Antonio Ginés – IES. Hnos. Machado – Dos Hermanas - Spain
TOPIC I.- THE ECONOMIC ACTIVITY AND THE ECONOMIC SYSTEMS
ECONOMICS AND SCARCITY.-
Economics' definition.- It's a science that studies the human behaviour as the relation between the purpose and the limited means that have alternative applications. The scarcity implies that there are not enough resources to produce enough to cover all the needs. The scarcity also implies that all the society's objectives can not be met at the same time, so it must follow a priority politics.
Utility.- The scarcity concept is applied to everything useful. And useful means everything that has capacity to satisfy human's needs. Human societies have developed the politics to decide the priorities and the way to satisfy them.
OBSERVATION OF THE SOCIAL RELATIONS'S ECONOMIC CONTENT. THE ECONOMIC AGENTS.-
Economic agents' definition.- They're the persons or groups who make an economic activity.
Economic agent's types.-
Households.- They make the decisions about what to consume and they have the most of the productions factors
Firms.- They make the decisions about the production and the distribution
Public sector.- It's formed by the different civil services. It takes part in the economy in three ways:
By making laws that regulate the way that the other economic agents act when they go to the market
By redistributing the incomes
By offering, at a lower price or for free, goods and services that the society thinks that it must be able to receive all the population
THE NEED FOR CHOICE AND THE RECOGNITION OF THE OPPORTUNITY COST OF A DECISION.-
The opportunity cost.-
Definition.- It's what an agent loses when he makes a decision.
Cannons-butter.- When the individuals group together in societies, they face different types of dilemmas. The classical is the dilemma between “the cannons and the butter”. The more we spend in national security to protect our coasts from the foreign aggressors (cannons), the less we'll spend in personal goods to improve the standard of living in our country (butter)
Pollution-incomes.- In the modern society, the dilemma between a clean environment and a high income level is also important. The legislation that forces the firms to reduce the pollution raises the cost to produce goods and services. Higher costs can create lower company profits, lower salaries, higher prices or all the three things at the same time.
The Production Possibility Frontier (PPF).-
Definition.- It's the group of productive factors or technologies' combinations that reach the highest production. It reflects the highest good and services' amounts that a society can produce in a fixed time period and with ones production's factors and ones given technological knowledge
Situations that can be given in a country's productive structure.-
Inefficient productive structure.- To be under the PPF signifies that either not all the resources are used (idle resources) or the technology isn't adequate (technology can improve). A country with a rate of unemployment above 5%, will always itself find in this productive structure, because there is unused available labour.
Efficient productive structure.- It's located in the frontier or very near to it. There are no idle resources and the best technology is utilized
Unattainable productive structure.- It's located over the Possibilities Production. It's theoretical because no country can produce more than is possible
PPF's shape.- It's concave and decreasing. This shape is due to two reasons:
Decreasing.- In order to produce more of one good it is necessary to produce less of another
Concave.- The opportunity cost is increasing
PPF's displacement.- It is displaceable, this is, the unattainable points can be reached. This displacement can be due to technological improvements, an increase in capital, an increase of workers or the discovery of new natural resources
EXCHANGE RELATIONS AND HISTORICAL DEVELOPMENT.-
Barter or exchange.-
Definition.- To buy or to sell by using a product or service instead of money as a exchange money, that is, to buy or to sell without use cash money
Origins.- It's beginnings go back to the first sedentary communities of human beings. These settlers knew agriculture and shepherding, they lived longer than their nomadic ancestors and they enjoyed better security. In addition the first jobs, like pottery or metal working, started to develop
Appearance of coins.- New products brought new needs that were impossible to satisfy in an autocratic society. Therefore bartering began with the need to exchange what is owned for what is needed. Although, on occasion, many intermediary exchanges were necessary to satisfy needs. That, combined with the growth of settlements and expansion of commercial networks facilitated the appearance of the concept of “coins” (which, initially, were sacks of salt).
Disappearance of barter.- In spite of everything, bartering didn't disappear with the arrival of the coins. In Ancient Egypt, the monetary and exchange systems lived together throughout history, the Phoenicians used it as the basis of their commercial system and the native people of Latin America also exchanged their products in markets.
Explanation for the appearance of money.- When the exchange is frequent, the barter systems quickly find the need to have some goods with monetary properties. That greatly facilitates trade and the permanency of the families in an area, building the location's wealth and demographic growth and giving way to the free trade's natural process and the economy's development
Good-money.- Civilitations have adopted several goods as money (gold, silver, other metals or minerals, wheat, bars of tea in China, etc.)
First money in the West.- The first historical signs that we have of money shaped as a coin in the West are those of the Phoenicians.
Intrinsic value.- The money in that phase had an intrinsic value. The gold and silver in themselves had a value, and so they were exchanged. However, today, money only has a value as a exchange instrument (the paper from which a note is composed does not have value)
Money's issue.- The states started to issue notes and coins that gave right to the bearer to exchange them for gold or silver from the country's reserves.
