1. Government and the Economy
Unit 9
Government
and the
Economy

2. Roles of the Government in the Economy

3. Roles of the Government in the Economy
Providing Public Goods
Most goods and services are private goods-once consumed by one individual no other individual can use it.
subject to the exclusion principle- you only can use it if you pay for it.
gov’t has the responsibility to provide public goods-goods anyone can use. EX: roads, parks, libraries

4. Public Good Example

5. Public Good Example

6. Roles of the Government in the Economy
Providing Public Goods (continued)
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

7. Roles of the Government in the Economy
2. Dealing with Externalities
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

8. 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: The Space Race 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

9. 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
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

10. Roles of the Government in the Economy
3. Maintaining Competition (continued)
These laws were designed to prevent any business combination that prevented competition
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

11. Roles of the Government in the Economy
4. Regulating Market Activity
The gov’t has created many agencies to watch over the business world

12. Roles of the Government in the Economy
Not all monopolies are prevented
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

13. 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

14. 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

15. 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

16. The Business Cycle

17. 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

18. 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

19. Other Economic Indicators
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

20. Other Economic Indicators
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
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

21. Other Economic Indicators
Inflation
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

22. Stocks and the Stock Market
Why Stock Prices Change
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

23. 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
If prices tend to rise, this is a “bull” market
If prices fall, it is a “bear” market

24. 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

25. Government and Poverty
Three influences on Income
Education
Family wealth
Discrimination

26. Government and 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!

27. 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

28. 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

29. 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

30. 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