POL S 6 Chapter 4: CH 4 Notes Political Economy
Political economy: the study of the interaction between states and markets
How politics and economics are related and their relationship shapes the balance between freedom and
equality
○
•
Politics influence economic institutions, and economic institutions influence politics
•
The most fundamental components of political economy = markets and property
Market: the interaction between the forces of supply and demand that allocates resources
Creating values for goods and services by arriving at specific prices
§
Can be very decentralized - millions of individuals making decisions
§
Sellers seek to create products that will be in demand
§
Buyers seek to buy the best or most goods at the lowest price
§
Markets are the medium through which buyers and sellers exchange goods
§
Markets emerge spontaneously and are not easily controlled by the state
§
In short, markets are communities of buyers and sellers who are constantly interacting thru the
economic choices they make
§
Market forces typically require the state to enforce contracts, sanction activity, and regulate
supply/demand when necessary
Minimum wage
□
Deeming some goods/services (drugs & prostitution) illegal affecting supply & demand
□
§
○
Property: goods or services that are owned by an individual or a group, privately or publicly
Can refer to land, buildings, businesses, or personal items
§
A certain set of property rights can accompany ownership
Right to buy and sell property
□
Right to not have property taken away without good reason/just cause and compensation
□
§
Property rights must be regulated by the state
§
Intellectual property: intangible property… ownership of a specific type of knowledge or content
i.e. a song, software code, medical treatment, etc.
□
Hard to make transactions clear since there is no physicality to the property
□
§
States can enact property rights for themselves or other individuals
State property rights: ownership over oil, airwaves, land, etc.
□
§
○
•
Privatization of goods: goods that have wide public use but are owned by groups that only make the good
accessible to few (morality)
Privatization can limit economic development because it creates a network of privately owned goods
that may fail to reach parts of a population
○
Because there are many concerns that arise form privatization, all states are to provide some level of
public goods
○
•
Public goods: goods provided or secured by the state, available to society, and which no private person
organization can own
Goods are available to society and indivisible
○
Public goods can generate greater equality because the public can share broadly in their benefits
○
States differ in the extent of public goods they provide
Largely due to the role of ideology in the relationship btwn states and markets
§
i.e. health care is a universal and public good in Canada, but not US
§
○
•
Natural resources as a source of corruption (i.e. oil and authoritarianism in Russia and Iran)
Those in power can take advantage of the resources in their hands and make personal profit
○
•
States that rely on the export of oil and gas to fund the national budget may very well wind up with unstable
economies
Natural resources are extremely vulnerable to price changes (fluctuations)
○
Also risk in the decline of a resource
○
•
Social expenditures: state provision of public benefits, such as education, health care, and transportation (or
what is commonly called welfare/welfare state)
Welfare has a negative connotation, suggestive of freeloading
○
Arguments that lazy people/immigrants are relying on these welfare benefits
○
Social expenditures can be very costly
○
STRICTLY defined, social expenditures are provided by the state to those who find themselves in
circumstances where they require greater care
Unemployed people
§
Underemployed people
§
Children
§
Elderly
§
Poor/impoverished
§
Disabled
§
○
•
To pay for providing public goods and social expenditures, states tax
Societies expect states to provide a certain number of goods and services if they pay taxes
○
Taxation is the key source of revenue (other option is to borrow)
○
Gross domestic product (GDP): the total market value of all goods and services produced by a country
over a period of one year
○
•
States foster economic growth through creating and managing money
Money = medium of exchange that only represents a tiny fraction of the world's wealth
○
Money is necessary for economic transactions
○
Money has lost intrinsic worth/value like metal/gold once had
○
States provide money as a means to secure and stimulate economic transactions
○
Central bank: the state institution that controls how much money is flowing through the economy, as
well as how much it costs to borrow money in that economy
National interest rate: the rate charged to private banks when they need to borrow funds from
