapter 02slide 9 Key Events in NZ’s Economic History Great Depression of the early 1930s –period of global economic and financial crisis –mass unemployment, deflation and recession –huge decline in international trade Great Inflation of the 1970s and 1980s Fig 2.4 Fig 2.4 –period, especially , of “double-digit” inflation –recession with inflation in many countries “stagflation” Global Financial Crisis from 2008 –unsustainable levels of household and business debt Eurozone crisis from 2010 –world recession in 2009; Eurozone crisis from 2010 © Pearson 2009 esc to return

next chapter 02slide 10 Introduction and extension of GST (Goods and Services Tax) Great Inflation wage/price “freeze” © Pearson 2009

next chapter 02slide 11 Sustainability Issues in 21 st Century Population growth and age structure –world population over 7 billionworld population –developed countries with more elderly, fewer young –developing countries aspire to higher living standards Energy, water and food supplies –fossil fuels (e.g. oil, gas, coal) limited –clean fresh water increasingly scarce –climate change may hasten resource depletion –modern food production depends on oil and water –NZ’s specialisation as a food supplier set to increase © Pearson 2009 esc to return

end of Chapter 2