Section 2 - Seven Sources of Economic Progress(1)

Section 2 - Seven Sources of Economic Progress(1) -...

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Unformatted text preview: Climbing the Economic Mountain! Climbing Section 4 Twelve Key Elements of Practical Personal Finance Section 3 Ten Elements of Clear Thinking About Economic Progress and the Role of Government Section 2 • The Financial Crisis of 2008 • Lessons from the Great Depression • The Seven Major Sources of Economic Progress Supply and Demand • Supply and Demand: Applications and Extensions • Supply and Demand: Basics Section 1 Twelve Key Elements of Economics Section II Seven Major Sources of Seven Economic Progress Economic 2 Overview The importance and incentives of private The property rights property How competition leads to economic progress The importance of limiting government The regulation regulation An efficient capital market Monetary stability and inflation Why low tax rates are important for economic Why progress progress Discuss more fully the importance of free trade 3 200 Countries in 200 Years 200 4 #1 The Legal System The foundation for economic progress is a The legal system that protects privately owned property rights and enforces contracts in an evenhanded manner an 5 #1 The Legal System Private property rights involve: 1. The right to exclusive use of the property 2. Legal protection against invasion from 2. other individuals other 3. The right to sell, transfer, exchange, or 3. mortgage the property mortgage 6 #1 The Legal System 1. Incentive to use resources in ways that 1. are considered beneficial to others. are ex. Empty lot ex. owners bear the cost of ignoring the owners wishes of others. wishes ex. Neutral colors 7 #1 The Legal System 2. Private owners have an incentive to care 2. for and manage what they own for ex. How do you drive a rental car ex. compared to your own car? compared ex. Berry’s Bikes 8 #1 The Legal System 3. Private owners have an incentive to 3. conserve for the future conserve ex. Popcorn at the movies 9 #1 The Legal System 4. Private owners have an incentive to make 4. sure their property does not damage your property property ex. Keeping your dog on a leash or fenced in 10 #1 The Legal System 11 11 #1 The Legal System Lack of property rights = lack of economic Lack progress progress 12 #1 The Legal System Even-handed enforcement of Even-handed understandable and stable laws is also important for economic progress important Its all about the rules of the game! 13 13 #2 Competitive Markets #2 Competition promotes the efficient use of resources and provides a continuous stimulus for innovative improvements stimulus 14 14 #2 Competitive Markets A. Competition places pressure on Competition producers to operate efficiently and cater to the preferences of consumers to 15 15 #2 Competitive Markets B. Competition gives firms a strong Competition incentive to develop better products and discover low cost methods of production discover 16 16 #2 Competitive Markets C. Competition also discovers the business Competition structure and size of the firm that can best keep the per-unit cost of a product or service low or 17 17 #2 Competitive Markets 18 18 Why do people hate Wal-Mart? Wal-Mart employs sweatshop labor from other Wal-Mart countries. countries. Wal-Mart does not provide adequate compensation to Wal-Mart their domestic employees. their Wal-Mart destroys the local small business Wal-Mart community. community. 19 19 #3 Limits on Government #3 Regulation Regulation Economic progress comes through limiting Economic government regulation that reduces trade and retards economic progress and 20 20 #3 Limits on Government #3 Regulation Regulation A. Many countries impose regulations that Many limit entry into various businesses and occupations occupations 21 21 #3 Limits on Government Regulation Regulation 22 #3 Limits on Government #3 Regulation Regulation B. Regulations that substitute political Regulations authority for the rule of law and freedom of contract tend to undermine gains from trade. trade. 23 23 #3 Limits on Government #3 Regulation Regulation C. The imposition of price controls will also The stifle trade stifle Remember price ceilings and price Remember floors, what do they have in common? floors, 24 24 #4 An Efficient Capital Market To realize its potential, a nation must have a To mechanism that channels capital into wealth creating projects. wealth 25 25 #4 An Efficient Capital Market Interest is the price for loanable funds. Interest Productive investments will yield a return sufficient to cover all costs, however not all investment projects are productive: investment 26 26 #4 An Efficient Capital Market Governments can and do intervene in Governments capital markets by allocating investment funds and fixing interest rates funds 1. Distorts market incentives 2. Increases the importance of political Increases rather than economic considerations rather 3. Makes unproductive investments more Makes likely. likely. 