the central bank or one another
§
When central bank lowers interest rate for banks, banks then lower their interest rates for
businesses and individuals
Chain reaction -- loans are less expensive so people will spend and borrow more…. This will
stimulate economic growth by increasing the amount of money active in the economy
□
§
Central banks…
Control the amount of money in the economy□
Control the cost of borrowing money□
Lower interest rates to stimulate the economy□
Raise interest rates to check inflation□
§
○
•
Inflation: an outstripping of supply by demand, resulting in an increase in the general price level of goods and
services and the resulting loss of value in a country's currency
Inflation problematic when too high
Money loses its value
§
○
People need higher wages to keep up with inflation
○
Central banks raise interest rates to control inflation
○
States can also be the cause of inflation is the government is forced to borrow money
○
•
Hyperinflation: inflation of more than 50% a month for more than two months in a row
Expanding the money supply by printing more money when governments lack tax revenues to cover
basic expenditures
○
Collapse of state legitimacy
○
•
Deflation: a period of falling prices and values for goods, services, investments, and wages
Too many goods chasing too little money
○
Businesses unable to make a profit because prices are so low
○
•
Regulation: a rule or an order that sets the boundaries of a given procedure
Economic regulations
Price controls
§
How firms operate in certain markets
§
○
Social regulations
Managing risk
§
Safety and environmental standards
§
○
•
Monopoly: a single producer that is able to dominate the market for a good or service without effective
competition
A market controlled by a single producer
○
•
Arguments over the regulation of trade:
Yes regulate trade to:
Generate state revenue
§
Foster local industry
§
Protect local jobs
§
Keep wealth in the country
§
○
No, do not regulate trade in order to:
Promote competition
§
Keep the costs of goods low
§
Stimulate domestic innovation in areas of comparative advantage
§
○
•
Ways to regulate trade:
Tariff: a tax imposed on imported goods
○
Quota: a nontariff barrier that limits the quantity of a good that may be imported into a country
○
Nontariff regulatory barriers: policies and regulations used to limit imports through methods other
than taxation
Protecting a states' citizens
§
○
•
Comparative advantage: the ability of one country to produce a particular good or service more efficiently
relative to other countries' efficiency in producing the same good or service
•
Political economic system: the relationship btwn political and economic institutions in a particular country
and the policies/outcomes they create
Classified as: (VIEW THE CHART ON PG. 98)
Liberalism: emphasis on individual freedoms over collective equality and on the power of markets
over the state
People should take responsibility for their own well-being□
Adam Smith and his faith in private property and markets□
Favors a weak state with little involvement in individual affairs
States should have little involvement in economy
®
□
Public goods should be limited to prevent free-riding and encourage individual
responsibility
□
Unemployment is inevitable and even necessary□
Taxation shout be minimized so the public retains wealth□
Light regulation to prompt competition in regard to trade□
State should only intervene when a crisis arises□
Laissez-faire: the principle that the economy should be "allowed to do" what it wishes; a
liberal system of production based on private property and free markets
□
Capitalism: a system of production based on private property and free-markets□
Low government involvement = high economic growth□
Liberal countries: USA, UK, Canada, Australia, New Zealand□
§
Social democracy (socialism)
Mix of liberalism and communism in the beliefs of private property and open markets□
Rejects revolution and embraces democracy□
Says that unchecked economic democracy is dangerous because wealth can end up
concentrated in the hands of very few people
□
State = creator of social rights□
The state should make public goods widely available (i.e. health care, pensions, education)□
Higher level of social expenditures to ensure basic benefits for all
Done thru taxes -- redistributing wealth from the rich to the poor
®
□
Socialist countries: Scandinavia, Germany, Sweden□
§
Communism: eliminate individual freedom to achieve equality
Belief that private property gives too much individual power and control over others□
Economic competition = exploitation of the poor
Wealthy taking advantage of poor laborers
®
□
State is used to transform markets and property□
Private property is nationalized, meaning it is placed in the state's hands on behalf of the
public
□
Support of the state eliminating market forces□