Development of support of paper money.-
By the XVIII and XIX centuries.- Many countries had a bimetallic standard, based in gold and silver
Between 1870 and the 1st World War.- The Gold Standard was mainly adopted. Any citizen could convert the paper money into an equivalent amount of gold
Between World Wars.- Countries tried to return to the Gold Standard, but the economic situation and the crisis of 1929 ended the ability for an individual to convert notes to gold
By the end of the 2nd World War.- The allies established a new financial system in the Bretton Woods' Agreements. Here it was established that all the currencies would be converted in U.S. dollars and only the U.S. dollar would be convertible in gold bars at 35 dollars per ounce for the foreign governments
By 1971.- The USA's expansive fiscal politics, motivated mainly by the military expenditure in Vietnam, cause the abundance of dollars, which created doubts about its convertibility to gold. As a result the European central banks tried to convert their dollar reserves to gold, creating an unsustainable situation for the USA. Due to this, in December of 1971, the president of the United States, Richard Nixon, suspended on his own the dollar conversion to gold and devalued the dollar by 10%. By 1973, the dollar is devalued another 10%, until, finally, the dollar conversion to gold was finished
From 1973 until today.- The money that we use today has a value in the subjective belief that it will be accepted by the rest of the inhabitants of a country, or economical area, as a type of exchange. The monetary authorities and the Central Banks don't try to defend any particular level of exchange rate, but they take part in the exchange market to calm the short-term speculative fluctuations, with the objective of maintaining at short-term the prices' stability and avoiding situations like hyper-inflation, that destroy the value money leading to less of trust or deflation.
THE ECONOMIC SYSTEMS. FUNDAMENTAL CHARACTERISTICS. EVALUATION AND COMPARISON. ANDALUSIAN ECONOMIC'S PECULIARITIES.-
Capitalism.- (It emerged in Europe by the XVI century)
Capital over work.- Capital dominates over work as a element of production and creator of wealth
Priority of the profit.- The profit is fixed in economic action so that capital accumulates.
Private ownership.- The ownership of the means of production is private
Economy determined by the free market.- The distribution, production and prices of goods and services are usually determined by some type of free market
Free enterprise.- Free enterprise exists
Non intervention.- The State doesn't take part
Liberalism and neoliberalism.- The political doctrine that historically has led the defence and implementation of this economic and political system has been economic and classic liberalism whose founding fathers are considered to be John Locke, Juan de Mariana, Adam Smith and Benjamin Franklin. Liberal classical thinking, in economics, holds that the government's role must to be reduced as much as possible. It must only look after the legal code that will guarantee the respect of private property, the defence of what are called “negative freedoms”: the civil and political rights that depend on the resources obtained for private means, the domestic and external security's control by means of the Armed Forces and the police, and possibly the establishment of politics that were considered indispensable for a functioning market, because a greater presence of the State in the economy would disturb how it works. The most prominent contemporary representatives scholars are Ludwing von Mises and Friedrich Hayek for the Austrian school of economics; George Stigler and Milton Friedman for the Chicago school of economics. Both are in the controversial categorization of neoliberalism.
Other tendencies.- There are other tendencies in the economical thinking that assign different functions to the State. John Maynard Keynes holds that the State can increase the effective demand by avoiding the cyclical crisis.
The centralize planning economy.-
State organization.- The production factors are in the hands of the State, who is the only important economic agent. The market doesn't assign the resources, because it's handled by the State. These manipulations are made with multi-annual economic plans (five-year plans), which explains in great detail the supply, production methods, wages, infrastructure investment, . . .
Forecast mistakes.- The market didn't send signals because this didn't exist (false market). Without signals, the planners didn't always get right in their forecasts and that caused a lack of adaptation to the reality and a scarce reaction capacity.
Scarce motivation.- Because the wages and the prices were fixed by the State, the firms needn't be competitive and the workers were unmotivated, because they earned the same if they did their work well or badly.
Excessive bureaucracy.- The planning needed a huge bureaucracy at the service of the State, so the decisions and the reaction capacity were slower.
Appearance and expansion.- This system, inspired by Marxist theory, appeared in Russia's Soviet Federal Socialist Republic after the 1st World War, due to the state of emergency and the war economy for the war against the White Army and the Triple Entente during the Russian Civil War, which happened in the first months after the October Revolution and the appearance of the first Soviet Republics, got worse with Stalin and his followers, when the Soviet Union was born, with the so-called one-country politics; models that were extended after the 2nd World War for all The East Europe and many asian countries, under the Soviet Union and the Komintern. Although at the beginning was more productive than the capitalism, soon the firms stopped being productive and the State became continuously in debt to maintain the full employment. As well, in the case of the USSR, it had to assign a huge amount of its budget to maintain the army and the war technology in its Cold War with the USA.
Self-destruction.- Finally, at the end of the 20th century, the USSR fell down with its economic system and nowadays Russia and the East countries go toward a Market Economy. China is looking for a balance, Cuba is trying to defend the centralized economic system by making some reforms or concessions in strategic sectors, like tourism, to the market economy, prevailing abroad. Actually, only North Korea follows a centralized economic model, almost without reforms of capitalist type or another type.
In reality, no country with a totally market or centralized economy exists, but more or less a combination of both in increasing or decreasing degree.
Andalusian economy peculiarities.-
The Andalusian economy, like the Spanish economy, has a mixed economic system with a lot of importance placed on the market economy
TOPIC II.- PRODUCTION AND ECONOMIC INTERDEPENDENCE
Definition.- A production process converts inputs into outputs (goods or services) with physical, technological, human and other types of resources
Planning.- A production process includes actions that happen in a planned way and produce a change or transformation of materials, objects or systems, at the end of which we obtain a product
FACTORS OF PRODUCTION.-
Evolution of the concept.-
Classic economists.- They use the three factors that Adam Smith defined, each factor takes part in the result of the production by means of a reward fixed by the market:
Land (that is rewarded by the income)
Labour (that is rewarded by the wage)
Capital (that is rewarded by interest)
Neoclassic economists.- They only use capital and labour
Land.- (More and more changed by human intervention). Today land is considered, a component of capital or a component of a wider natural factor (natural resources or natural capital)
4th factor of production.- In the economy of knowledge and business development produced since the end of the 20th Century, people consider that technology and science (what has been called R&D -Research and Development- or even R, D&I -Research, Development and Innovation-) is a 4th factor of production that characterizes more and more the production in the industrialised countries. At the same time, to the concept of physical capital or financial capital is added the concept of human capital or intellectual capital, even social capital, as a way of explaining the improvement of the productivity that isn't due to the other factors
New factors of production.-
Intangible capital (know-how, organization, non-physical but computable assets, intangible labour, knowledge economy)
Training.- Investment allows the volume of the factors of production to increase. Training can be considered a form of investment, because it increases the abilities of the workers and the production
Definition.- Added Value is the increase in value that is produced in a good in each phase of the production process
Double accounting.- To avoid double accounting added value is calculated in each stage of the production process
Stage of the production
Value of the sales
Cost of the intermediate products
DIVISION OF LABOUR.-
Definition.- The division of labour, generally speaking, deals about specialization and cooperation of the labour forces in tasks and roles, with the objective of improving efficiency. When a worker executes all the different tasks necessary to manufacture a product, the performance is slow, so it is necessary to share the tasks.
