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