State makes all economic decisions□
All resources allocated by the state□
High state capacity and autonomy□
Communist countries: Cuba, Soviet Union, North Korea□
§
Mercantilism: national economic power is paramount and the domestic economy is viewed as an
instrument that exists primarily to serve the needs of the state
Economic weakness undermines national sovereignty□
Oldest political-economic system□
Utilizes an active industrial policy to achieve state economic power□
Directing the economy towards certain industries and away from others thru taxation and
subsidies
□
Parastatal: industry partially owned by the state
Attempting to create or control businesses that are critical for international
competitiveness
®
□
Use of trade regulations to prevent too much wealth in foreign goods which creates
dependence on foreign economies
□
Limiting social expenditures and keeping taxation to a minimum□
Greater focus on rapid industrial development and national wealth□
Mercantilist countries: South Korea, Japan□
§
○
•
Measuring Wealth
Measuring economic development of a country by GDP
Problems:
Doesn't measure personal income and includes things like government expenditures□
Doesn’t assign value to innovation or leisurely things□
Not all money is valued the same across states; fails to consider quality of life
i.e. cost of living in California vs. Idaho
®
□
§
○
To solve the issues of GDP, economists look at purchasing power parity (PPP)
Purchasing power parity (PPP): a statistical tool that attempts to estimate the buying power of
income across different countries by using prices in the US as a benchmark
§
○
•
Measuring Inequality and Poverty
GDP doesn’t tell how wealth is distributed across a nation
○
Gini index: a statistical formula that measures the amount of economic inequality in a society with a
scale ranging 0-100, where 0 is perfect equality and 100 is total inequality
○
More wealth does not mean more equality
○
Social democratic countries have lower Gini ratings
○
Inequality is not the same thing as poverty, although most low Gini rated countries are very poor
○
People have grown wealthier overall worldwide
○
Recent decrease in economic inequality and poverty between countries, but increased inequality within
countries
○
•
Human Development Index (HDI): a statistical tool that attempts to evaluate the overall wealth, health, and
knowledge of a country's people
A way to consider whether the wealth generated in a country is used in a way that provides a basic
standard of living for all people (either publicly or privately)
○
Strong correlation btwn GDP and standard of living
○
The higher the national income, the greater standard of living (high education, longer life expectancy)
○
PG 106 LEFT OFF
○
•
FOUR WAYS TO MEASURE WEALTH
GDP: measures total production within
a country, regardless of who owns the
products
•
CH 4 Notes: Political Economy
Monday, April 23, 2018
1:08 PM
Political economy: the study of the interaction between states and markets
How politics and economics are related and their relationship shapes the balance between freedom and
equality
○
•
Politics influence economic institutions, and economic institutions influence politics
•
The most fundamental components of political economy = markets and property
Market: the interaction between the forces of supply and demand that allocates resources
Creating values for goods and services by arriving at specific prices
§
Can be very decentralized - millions of individuals making decisions
§
Sellers seek to create products that will be in demand
§
Buyers seek to buy the best or most goods at the lowest price
§
Markets are the medium through which buyers and sellers exchange goods
§
Markets emerge spontaneously and are not easily controlled by the state
§
In short, markets are communities of buyers and sellers who are constantly interacting thru the
economic choices they make
§
Market forces typically require the state to enforce contracts, sanction activity, and regulate
supply/demand when necessary
Minimum wage
□
Deeming some goods/services (drugs & prostitution) illegal affecting supply & demand
□
§
○
Property: goods or services that are owned by an individual or a group, privately or publicly
Can refer to land, buildings, businesses, or personal items
§
A certain set of property rights can accompany ownership
Right to buy and sell property
□
Right to not have property taken away without good reason/just cause and compensation
□
§
Property rights must be regulated by the state
§
Intellectual property: intangible property… ownership of a specific type of knowledge or content
i.e. a song, software code, medical treatment, etc.
□
Hard to make transactions clear since there is no physicality to the property
□
§
States can enact property rights for themselves or other individuals
State property rights: ownership over oil, airwaves, land, etc.