Industrial division.- The industrial division deals with division of tasks within an industry or firm.
Vertical division.- The vertical division is a group of jobs executed before by one person but today is divided into different professions.
Collateral division.- The collateral division is the division that separates different professions.
Example.- Adam Smith in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” says that a person, on his own, can make less than one hundred pins per day, but if we share the job we could make up to ten thousand pins.
Advantages of division of labour.-
To save capital.- Each worker doesn't need to have all the tools that he would need for the different functions
To save time.- The worker doesn't need to constantly change tools.
To decrease mistakes.- The tasks that each worker executes are easier, so the mistakes decrease.
Invention of machines.-
Concentration and machinery.- When the worker has a small and easy task, he will pay more attention than if he executes one task where he must constantly take turns with his workmates; that is to say, when a worker executes a more difficult task he will lose his concentration as he waits for it. The text of Adam Smith “An Inquiry into the Nature and Causes of the Wealth of Nations” speaks also about the importance of the machinery (that the craftsmen build in order to speed up the work). They bring simplicity to the task
Definition of total, marginal and average product.-
Total product.- The total product is the total amount in physical units that is obtained for the total amount of factor used
Marginal product.- The marginal product is the variation that the total production experiences when it uses one additional unit of factor
Average product or productivity.- The average product is the amount of units of product that are obtained for every unit of factor used
Other definitions of productivity.-
Production/resources.- It is the ratio of the obtained production through a production or services system and the resources used to obtain it
Results/time.- Also it can be defined as the ratio of the results and the time used to obtain them: the less time used to obtain the wanted result, the more productive the system is
Outputs/inputs.- It's the ratio of a system's outputs and inputs
Capacity of production and added value.- Productivity evaluates the capacity of a system to create the products that people desire and, at the same time, the degree it makes use of the resources used, that is, the added value.
Productivity-profitability.- A greater productivity using the same resources or producing the same goods or services equals greater profitability for the company. That's why, the company's Quality management systems tries to increase productivity.
Management quality.- Productivity is connected to the continuous improvement of the Quality management systems and thanks to this quality system people can prevent the quality defects avoiding that they arrive at the final user. Productivity is connected to the production standards, if people improve these standards then they will save resources and it will be reflected in the increase of their usefulness.
Types of productivity.-
Factor productivity.- It's the increase or decrease of output, it's caused by the variation of any factors that take part in the production: labour, capital, technique, etc.
Total factor productivity (TFP).- It's the difference between the increase rate of the production and the weighted increase rate of factors (labour, capital, ...). The TFP is a measurement of the effect of the economies of scale, in which the total production increases more in proportion to the amount that each factor of production increases.
Improvement of the productivity.- It's obtained by innovation in:
Globalisation.- All countries (nation-states) are dependent in different degrees, in each one of the following areas: trade, technology, communications and migration, among others. All of this, in the context of globalization, forces the countries to be in a constant interdependence because they are connected in different areas, like those mentioned above.
Specialization.- The economic interdependence is a result of specialization
Variation.- The interdependence is not inflexible, because organizations, individuals and countries can change their production from one group of products to another.
Mutual dependence.- On the other hand, the relationships between imperialist nations and their colonies aren't unilateral, that is, not only do the colonies need the foreign powers for their development but the power countries also need the colonies to obtain raw material and as markets to sell their goods and/or to export their capitals.
The firm is the basic economic unit in charge of satisfying the market's needs using material and human resources. It's in charge, therefore, of organizing the factors of production, capital and labour.
FUNCTIONAL AREAS OF THE FIRM (a possible division).-
Production and Logistics.- The business logistics manages and plans the activities of the purchasing, production, transport, warehousing, maintenance and distribution departments
Management and Human Resources.- Selects, hires, trains, employes and maintains collaborators of the organization. A person or a department (the Human Resources professionals and the organization managers) can do these tasks.
Commercial (Marketing).- Designs the product, assigns the prices and chooses the most appropriate channels of distribution and techniques of communication in order to launch a product that will satisfy truly the needs of the costumers. These tools are also known as Grundy's Four P's: product, price, distribution or place and advertising or promotion.
Finances and Administration.- It studies how the enterprise can obtain and manage the money that it need to achieve its objectives and how it arranges its assets
Sales.- It's in charge of the sales of the products of the enterprise and customer service.
According to the economic activity.-
The primary sector.- They are mainly extractive and they create the utility of the goods when they obtain the resources from nature (agricultural, livestock, fisheries, mining, etc.)
The secondary sector.- They physically convert some goods in others more useful. The industrial and building firms are in this group.
The tertiary sector.- (Services and trade), with activities such as transport, tourism, consultancy, etc.
According to the legal status.-
Firms that belong to only one person.- This person has an unlimited responsibility (with everything he owns). It's the simplest way to create a firm. They normally are small and familial firms.
