Climbing the Economic Mountain! Section 1 Twelve Key Elements of Economics Supply and Demand Supply and Demand: Applications and Extensions Supply and Demand: Basics Section 2 The Financial Crisis of 2008 Lessons from the Great Depression The Seven Major Sources of Economic Progress Section 3 Ten Elements of Clear Thinking About Economic Progress and the Role of Government Section 4 Twelve Key Elements of Practical Personal Finance

2 Section II Seven Major Sources of Economic Progress

3 Overview The importance and incentives of private property rights How competition leads to economic progress The importance of limiting government regulation An efficient capital market Monetary stability and inflation Why low tax rates are important for economic progress Discuss more fully the importance of free trade

200 Countries in 200 Years 4

5 #1 The Legal System The foundation for economic progress is a legal system that protects privately owned property rights and enforces contracts in an evenhanded manner

6 #1 The Legal System Private property rights involve: 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property

7 #1 The Legal System 1. Incentive to use resources in ways that are considered beneficial to others. ex. Empty lot ex. Empty lot owners bear the cost of ignoring the wishes of others. ex. Neutral colors

8 #1 The Legal System 2. Private owners have an incentive to care for and manage what they own ex. How do you drive a rental car compared to your own car? ex. Berry’s Bikes

9 #1 The Legal System 3. Private owners have an incentive to conserve for the future ex. Popcorn at the movies

10 #1 The Legal System 4. Private owners have an incentive to make sure their property does not damage your property ex. Keeping your dog on a leash or fenced in

11 #1 The Legal System

12 #1 The Legal System Lack of property rights = lack of economic progress

13 #1 The Legal System Even-handed enforcement of understandable and stable laws is also important for economic progress Its all about the rules of the game!

14 #2 Competitive Markets Competition promotes the efficient use of resources and provides a continuous stimulus for innovative improvements

15 #2 Competitive Markets A. Competition places pressure on producers to operate efficiently and cater to the preferences of consumers

16 #2 Competitive Markets B. Competition gives firms a strong incentive to develop better products and discover low cost methods of production

17 #2 Competitive Markets C. Competition also discovers the business structure and size of the firm that can best keep the per-unit cost of a product or service low

18 #2 Competitive Markets

19 Why do people hate Wal-Mart? Wal-Mart employs sweatshop labor from other countries. Wal-Mart does not provide adequate compensation to their domestic employees. Wal-Mart destroys the local small business community.

20 #3 Limits on Government Regulation Economic progress comes through limiting government regulation that reduces trade and retards economic progress

21 #3 Limits on Government Regulation A. Many countries impose regulations that limit entry into various businesses and occupations

#3 Limits on Government Regulation 22

23 #3 Limits on Government Regulation B. Regulations that substitute political authority for the rule of law and freedom of contract tend to undermine gains from trade.

24 #3 Limits on Government Regulation C. The imposition of price controls will also stifle trade Remember price ceilings and price floors, what do they have in common?

25 #4 An Efficient Capital Market To realize its potential, a nation must have a mechanism that channels capital into wealth creating projects.

26 #4 An Efficient Capital Market Interest is the price for loanable funds. Productive investments will yield a return sufficient to cover all costs, however not all investment projects are productive:

27 #4 An Efficient Capital Market Governments can and do intervene in capital markets by allocating investment funds and fixing interest rates 1. Distorts market incentives 2. Increases the importance of political rather than economic considerations 3. Makes unproductive investments more likely.

28 #5 Monetary Policy Inflationary monetary policies distort price signals, undermining the market economy.

29 #5 Monetary Policy Money serves 3 major functions in our economy: 1. Medium of Exchange 2. Unit of Account 3. Store of Value

30 #5 Monetary Policy When the supply of money is constant or increases at a slow and steady pace, then the purchasing power of money will be relatively constant.

31 #5 Monetary Policy Inflation: When the supply of money expands rapidly compared to the supply of goods and services, the value of money declines and the general level of prices rise.

32 #5 Monetary Policy

33 Hyperinflation in Germany

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36 Hyperinflation in Zimbabwe

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41 #5 Monetary Policy High and variable inflation cause 3 main problems: 1. Reduces investment 2. Distorts the information delivered by prices 3. Results in less productive use of resources

42 Adjusting for Price Changes Nominal Values: values expressed in current dollars Real Values: Values that have been adjusted for the effects of inflation Don’t be fooled!

43 Adjusting for Price Changes

44 #5 Monetary Policy The key to price stability is to control the growth of the money supply 1. The country’s monetary authority (the central bank) should be held accountable for the inflation rate. 2. A country could tie its currency to another country’s currency (or just adopt it)

45 #6 Low Tax Rates People will produce more when they are permitted to keep more of what they earn

46 #6 Low Tax Rates A. High taxes discourage work effort and reduce the productivity of labor.

47 #6 Low Tax Rates B. High tax rates will reduce both the level and efficiency of capital formation

48 #6 Low Tax Rates C. High marginal tax rates encourage individuals to consume tax-deductible goods in place of nondeductible goods, even if nondeductible goods are more desirable

49 #7 Free Trade A nation progresses by selling goods and services that it can produce at a relatively low cost and buying those that would be costly to produce (The Law of Comparative Advantage).

50 #7 Free Trade A. People of each nation benefit if they can acquire a product or service through trade more cheaply than if they produce it themselves. Remember how poor you would be if you had to make everything yourself….

51 #7 Free Trade B. International trade allows domestic producers and consumers to benefit from the economies of scale typical of many large operations.

52 #7 Free Trade C. International trade promotes competition in domestic markets and allows customers to purchase a wide variety of goods at lower prices

53 #7 Free Trade Government barriers to trade: 1. Tariffs 2. Quotas 3. Domestic Subsidies

54 #7 Free Trade Potential reasons for the government to restrict international trade: 1. The National Defense Argument 2. The Infant Industry Argument 3. The Antidumping Argument

55 #7 Free Trade The real reason the government restricts most international trade…. The politics of special interest groups and trade restrictions

56 Economic Freedom! Economic Freedom consists of: 1. Secure private property rights and even handed enforcement of contracts 2. Minimal government regulation 3. Market versus government allocation of capital 4. Stable monetary environment 5. Low marginal tax rates 6. Minimal barriers to trade

57 Economic Freedom! How important is economic freedom for economic growth? It matters more than anything else!

58 Economic Freedom!

59 North Korea vs. South Korea Per Capita Income = $1,800 Per Capita Income = $24,200

60 Economic Freedom! Lets take a tour of the world and look at countries with various levels of economic freedom!

61 A country with very low economic freedom: Zimbabwe (in Africa)

62 Families in Zimbabwe (Africa)

63 Families in Zimbabwe (Africa)

64 A country with low economic freedom: Romania (in Europe)

65 Families in Romania (Europe)

66 Families in Romania (Europe)

67 Families in Romania (Europe)

68 Families in Romania (Europe)

69 Families in Romania (Europe)

70 Families in Romania (Europe)

71 Families in Romania (Europe)

72 Families in Romania (Europe)

73 A country with medium Economic Freedom: Mexico (in North America)

74 Families in Mexico

75 Families in Mexico

76 A country with high levels of economic freedom: Hong Kong (in Asia)

77 Families in Hong Kong

78 Families in Hong Kong

79 Families in Hong Kong

80 Economic Freedom!

81 Review Know the seven major sources of economic progress 1.The Legal System: private property rights and evenhanded enforcement of stable laws 2.Competitive Markets 3.Limits on Government Regulation 4.An Efficient Capital Market 5.Stable Monetary Policy 6.Low Tax Rates 7.Free Trade Understand the importance of Economic Freedom