27 27 #5 Monetary Policy Inflationary monetary policies distort price Inflationary signals, undermining the market economy. signals, 28 28 #5 Monetary Policy Money serves 3 major functions in our Money economy: economy: 1. Medium of Exchange 2. Unit of Account 3. Store of Value 29 29 #5 Monetary Policy When the supply of money is constant or When increases at a slow and steady pace, then the purchasing power of money will be relatively constant. relatively 30 30 #5 Monetary Policy Inflation: When the supply of money Inflation: expands rapidly compared to the supply of goods and services, the value of money declines and the general level of prices rise. rise. 31 31 #5 Monetary Policy 32 32 Hyperinflation in Germany 33 33 Hyperinflation in Germany 34 34 Hyperinflation in Germany 35 35 Hyperinflation in Zimbabwe 36 36 Hyperinflation in Zimbabwe 37 37 Hyperinflation in Zimbabwe 38 38 Hyperinflation in Zimbabwe 39 39 Hyperinflation in Zimbabwe 40 40 #5 Monetary Policy High and variable inflation cause 3 main High problems: problems: 1. Reduces investment 2. Distorts the information delivered by Distorts prices prices 3. Results in less productive use of Results resources resources 41 41 Adjusting for Price Changes Nominal Values: values expressed in values current dollars current Real Values: Values that have been Values adjusted for the effects of inflation adjusted Don’t be fooled! 42 42 Adjusting for Price Changes 43 43 #5 Monetary Policy The key to price stability is to control the growth of The the money supply the The country’s monetary authority (the central The bank) should be held accountable for the inflation rate. inflation 2. A country could tie its currency to another country country’s currency (or just adopt it) 1. 44 44 #6 Low Tax Rates People will produce more when they are People permitted to keep more of what they earn permitted 45 45 #6 Low Tax Rates A. High taxes discourage work effort and A. reduce the productivity of labor. reduce 46 46 #6 Low Tax Rates B. High tax rates will reduce both the level B. and efficiency of capital formation and 47 47 #6 Low Tax Rates C. High marginal tax rates encourage C. individuals to consume tax-deductible goods in place of nondeductible goods, even if nondeductible goods are more desirable desirable 48 48 #7 Free Trade A nation progresses by selling goods and nation services that it can produce at a relatively low cost and buying those that would be costly to produce (The Law of Comparative Advantage). Comparative 49 49 #7 Free Trade A. People of each nation benefit if they can A. acquire a product or service through trade more cheaply than if they produce it themselves. it Remember how poor you would be if you Remember had to make everything yourself…. had 50 50 #7 Free Trade B. International trade allows domestic B. producers and consumers to benefit from the economies of scale typical of many large operations. large 51 51 #7 Free Trade C. International trade promotes competition C. in domestic markets and allows customers to purchase a wide variety of goods at lower prices goods 52 52 #7 Free Trade Government barriers to trade: 1. Tariffs 2. Quotas 3. Domestic Subsidies 53 53 #7 Free Trade Potential reasons for the government to Potential restrict international trade: restrict 1. The National Defense Argument 2. The Infant Industry Argument 3. The Antidumping Argument 54 54 #7 Free Trade The real reason the government restricts The most international trade…. most The politics of special interest groups and The trade restrictions trade 55 55 Economic Freedom! Economic Freedom consists of: 1. Secure private property rights and even Secure handed enforcement of contracts handed 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 56 56 Economic Freedom! How important is economic freedom for economic growth? It matters more than anything else! 57 57 Economic Freedom! 58 58 North Korea vs. South Korea Per Capita Income = $1,800 Per Capita Income = $24,200 59 59 Economic Freedom! Lets take a tour of the world and look at Lets countries with various levels of economic freedom! freedom! 60 60 A country with very low economic country very freedom: Zimbabwe (in Africa) freedom: 61 61 Families in Zimbabwe (Africa) 62 62 Families in Zimbabwe (Africa) 63 63 A country with low economic freedom: country low Romania (in Europe) Romania 64 64 Families in Romania (Europe) 65 65 Families in Romania (Europe) 66 66 Families in Romania (Europe) 67 67 Families in Romania (Europe) 68 68 Families in Romania (Europe) 69 69 Families in Romania (Europe) 70 70 Families in Romania (Europe) 71 71 Families in Romania (Europe) 72 72 A country with medium Economic Freedom: country medium Mexico (in North America) Mexico 73 73 Families in Mexico 74 74 Families in Mexico 75 75 A country with high levels of economic country high freedom: Hong Kong (in Asia) freedom: 76 76 Families in Hong Kong 77 77 Families in Hong Kong 78 78 Families in Hong Kong 79 79 Economic Freedom! 80 80 Review Know the seven major sources of economic Know progress progress 1. The Legal System: private property rights and The evenhanded enforcement of stable laws evenhanded 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 Understand Freedom Freedom 81 81 ...
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