Firms that belong at a group of persons.-
Corporations.- Such as the public limited company, unlimited company, limited partnership company and private company limited by shares.
Social economy.- Cooperatives and others.
According to the size.- There isn't unanimity among economists in defining small and large companies because an established criteria doesn't exist to measure them. The main criteria are: sales volume, net worth, number of workers, profits, etc. The most used is the number of workers:
Microenterprise.- It has 10 workers or less
Small enterprise.- It has between 11 and 50 workers
Medium-sized enterprise.- It has between 51 and 250 workers
Great enterprise.- It has more than 250 workers
According to the area of the activities.-
According to who is the owner.-
Private sector company.- The owners are individuals
Public sector company.- The owner is the State
Mixed company.- The owners are individuals and the State
Self-management company.- The owners are the workers
According to the market share.-
Applicant firm.- It wants to have more market share
Specialist firm.- It concentrates in a market segment as a near monopolist. This segment must to be big enough to be profitable, but not so big to attract the leader firms
Leader firm.- It's the most important firm and it is imitated by the others
Follower firm.- It hasn't an important market share and isn't a problem to the leader firm
THE OBTAINING AND ANALYSIS OF COST OF PRODUCTION AND PROFIT.-
Definition of total costs.- They are those that a company has in a production process or activity. They are the sum of fixed costs and variable costs: TC = FC + VC
Definition of fixed costs.- They are invariable if the activity level has small changes. Fixed costs are connected with productive structure and so they are also called structure costs, and they are used to make reports about the degree of use of that structure. Example: If we make more bread we needn't pay a bigger rent for our industrial unit.
Definition of variable costs.- They change if the activity level changes. That is, if the activity level decreases, these costs decrease, and if the activity level increases, these costs increase. Except when there are structural changes, in the economic units – or productive units – variable costs have a linear behaviour, because the average value per unit tends to be constant. In Microeconomic Theory variable costs are not linear, at the beginning they are more increasing but after that they are less increasing. Example: If we make more bread we need more flour.
Definition of profit.- It's the wealth that a person obtains from an economic process. Profit is total income minus total production and distribution costs. It's output value minus input value. Economic profit indicates the creation of wealth. Negative profit is called loss. In a free market, the greater profit a company has, the more successful a company is.
IDENTIFICATION OF MAIN ECONOMIC SECTORS IN ANDALUSIA.-
Primary Sector.- It has the least percentage of the total production but it has a big relative importance with the other productive sectors. This importance is greater if we compare it with the primary sector of other western economies, where it has been reduced to the smallest quantity. The primary sector produces 8.26% of the total and takes up 8.19% of the working population. It's a small competitive sector since other economies with far smaller working population produce far more. To this relative importance of the Andalusian primary sector must be added its long tradition in Andalusia, where it's deeply rooted. Primary sector can be divided into a series of subsectors: agriculture, fishing, livestock, hunting, forest resources, mining and energy industry.
Agriculture.- Traditionally the main products have been wheat, olive tree and grapevine. In the last decades traditional farming has decreased and farming of wheat, rise, beetroot, cotton and sunflower has increased. Greenhouse farming, mainly in Almeria has also increased.
Fishing.- It's a traditional activity in Andalusia and its importance is seen in the Andalusian diet. The Andalusian fishing fleet is the second most important of Spain, with a big fishing area that includes waters which do not belong to Andalusia. Major exploitation problems exist today due to the new fishing techniques and to the new fishing ships with a big draught and with powerful freezers that be able to fish for several weeks. This modern fishing is associated with deep sea fishing, while coastal fishing, except for the motorization of ships, continues to be a very traditional activity. All the previously mentioned problems have led to a rapid improvement in aquaculture, both along the coasts as well as in the fish farms inland. For example, the fish farm of Riofrio, in Granada, exports 40% of its caviar production, and it competes in international markets with Russian and Iranian caviar.
Livestock.- The Andalusian livestock is 10% of the national livestock, while the Andalusian agriculture is 30% of the national agriculture. Therefore, only 70% of the Andalusian needs for meat and milk are supplied by the Andalusian livestock. This situation is due to the climate but also to historical reasons.
Hunting.- In the big game hunting, the most important animals are deer and wild boars but also wild goats, mouflons, fallow deer, roe deer, etc. The most important in shooting are partridges, rabbits, hares, quails, thrush, pigeons, etc.
Forest resources.- Forest resources are very important due to their extension and diversification: grass, fruits, wood, etc., and due to other aspects such as the fixing of the ground, hydric regulation and maintenance of the flora and the fauna. In total, the forest area is 50% of the Andalusian area, and half of this area is wood (more than 10 trees per ha) the rest of the area without trees are pasture lands, bushes and rocky places. The value of the production of the forest areas is only 2% of the agricultural production. Hunting, wood, fruits (nuts), cork and the use of the grass are the most important sub-sectors
Mining and energy.- The exploitation of the mining resources was made without regard to the fact that this is a limited resource. Therefore, most of the mining areas (Linares-La Carolina, Riotinto and Guadiato basin) are now in decay due to the high cost of extraction and the low calorific power in the case of coal. Despite this low profitability and general crisis in the sector, it still has certain importance. If we compare the value of the extractions with the rest of Spain, we can state that, Andalusia has 59% of the metallic extractions, more than anything else, pyrite and iron. Andalusia has 98% of the extraction of gold and silver and 100% of strontium
Industry.- The development, in the 19th century, of the industries tied to mining extraction (Garrucha and Carboneras, Riotinto, El Pedroso, Peñarroya and Linares-La Carolina) failed. At the beginning of the 21st century, in spite of the fact that a greater integration between the mining extraction and the industrial transformation exists, this is still insufficient and incomplete. The scarcity of energy products provokes a strong dependence on imported oil, even though Andalusia has a great potential for the development of renewable energy sources, more than anything solar energy and wind power. There are other less important industries such as the car industry, aeronautics, etc.