□
§
○
•
Privatization of goods: goods that have wide public use but are owned by groups that only make the good
accessible to few (morality)
Privatization can limit economic development because it creates a network of privately owned goods
that may fail to reach parts of a population
○
Because there are many concerns that arise form privatization, all states are to provide some level of
public goods
○
•
Public goods: goods provided or secured by the state, available to society, and which no private person
organization can own
Goods are available to society and indivisible
○
Public goods can generate greater equality because the public can share broadly in their benefits
○
States differ in the extent of public goods they provide
Largely due to the role of ideology in the relationship btwn states and markets
§
i.e. health care is a universal and public good in Canada, but not US
§
○
•
Natural resources as a source of corruption (i.e. oil and authoritarianism in Russia and Iran)
Those in power can take advantage of the resources in their hands and make personal profit
○
•
States that rely on the export of oil and gas to fund the national budget may very well wind up with unstable
economies
Natural resources are extremely vulnerable to price changes (fluctuations)
○
Also risk in the decline of a resource
○
•
Social expenditures: state provision of public benefits, such as education, health care, and transportation (or
what is commonly called welfare/welfare state)
Welfare has a negative connotation, suggestive of freeloading
○
Arguments that lazy people/immigrants are relying on these welfare benefits
○
Social expenditures can be very costly
○
STRICTLY defined, social expenditures are provided by the state to those who find themselves in
circumstances where they require greater care
Unemployed people
§
Underemployed people
§
Children
§
Elderly
§
Poor/impoverished
§
Disabled
§
○
•
To pay for providing public goods and social expenditures, states tax
Societies expect states to provide a certain number of goods and services if they pay taxes
○
Taxation is the key source of revenue (other option is to borrow)
○
Gross domestic product (GDP): the total market value of all goods and services produced by a country
over a period of one year
○
•
States foster economic growth through creating and managing money
Money = medium of exchange that only represents a tiny fraction of the world's wealth
○
Money is necessary for economic transactions
○
Money has lost intrinsic worth/value like metal/gold once had
○
States provide money as a means to secure and stimulate economic transactions
○
Central bank: the state institution that controls how much money is flowing through the economy, as
well as how much it costs to borrow money in that economy
National interest rate: the rate charged to private banks when they need to borrow funds from
the central bank or one another
§
When central bank lowers interest rate for banks, banks then lower their interest rates for
businesses and individuals
Chain reaction -- loans are less expensive so people will spend and borrow more…. This will
stimulate economic growth by increasing the amount of money active in the economy
□
§
Central banks…
Control the amount of money in the economy□
Control the cost of borrowing money□
Lower interest rates to stimulate the economy□
Raise interest rates to check inflation□
§
○
•
Inflation: an outstripping of supply by demand, resulting in an increase in the general price level of goods and
services and the resulting loss of value in a country's currency
Inflation problematic when too high
Money loses its value
§
○
People need higher wages to keep up with inflation
○
Central banks raise interest rates to control inflation
○
States can also be the cause of inflation is the government is forced to borrow money
○
•
Hyperinflation: inflation of more than 50% a month for more than two months in a row
Expanding the money supply by printing more money when governments lack tax revenues to cover
basic expenditures
○
Collapse of state legitimacy
○
•
Deflation: a period of falling prices and values for goods, services, investments, and wages
Too many goods chasing too little money
○
Businesses unable to make a profit because prices are so low
○
•
Regulation: a rule or an order that sets the boundaries of a given procedure
Economic regulations
Price controls
§
How firms operate in certain markets
§
○
Social regulations
Managing risk
§
Safety and environmental standards
§
○
•
Monopoly: a single producer that is able to dominate the market for a good or service without effective
competition
A market controlled by a single producer
○
•
Arguments over the regulation of trade:
Yes regulate trade to:
Generate state revenue
§
Foster local industry
§
Protect local jobs
§
Keep wealth in the country
§
○
No, do not regulate trade in order to:
