Trade, Money and Capital

B. TRADE, MONEY AND CAPITAL

Features of a modern economy

1. - Specialization and division of labor
2. - Measure economic values
3. - Stock of capital

* Trade, specialization and division of labor. * Specialization: occurs when people and countries concentrate their efforts on a particular set of tasks, it permits each person and country to use to best advantage the specific skills and resources that are available. * Division of labor: dividing production into a number of small-specialized steps or task. * Specialization and trade are the key to high living standards.

* Globalization * Globalization: is used to denote an increase in economic integration among nations. Increasing integration is seen today in the dramatic growth in the glows of goods, services, and finance across national borders.

* Money: the lubricant of exchange * Money: is the means of payment in the form of currency and checks used to buy things. Lubricant that facilitates exchange. * Governments control the money supply through their center banks * Money is the medium of exchange. Proper management of the financial system is one of the major issues for government macroeconomic policy in the countries.

* Capital * Capital: a produced and durable input, which is itself an output of the economy. It consists of a vast and specialized array of machines, buildings, computers, software, and so on. * Capital has to be produced before you use it.

* Growth from the sacrifice of current consumption * Economic activity involves forgoing current consumption to increase our capital. Every time we invest we are enhancing the future productivity of our economy and increasing future consumption.

* Capital and private property * In a market economy, capital typically is privately owned, and the income form capital goes to individuals. * Capital goods also have market values, and people can buy and sell the capital good for whatever price the goods will fetch. * The ability of individuals to own and profit from capital is what gives capitalism name. * While our society is one built on private property, property rights are limited (taxes and government) * Property rights for capital and pollution * Property rights define how individuals or firms can own, buy, sell, and use capital goods and other property. * An efficient and acceptable legal framework for a market economy includes the definition of clear property rights, the laws of contracts, and system for adjudicating disputes.

C. THE VISIBLE HAND OF GOVERNMENT.

* All goods and services are voluntary exchange for money at competitive market prices that reflect consumer valuation and social costs. * No economy actually conforms totally to the idealized world of the smoothly functioning invisible hand. * Economic imperfections lead to such ills as pollution, unemployment, financial panics, and extremes of wealth and poverty. * Governments operate by requiring people to pay taxes, obey regulations, and consume certain collective goods and services. * Government have 3 main economic functions in a market economy: * Increase efficiency (public goods) * Promote equity (taxes) * Foster macroeconomic stability and growth (economic growth)

* Efficiency * Perfect competition: Refers to a market in which no firm or consumer is large enough to affect the market price. * Imperfect competition: When buyer or seller can affect a good’s prices. Leads to prices that rise above cost and to consumer purchases that are reduced below efficient levels. * Monopolist: a singles supplier who alone determines the price of particular good or service.

* Externalities * Externalities (or spillover effects) occur when firms or people impose costs or benefits on others outside the marketplace. * Government regulations are designed to control externalities like air and water pollution damage from strip mining, hazardous wastes, unsafe drugs and foods, and radioactive materials.

* Public Goods * Public goods: are commodities, which can be enjoyed by everyone, and form, which no one can be excluded (national defense). * Taxes * The government must find the revenues to pay for its public goods and for its income redistribution programs. * All levels of government collect taxes to pay for their spending. * Taxes are the price that we pay for public goods * They are involuntary. * Equity * Markets do not necessarily produce a fair distribution income. A market economy may produce inequalities in income and consumption that are no t acceptable to the electorate. * The reason is that incomes are determined by a wide variety of factors, including effort, education, inheritance, factor price, and luck. * To reduce income inequality: * Engage in progressive taxation: taxing large incomes at a higher rate than small incomes. * Transfer payments: which are money payments to people. * Macroeconomic growth and stability * Thanks John Maynard Keynes we know how to control the worst excess of business cycle. By careful use of fiscal an monetary polices, governments can affect output, employment, and inflation * The fiscal polices of government involve the power to tax and the power to pend. * Monetary policy involves determining the supply of money and interest rates. * Macroeconomics polices for stabilization and economic growth include fiscal polices along with monetary polices. * Mixed economy: in which the market determines output and prices in most individual sectors while government steers the overall economy with programs of taxation, spending, and monetary regulation. * The rise of the welfare state * Laissez-faire (leave us alone): holds that government should interfere as a little as possible in economic affairs and leave economic decisions to the private decision making of buyers and sellers. * Welfare state: is one un which markets direct the detailed activities of day-to-day economic life while government regulates social conditions and provides pension, health care, and other necessities for poor families. * The mixed economies. * The success of market economies may lead people to overlook the important contribution of collective actions. * The tools of economics are indispensable to help societies find the golden mean between an efficient market mechanism and publicly decide regulation and redistribution * The good mixed economy is perforce the limited mixed economy