Construction.- At the beginning of 2008 the international financial crisis worsened, the banks saw a fall in their profits, and the market exchange experienced sharp falls. In this context, the construction industry begin to show evident signs crisis: a sharp fall in sales, a fall in the price of the constructions, a rise in the debt inability to pay, or a rise of unemployment in the sector (for example, half of the real state firms closed). In February, the Spanish economy showed evident symptoms of an economic crisis, as unemployment saw the largest increase in 25 years
Tertiary sector.- This sector has had a very important increase in the last decades. It was minority and now it is majority in the western economies. This process has been called tertiaritation of the economy and has been very important in the Andalusian economy. By 1975 the tertiary sector produced 51.1% of the Andalusian Gross Value Added (GVA) and it gave employment to 40.8%, while by 2007 produced 67.9% of the GVA and 66,42% of the jobs. However this increase of the Tertiary sector came before other developed economies and it was independent of the industrial sector
Trade.- It is focused in the export of food and agriculture products and in the import of energy products. The three main countries that buy Andalusian products are Germany, France and Italy with 33% of the total exports. The economies of these countries buy the majority of the Andalusian food and agriculture products. On the other hand, Algeria, Nigeria and Russia sell to Andalusia mainly oil and account for 24.2% of imports. The challenge for Andalusia in the future is to diversify its exports to include other more elaborate products with a bigger added value and to reduce its dependence on the import of energy products.
Tourism.- Andalusia is the first Spanish community in tourism with almost 30 million annual visitors. The main places are Costa del Sol and the Sierra Nevada. The Andalusian location, to the South of the Iberian peninsula, means that it is one of the warmest places in Europe. In all the territory predominates the Mediterranean climate, that gives a large number of sun hours, and joined with the existence of a lot of big beaches, it's ideal for the development of sun and beach tourism
READING AND INTERPRETATION OF ECONOMIC INFORMATION AND CHARTS.-
ANALYSIS OF ECONOMIC NEWS ABOUT CHANGES IN THE PRODUCTIVE SYSTEM OR IN THE ORGANIZATION OF THE PRODUCTION IN THE CONTEXT OF GLOBALIZATION.-
Technology will revolutionize the electric production in ten years time
Europe, Latin America and the globalization
TOPIC III.- EXCHANGE AND MARKET
Definition.- It's the amount of goods and services that producers offer at different prices and given conditions at a point in time
Definition.- It is the measure of the way quantity supplied reacts to a change in price.
Formula.- Es = % change in quantity supplied : % change in price
Example.- If, in response to a 10% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would be 20%/10% = 2.
Inelastic – elastic.- When there is a relatively inelastic supply for the good the coefficient is low; when supply is highly elastic, the coefficient is high. Supply is normally more elastic in the long run than in the short run for produced goods. As spare capacity and more capital equipment can be utilised the supply can be increased, whereas in the short run only labour can be increased. Of course goods that have no labour component and are not produced cannot be expanded. Such goods are said to be "fixed" in supply and do not respond to price changes.
Stocks.- The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.
Determinants of the price elasticity of supply.-
The existence of the naturally occurring raw materials needed for production
The length of the production process
The production spare capacity (the more spare capacity there is in an industry the easier it should be to increase output if the price goes up)
The ease of resources to move into the industry
The storage capacity of the merchants (if they have more goods in stock they will be able to respond to a change in price more quickly)
SHAPE OF THE CURVE.- The supply curve usually slopes upwards from left to right; that is, it has a positive association. The positive slope is often referred to as "law of supply," which means producers will offer more of a service, product, or resource as its price rises
SUPPLY CURVES THAT DON'T SLOPE UPWARDS.- The labour supply curve will slope upwards to the right, as it does at point E for example. This individual will continue to increase his supply of labour services as the wage rate increases up to point F where he is working HF hours (each period of time). Beyond this point he will start to reduce the amount of labour hours he supplies (for example at point G he has reduced his work hours to HG). Where the supply curve is sloping upwards to the right (positive wage elasticity of labour supply), the substitution effect is greater than the income effect. Where it slopes upwards to the left (negative elasticity), the income effect is greater than the substitution effect. The direction of slope may change more than once for some individuals, and the labour supply curve is likely to be different for different individuals.
Determinants of individual supply.-
The price of the product.- The bigger price, the bigger supply
The costs of the production factors.- The bigger cost, the smaller supply
The size of the market.- The bigger market, the bigger supply
The availability of the production factors.- The bigger availability, the bigger supply
The number of competitor firms.- The bigger competition, the bigger supply
The amount of produced goods.- The bigger amount, the bigger supply
Definition.- It's the amount of goods and services that buyers are willing and able to purchase at different prices and giving conditions at a point in time
Determinants of individual demand.-
The price of the good.- The bigger price, the smaller demand
The level of income.- The higher level of income, the bigger demand
Personal tastes.- If a product is in fashion its demand increases
The population (number of people).- The bigger population, the bigger demand
The government policies.- The government can provoke that the demand of a product increases
The price of substitutive goods, and the price of complementary goods.-
Substitutive goods.- If the products are substitutive, the bigger price of one of them, the bigger demand of the other
Complementary goods.- If the products are complementary, the bigger price of one of them, the smaller demand of the other
Movement along a demand curve.- There is movement along a demand curve when a change in price causes the quantity demanded to change. It is important to distinguish between movement along a demand curve, and a shift in a demand curve.