Promote competition
§
Keep the costs of goods low
§
Stimulate domestic innovation in areas of comparative advantage
§
○
•
Ways to regulate trade:
Tariff: a tax imposed on imported goods
○
Quota: a nontariff barrier that limits the quantity of a good that may be imported into a country
○
Nontariff regulatory barriers: policies and regulations used to limit imports through methods other
than taxation
Protecting a states' citizens
§
○
•
Comparative advantage: the ability of one country to produce a particular good or service more efficiently
relative to other countries' efficiency in producing the same good or service
•
Political economic system: the relationship btwn political and economic institutions in a particular country
and the policies/outcomes they create
Classified as: (VIEW THE CHART ON PG. 98)
Liberalism: emphasis on individual freedoms over collective equality and on the power of markets
over the state
People should take responsibility for their own well-being□
Adam Smith and his faith in private property and markets□
Favors a weak state with little involvement in individual affairs
States should have little involvement in economy
®
□
Public goods should be limited to prevent free-riding and encourage individual
responsibility
□
Unemployment is inevitable and even necessary□
Taxation shout be minimized so the public retains wealth□
Light regulation to prompt competition in regard to trade□
State should only intervene when a crisis arises□
Laissez-faire: the principle that the economy should be "allowed to do" what it wishes; a
liberal system of production based on private property and free markets
□
Capitalism: a system of production based on private property and free-markets□
Low government involvement = high economic growth□
Liberal countries: USA, UK, Canada, Australia, New Zealand□
§
Social democracy (socialism)
Mix of liberalism and communism in the beliefs of private property and open markets□
Rejects revolution and embraces democracy□
Says that unchecked economic democracy is dangerous because wealth can end up
concentrated in the hands of very few people
□
State = creator of social rights□
The state should make public goods widely available (i.e. health care, pensions, education)□
Higher level of social expenditures to ensure basic benefits for all
Done thru taxes -- redistributing wealth from the rich to the poor
®
□
Socialist countries: Scandinavia, Germany, Sweden□
§
Communism: eliminate individual freedom to achieve equality
Belief that private property gives too much individual power and control over others□
Economic competition = exploitation of the poor
Wealthy taking advantage of poor laborers
®
□
State is used to transform markets and property□
Private property is nationalized, meaning it is placed in the state's hands on behalf of the
public
□
Support of the state eliminating market forces□
State makes all economic decisions□
All resources allocated by the state□
High state capacity and autonomy□
Communist countries: Cuba, Soviet Union, North Korea□
§
Mercantilism: national economic power is paramount and the domestic economy is viewed as an
instrument that exists primarily to serve the needs of the state
Economic weakness undermines national sovereignty□
Oldest political-economic system□
Utilizes an active industrial policy to achieve state economic power□
Directing the economy towards certain industries and away from others thru taxation and
subsidies
□
Parastatal: industry partially owned by the state
Attempting to create or control businesses that are critical for international
competitiveness
®
□
Use of trade regulations to prevent too much wealth in foreign goods which creates
dependence on foreign economies
□
Limiting social expenditures and keeping taxation to a minimum□
Greater focus on rapid industrial development and national wealth□
Mercantilist countries: South Korea, Japan□
§
○
•
Measuring Wealth
Measuring economic development of a country by GDP
Problems:
Doesn't measure personal income and includes things like government expenditures□
Doesn’t assign value to innovation or leisurely things□
Not all money is valued the same across states; fails to consider quality of life
i.e. cost of living in California vs. Idaho
®
□
§
○
To solve the issues of GDP, economists look at purchasing power parity (PPP)
Purchasing power parity (PPP): a statistical tool that attempts to estimate the buying power of
income across different countries by using prices in the US as a benchmark
§
○
•
Measuring Inequality and Poverty
GDP doesn’t tell how wealth is distributed across a nation
○
Gini index: a statistical formula that measures the amount of economic inequality in a society with a
scale ranging 0-100, where 0 is perfect equality and 100 is total inequality
○
More wealth does not mean more equality
○
Social democratic countries have lower Gini ratings
○
Inequality is not the same thing as poverty, although most low Gini rated countries are very poor
○
People have grown wealthier overall worldwide
○
Recent decrease in economic inequality and poverty between countries, but increased inequality within
countries
○
•
Human Development Index (HDI): a statistical tool that attempts to evaluate the overall wealth, health, and
knowledge of a country's people
A way to consider whether the wealth generated in a country is used in a way that provides a basic
standard of living for all people (either publicly or privately)
○
Strong correlation btwn GDP and standard of living
○
The higher the national income, the greater standard of living (high education, longer life expectancy)
○
PG 106 LEFT OFF
○
•
FOUR WAYS TO MEASURE WEALTH
GDP: measures total production within
a country, regardless of who owns the
products
•
CH 4 Notes: Political Economy
Monday, April 23, 2018
1:08 PM
Political economy: the study of the interaction between states and markets
How politics and economics are related and their relationship shapes the balance between freedom and
equality
○
•
Politics influence economic institutions, and economic institutions influence politics•
The most fundamental components of political economy = markets and property
Market: the interaction between the forces of supply and demand that allocates resources
Creating values for goods and services by arriving at specific prices
§
Can be very decentralized - millions of individuals making decisions
§
Sellers seek to create products that will be in demand
§
Buyers seek to buy the best or most goods at the lowest price
§
Markets are the medium through which buyers and sellers exchange goods
§
Markets emerge spontaneously and are not easily controlled by the state
§
In short, markets are communities of buyers and sellers who are constantly interacting thru the
economic choices they make
§
Market forces typically require the state to enforce contracts, sanction activity, and regulate
supply/demand when necessary
Minimum wage□
Deeming some goods/services (drugs & prostitution) illegal affecting supply & demand□
§
○
Property: goods or services that are owned by an individual or a group, privately or publicly
Can refer to land, buildings, businesses, or personal items
§
A certain set of property rights can accompany ownership
Right to buy and sell property□
Right to not have property taken away without good reason/just cause and compensation□
§
Property rights must be regulated by the state
§
Intellectual property: intangible property… ownership of a specific type of knowledge or content
i.e. a song, software code, medical treatment, etc.□
Hard to make transactions clear since there is no physicality to the property□
§
States can enact property rights for themselves or other individuals
State property rights: ownership over oil, airwaves, land, etc.□
§
○
•
Privatization of goods: goods that have wide public use but are owned by groups that only make the good
accessible to few (morality)
Privatization can limit economic development because it creates a network of privately owned goods
that may fail to reach parts of a population
○
Because there are many concerns that arise form privatization, all states are to provide some level of
public goods
○
•
Public goods: goods provided or secured by the state, available to society, and which no private person
organization can own
Goods are available to society and indivisible
○
Public goods can generate greater equality because the public can share broadly in their benefits
○
States differ in the extent of public goods they provide
Largely due to the role of ideology in the relationship btwn states and markets
§
i.e. health care is a universal and public good in Canada, but not US
§
○
•
Natural resources as a source of corruption (i.e. oil and authoritarianism in Russia and Iran)
Those in power can take advantage of the resources in their hands and make personal profit
○
•
States that rely on the export of oil and gas to fund the national budget may very well wind up with unstable
economies
Natural resources are extremely vulnerable to price changes (fluctuations)
○
Also risk in the decline of a resource
○
•
Social expenditures: state provision of public benefits, such as education, health care, and transportation (or
what is commonly called welfare/welfare state)
Welfare has a negative connotation, suggestive of freeloading
○
Arguments that lazy people/immigrants are relying on these welfare benefits
○
Social expenditures can be very costly
○
STRICTLY defined, social expenditures are provided by the state to those who find themselves in
circumstances where they require greater care
Unemployed people
§
Underemployed people
§
Children
§
Elderly
§
Poor/impoverished
§
Disabled
§
○
•
To pay for providing public goods and social expenditures, states tax