Shift of a demand curve.- The shift of a demand curve takes place when there is a change in the relationship between quantity and price that is brought about by a change in any of the factors influencing demand except price. A demand shift results in a new demand curve. When income rises, the demand curve for normal goods shifts right.
Demand-price curve.- The demand curve usually slopes downwards from left to right; that is, it has a negative association (for two theoretical exceptions: Veblen goods and Giffen goods).
Veblen goods.- It is claimed that some types of high-status goods, such as diamonds, Apple products or luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable.
Giffen goods.- A Giffen good, for example rice, is one which people consume more of as price rises, violating the law of demand. In normal situations, as the price of such a good rises, the substitution effect causes people to purchase less of it and more of substitute goods. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.
Definition.- An economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the equilibrium price and will tend not to change unless demand or supply change.
Interpretations.- In most interpretations, classical economists such as Adam Smith maintained that the free market would tend towards economic equilibrium through the price mechanism. That is, any excess supply (market surplus or glut) would lead to price cuts, which decrease the quantity supplied (by reducing the incentive to produce and sell the product) and increase the quantity demanded (by offering consumers bargains), automatically abolishing the glut. Similarly, in an unfettered market, any excess demand (or shortage) would lead to price increases, reducing the quantity demanded (as customers are priced out of the market) and increasing in the quantity supplied (as the incentive to produce and sell a product rises). As before, the disequilibrium (here, the shortage) disappears. This automatic abolition of non-market-clearing situations distinguishes markets from central planning schemes, which often have a difficult time getting prices right and suffer from persistent shortages of goods and services.
Definition.- The induced demand is the phenomenon that after supply increases, more of a good is consumed. This is entirely consistent with the economic theory of supply and demand; however, this idea has become important in the debate over the expansion of transportation systems, and is often used as an argument against widening roads, such as major commuter roads. It is considered by some to be a contributing factor to urban sprawl
Price of road travel.- A journey on a road can be considered as having an associated cost or price (the generalised cost) which includes the out-of-pocket cost (e.g. fuel costs and tolls) and the opportunity cost of the time spent travelling, which is usually calculated as the product of travel time and the value of travellers' time. When road capacity is increased, initially there is more road space per vehicle travelling than there was before, so congestion is reduced, and therefore the time spent travelling is reduced - reducing the generalised cost of every journey (by affecting the second "cost" mentioned in the previous paragraph). In fact, this is one of the key justifications for construction of new road capacity (the reduction in journey times). A change in the cost (or price) of travel results in a change in the quantity consumed.
Definition.- In neoclassical economics and microeconomics, perfect competition describes the perfect being a market in which there are many small firms, all producing homogeneous goods.
In the short-run.- Such markets are productively inefficient (we could produce the given output at a lower cost or could produce more output for given cost) as output will not occur where marginal costs (mc) is equal to average costs (ac), but allocatively efficient (the distribution of resources between alternatives fits with consumer taste), as output under perfect competition will always occur where marginal costs (mc) is equal to marginal revenue (mr), and therefore where marginal costs (mc) equals average revenue (ar). However, in the long term, such markets are both allocatively and productively efficient. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. Because the conditions for perfect competition are very strict, there are few perfectly competitive markets.
Profit.- In the short-run, it is possible for an individual firm to make a profit. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C .
In the long period.- However, in the long period, positive profit cannot be sustained. The arrival of new firms or expansion of existing firms in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point.
Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.
Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.
Perfect Information - For both consumers and producers.
Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers.
Definition.- A monopoly (from Greek monos, alone or single + polein, to sell) exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition
Competition laws.- In many jurisdictions, competition laws place specific restrictions on monopolies. Holding a dominant position or a monopoly in the market is not illegal in itself, however certain categories of behaviour can, when a business is dominant, be considered abusive and therefore be met with legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture. The government may also reserve the venture for itself, thus forming a government monopoly.
Price.- If a company raises prices too high, then others may enter the market if they are able to provide the same good, or a substitute, at a lower price. The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".
Total profits.- The total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem does not hold true if customers in the monopoly good are poorly informed, or if the tied good has high fixed costs.
Alter the market.- A pure monopoly can -unlike a competitive firm- alter the market price for her own convenience: a decrease in the level of production results in a higher price. In the economics' jargon, it is said that pure monopolies "face a downward-sloping demand". An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lower quantity of output than a price-taking firm; again, less is available at a higher price.
Monopoly and efficiency.- It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low.
Short run.- In the short run it can be good to allow a firm to attempt to monopolize a market. When monopolies are not broken through the open market, sometimes a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly environment, or forcibly break it up (see Antitrust law). Public utilities, often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly. When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market and began to take phone traffic from the less efficient AT&T server.
Ways for the appearance of a monopoly.-
Trust.- A special trust or business trust is a business entity formed with intent to monopolize business, to restrain trade, or to fix prices. Trusts gained economic power in the U.S. in the late 19th and early 20th centuries. Some but not all were organized as trust in the legal sense. They were often created when corporate leaders convinced (or coerced) the shareholders of all the companies in one industry to convey their shares to a board of trustees, in exchange for dividend-paying certificates. The board would then manage all the companies in 'trust' for the shareholders (and minimize competition in the process).
Cartel.- It's a form of oligopoly in which several providers FROM THE SAME SECTOR act together to coordinate services, prices or sale of goods
Mergers and acquisitions.-
Merger.- A merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.
Acquisition.- An acquisition, also known as a takeover or a “buyout”, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company. Achieving acquisition success has proven to be very difficult, while various studies have showed that 50% of acquisitions were unsuccessful.