Societies expect states to provide a certain number of goods and services if they pay taxes
○
Taxation is the key source of revenue (other option is to borrow)
○
Gross domestic product (GDP): the total market value of all goods and services produced by a country
over a period of one year
○
•
States foster economic growth through creating and managing money
Money = medium of exchange that only represents a tiny fraction of the world's wealth
○
Money is necessary for economic transactions
○
Money has lost intrinsic worth/value like metal/gold once had
○
States provide money as a means to secure and stimulate economic transactions
○
Central bank: the state institution that controls how much money is flowing through the economy, as
well as how much it costs to borrow money in that economy
National interest rate: the rate charged to private banks when they need to borrow funds from
the central bank or one another
§
When central bank lowers interest rate for banks, banks then lower their interest rates for
businesses and individuals
Chain reaction -- loans are less expensive so people will spend and borrow more…. This will
stimulate economic growth by increasing the amount of money active in the economy
□
§
Central banks…
Control the amount of money in the economy□
Control the cost of borrowing money□
Lower interest rates to stimulate the economy□
Raise interest rates to check inflation□
§
○
•
Inflation: an outstripping of supply by demand, resulting in an increase in the general price level of goods and
services and the resulting loss of value in a country's currency
Inflation problematic when too high
Money loses its value
§
○
People need higher wages to keep up with inflation
○
Central banks raise interest rates to control inflation
○
States can also be the cause of inflation is the government is forced to borrow money
○
•
Hyperinflation: inflation of more than 50% a month for more than two months in a row
Expanding the money supply by printing more money when governments lack tax revenues to cover
basic expenditures
○
Collapse of state legitimacy
○
•
Deflation: a period of falling prices and values for goods, services, investments, and wages
Too many goods chasing too little money
○
Businesses unable to make a profit because prices are so low
○
•
Regulation: a rule or an order that sets the boundaries of a given procedure
Economic regulations
Price controls
§
How firms operate in certain markets
§
○
Social regulations
Managing risk
§
Safety and environmental standards
§
○
•
Monopoly: a single producer that is able to dominate the market for a good or service without effective
competition
A market controlled by a single producer
○
•
Arguments over the regulation of trade:
Yes regulate trade to:
Generate state revenue
§
Foster local industry
§
Protect local jobs
§
Keep wealth in the country
§
○
No, do not regulate trade in order to:
Promote competition
§
Keep the costs of goods low
§
Stimulate domestic innovation in areas of comparative advantage
§
○
•
Ways to regulate trade:
Tariff: a tax imposed on imported goods
○
Quota: a nontariff barrier that limits the quantity of a good that may be imported into a country
○
Nontariff regulatory barriers: policies and regulations used to limit imports through methods other
than taxation
Protecting a states' citizens
§
○
•
Comparative advantage: the ability of one country to produce a particular good or service more efficiently
relative to other countries' efficiency in producing the same good or service
•
Political economic system: the relationship btwn political and economic institutions in a particular country
and the policies/outcomes they create
Classified as: (VIEW THE CHART ON PG. 98)
Liberalism: emphasis on individual freedoms over collective equality and on the power of markets
over the state
People should take responsibility for their own well-being□
Adam Smith and his faith in private property and markets□
Favors a weak state with little involvement in individual affairs
States should have little involvement in economy
®
□
Public goods should be limited to prevent free-riding and encourage individual
responsibility
□
Unemployment is inevitable and even necessary□
Taxation shout be minimized so the public retains wealth□
Light regulation to prompt competition in regard to trade□
State should only intervene when a crisis arises□
Laissez-faire: the principle that the economy should be "allowed to do" what it wishes; a
liberal system of production based on private property and free markets
□
Capitalism: a system of production based on private property and free-markets□
Low government involvement = high economic growth□
Liberal countries: USA, UK, Canada, Australia, New Zealand□
§
Social democracy (socialism)
Mix of liberalism and communism in the beliefs of private property and open markets□
Rejects revolution and embraces democracy□
Says that unchecked economic democracy is dangerous because wealth can end up
concentrated in the hands of very few people
□
State = creator of social rights□
The state should make public goods widely available (i.e. health care, pensions, education)□
Higher level of social expenditures to ensure basic benefits for all
Done thru taxes -- redistributing wealth from the rich to the poor
®
□
Socialist countries: Scandinavia, Germany, Sweden□
§
Communism: eliminate individual freedom to achieve equality
Belief that private property gives too much individual power and control over others□
Economic competition = exploitation of the poor
Wealthy taking advantage of poor laborers
®
□
State is used to transform markets and property□
Private property is nationalized, meaning it is placed in the state's hands on behalf of the
public
□
Support of the state eliminating market forces□
State makes all economic decisions□
All resources allocated by the state□
High state capacity and autonomy□
Communist countries: Cuba, Soviet Union, North Korea□
§
Mercantilism: national economic power is paramount and the domestic economy is viewed as an
instrument that exists primarily to serve the needs of the state
Economic weakness undermines national sovereignty□
Oldest political-economic system□
Utilizes an active industrial policy to achieve state economic power□
Directing the economy towards certain industries and away from others thru taxation and
subsidies
□
Parastatal: industry partially owned by the state
Attempting to create or control businesses that are critical for international
competitiveness
®
□
Use of trade regulations to prevent too much wealth in foreign goods which creates
dependence on foreign economies
□
Limiting social expenditures and keeping taxation to a minimum□
Greater focus on rapid industrial development and national wealth□
Mercantilist countries: South Korea, Japan□
§
○
•
Measuring Wealth
Measuring economic development of a country by GDP
Problems:
Doesn't measure personal income and includes things like government expenditures□
Doesn’t assign value to innovation or leisurely things□
Not all money is valued the same across states; fails to consider quality of life
i.e. cost of living in California vs. Idaho
®
□
§
○
To solve the issues of GDP, economists look at purchasing power parity (PPP)
Purchasing power parity (PPP): a statistical tool that attempts to estimate the buying power of
income across different countries by using prices in the US as a benchmark
§
○
•
Measuring Inequality and Poverty
GDP doesn’t tell how wealth is distributed across a nation
○
Gini index: a statistical formula that measures the amount of economic inequality in a society with a
scale ranging 0-100, where 0 is perfect equality and 100 is total inequality
○
More wealth does not mean more equality
○
Social democratic countries have lower Gini ratings
○
Inequality is not the same thing as poverty, although most low Gini rated countries are very poor
○
People have grown wealthier overall worldwide
○
Recent decrease in economic inequality and poverty between countries, but increased inequality within
countries
○
•
Human Development Index (HDI): a statistical tool that attempts to evaluate the overall wealth, health, and
knowledge of a country's people
A way to consider whether the wealth generated in a country is used in a way that provides a basic
standard of living for all people (either publicly or privately)
○
Strong correlation btwn GDP and standard of living
○
The higher the national income, the greater standard of living (high education, longer life expectancy)
○
PG 106 LEFT OFF
○
•
FOUR WAYS TO MEASURE WEALTH
GDP: measures total production within
a country, regardless of who owns the
products
•
CH 4 Notes: Political Economy
Monday, April 23, 2018 1:08 PM
Document Summary
Political economy: the study of the interaction between states and markets. How politics and economics are related and their relationship shapes the balance between freedom and equality. Politics influence economic institutions, and economic institutions influence politics. The most fundamental components of political economy = markets and property. Creating values for goods and services by arriving at specific prices. Can be very decentralized - millions of individuals making decisions. Sellers seek to create products that will be in demand. Buyers seek to buy the best or most goods at the lowest price. Markets are the medium through which buyers and sellers exchange goods. Markets emerge spontaneously and are not easily controlled by the state. In short, markets are communities of buyers and sellers who are constantly interacting thru the economic choices they make. Market forces typically require the state to enforce contracts, sanction activity, and regulate supply/demand when necessary. Can refer to land, buildings, businesses, or personal items.