Types of monopoly.-
Pure monopoly.- If there is a single seller in a certain industry and there are no close substitutes for the good being produced by her, then the market structure is that of a Pure monopoly
Artificial monopoly.- This is a monopoly created by the government by means of artificial barriers to entry such as patents and copyrights
Natural monopoly.- A natural monopoly occurs when, due to the economies of scale of a particular industry, the maximum efficiency of production and distribution is realized through a single supplier. Examples include water services and electricity. It may also depend on control of a particular natural resource.
Monopolistic competition.- It's a common market structure where many competing producers sell products that are differentiated from one another (ie. the products are substitutes, but are not exactly alike). Many markets are monopolistically competitive, common examples include the markets for restaurants, cereal, clothing, shoes and service industries in large cities.
Monopsony.- A monopsony (from Ancient Greek (monos) "single" + (opsonia) "purchase") is a market form in which only one buyer faces many sellers
Bilateral monopoly.- In a bilateral monopoly there is both a monopoly (a single seller) and monopsony (a single buyer) in the same market. In such market price and output will be determined by the non economic forces like bargaining power of both buyer and seller.
Definition.- It's a market form in which a market or industry is dominated by a small number of sellers (oligopolists). The word is derived from the Greek oligo' “few” plus -opoly as in monopoly and duopoly. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion.
Cartel.- Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.
Price leadership.- Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership
Approaching perfect competition.- In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other.
GOODS AND SERVICES MARKET.-
Running.- Supply and demand of the product determine an equilibrium price, and at that price the firms freely decide the amount that they are going to produce. Therefore, the market determines the price and each firm accepts this price as a fixed piece of information and they can't have an influence on it.
Output of each firm.- Each firm is going to produce the quantity that its supply curve indicates for this price. the supply curve of each firm is conditioned for its production cost
Minimization of costs and equalization of profits.- The inefficient firms won't be able to abandon the sector in the short-run, but in the long-run they will sell their installations, therefore, there is a trend to minimize costs and to equalize profits in perfect competition
Perfectly inelastic supply curve.- Land was sometimes defined in classical and neoclassical economics as the "original and indestructible powers of the soil." Georgists hold that this implies a perfectly inelastic supply curve (i.e., zero elasticity).
Shifts of the demand curve.-
Definition.- Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.
Demand for labour and wage determination.- Labour demand is a derived demand, in other words the employer's cost of production is the wage, in which the business or firm benefits from an increased output or revenue. If the Marginal Revenue Product (MRP) is greater than a firm's Marginal Cost, then the firm will employ the worker. The firm only employs however up to the point where MRP=MC, not lower, in economic theory.
Wage differences.- Wage differences exist, particularly in mixed and fully/partly flexible labour markets. For example, the wages of a doctor and a port cleaner, both employed by the NHS, differ greatly. But why? There are many factors concerning this issue. This includes the MRP (see above) of the worker. A doctor's MRP is far greater than that of the port cleaner. In addition, the barriers to becoming a doctor are far greater than that of becoming a port cleaner. For example to become a doctor takes a lot of education and training which is costly, and only those who are socially and intellectually advantaged can succeed in such a demanding profession. The port cleaner however requires minimal training. The supply of doctors therefore would be much more inelastic than the supply of port cleaners. The demand would also be inelastic as there is a high demand for doctors, so the NHS will pay higher wage rates to attract the profession.
Labour supply curve.- The labour supply curve will slope upwards to the right, as it does at point E for example. This individual will continue to increase his supply of labor services as the wage rate increases up to point F where he is working HF hours (each period of time). Beyond this point he will start to reduce the amount of labor hours he supplies (for example at point G he has reduced his work hours to HG). Where the supply curve is sloping upwards to the right (positive wage elasticity of labor supply), the substitution effect is greater than the income effect. Where it slopes upwards to the left (negative elasticity), the income effect is greater than the substitution effect. The direction of slope may change more than once for some individuals, and the labor supply curve is likely to be different for different individuals.
Capital market.- The capital market is the market for securities, where companies and governments can raise longterm funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market.
Money market.- The money market is the global financial market for short-term borrowing and lending. It provides short-term liquidity funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and banker's acceptances are bought and sold.
The main determinants of capital market.- The main determinants are income and interest rate
LIMITS TO THE MARKET MECHANISM AND ITS REPERCUSSION ON CONSUMERS.-
First World – Third World.- A number of Third World countries were former colonies and with the end of imperialism many of these countries, especially the smaller ones, were faced with the challenges of nation and institution-building on their own for the first time. Due to this common background a lot of these nations were for most of the 20th century, and are still today, "developing" in economic terms. This term when used today generally denotes countries that have not "developed" to the same levels as OECD countries, and which are thus in the process of "developing". In the 1980s, economist Peter Bauer offered a competing definition for the term Third World. He claimed that the attachment of Third World status to a particular country was not based on any stable economic or political criteria, and was a mostly arbitrary process. The large diversity of countries that were considered to be part of the Third World, from Indonesia to Afghanistan, ranged widely from economically primitive to economically advanced and from politically non-aligned to Soviet- or Western-leaning. The only characteristic that Bauer found common in all Third World countries was that their governments "demand and receive Western aid" (the giving of which he strongly opposed). Thus, the aggregate term "Third World" was challenged as misleading even during the Cold War period.
Manufactured products - raw materials.- Third world countries sell raw materials and buy manufactured products that are more expensive
TOPIC IV.- NATIONAL MAGNITUDES AND INDICATORS OF A ECONOMY
INTERPRETATION OF NATIONAL AND INDIVIDUAL WEALTH.-
Wealth-income.- Wealth is the amount of properties owned by someone. Income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received in a given period of time
National wealth.- Therefore, national wealth will be the amount of properties owned by a nation
CIRCULAR FLOW OF INCOME.-
Relationship between households and firms.-
Relation between households and firms and the government.-
OBTAINING THE DOMESTIC PRODUCT AND CALCULATION AND INTERPRETATION OF THE MAIN RELATED MAGNITUDES.-
Gross domestic product (GDP).-
Definition.- The gross domestic product (GDP) or gross domestic income (GDI), a basic measure of an economy's economic performance, is the market value of all final goods and services made within the borders of a nation in a year.
GDP can be defined in two ways:
GDP at market prices.- It is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). GDPmp = consumption + gross investment + government spending + (exports – imports), or, GDPmp = C + I + G + (X – M)
GDP at factor cost.- It is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, in the period. GDPfc = Primary Sector + Secondary Sector + Tertiary Sector
Relationship between GDPfc and GDPmp.- GDPfc = GDPmp – indirect taxes + subsidies on production and imports. GDPfc = GDPmp – Ti + Su
Net domestic product at factor cost.- The net domestic product at factor cost (NDPfc) equals the gross domestic product at factor cost (GDPfc) minus depreciation on a country's capital goods. NDPfc = GDPfc - Dep
Net National Product at factor cost.- Net National Product at factor cost (NNPfc) is Net Domestic Product at factor cost (NDPfc) plus income earned by its citizens abroad, minus income earned by foreigners in the country. NNPfc = NDPfc + ICA – IFC
Net National Product at market prices.- Net National Product at market prices is Net National Product at factor cost plus Indirect Taxes minus subsidies on production and imports. NNPmp = NNPfc + Ti - Su
Example.- Calculate the NDPfc with this information: C = 500; I = 100; G = 200; X = 20; M = 30; Ti = 70; Su = 15; Dep = 25; ICA = 33; IFC = 27
NDPfc = C + I + G + (X – M) – Ti + Su – Dep = 500 + 100 + 200 + (20 – 30) – 70 + 15 – 25 = 710
Definition of income distribution.- Income distribution is how a nation’s total economy is distributed amongst its population.
Geographical.- This analysis measures the differences among the inhabitants of the regions
Functional.- This analysis measures the differences among the factors: land, labour and capital
Lorenz curve.- The Lorenz curve is often used to represent income distribution, where it shows for the bottom x% of households, what percentage y% of the total income they have. The percentage of households is plotted on the x-axis, the percentage of income on the y-axis.
Perfect equality.- Every point on the Lorenz curve represents a statement like "the bottom 20% of all households have 10% of the total income.". A perfectly equal income distribution would be one in which every person has the same income. In this case, the bottom "N"% of society would always have "N"% of the income. This can be depicted by the straight line "y" = "x"; called the "line of perfect equality."
Perfect inequality.- By contrast, a perfectly unequal distribution would be one in which one person has all the income and everyone else has none. In that case, the curve would be at "y" = 0 for all "x" < 100%, and "y" = 100% when "x" = 100%. This curve is called the "line of perfect inequality."
Gini coefficient.- The Gini coefficient is the area between the line of perfect equality and the observed Lorenz curve, as a percentage of the area between the line of perfect equality and the line of perfect inequality. It is defined as a ratio and can range from 0 to 1 (0% to 100%): A low Gini coefficient indicates more equal income or wealth distribution, with 0 corresponding to perfect equality (everyone having exactly the same income), while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to perfect inequality (i.e., a situation with more than one individual, where one person has all the income).
Social impact.- In the neoliberal system a debate exists on whether the market can regulate itself and distribute the wealth of a country in a balanced way or if the government must take part. Radical neoliberalism says that the government mustn't take part in the economy just to guarantee stability. The updated socialism and centre sectors are part of a softer neoliberalism and promote a government more worried about social subjects, but without abandon the ideology of the contemporary liberalism
Wealth distribution – GDP does not take disparity in incomes between the rich and poor into account.
Non-market transactions – GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services.
Underground economy – Official GDP estimates may not take into account the underground economy, in which transactions contributing to production, such as illegal trade and tax-avoiding activities, are unreported, causing GDP to be underestimated.
Non-monetary economy – GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services
Quality of goods – People may buy cheap, low-durability goods over and over again, or they may buy high-durability goods less often. It is possible that the monetary value of the items sold in the first case is higher than that in the second case, in which case a higher GDP is simply the result of greater inefficiency and waste.
Quality improvements and inclusion of new products – By not adjusting for quality improvements and new products, GDP understates true economic growth. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value.
What is being produced – GDP counts work that produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable amount of economic activity and thus boost GDP. The economic value of health care is another classic example -it may raise GDP if many people are sick and they are receiving expensive treatment, but it is not a desirable situation. Alternative economic measures, such as the standard of living or discretionary income per capita better measure the human utility of economic activity.
Externalities – GDP ignores externalities or economic “bads” such as damage to the environment. By counting goods which increase utility but not deducting bads or accounting for the negative effects of higher production, such as more pollution, GDP is overstating economic welfare. The Genuine Progress Indicator is thus proposed by ecological economists and green economists as a substitute for GDP. In countries highly dependent on resource extraction or with high ecological footprints the disparities between GDP and GPI can be very large, indicating ecological overshoot. Some environmental costs, such as cleaning up oil spills are included in GDP.
Sustainability of growth – GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources.
Basket of goods.- GDP growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure.
Comparable basket of goods.- Cross-border comparisons of GDP can be inaccurate as they do not take into account local differences in the quality of goods, even when adjusted for purchasing power parity. This type of adjustment to an exchange rate is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. This is especially true for goods that are not traded globally, such as housing.
Alternatives to GDP.-
Human Development Index (HDI) .- HDI uses GDP as a part of its calculation and then factors in indicators of life expectancy and education levels.
Genuine Progress Indicator (GPI) or Index of Sustainable Economic Welfare (ISEW).- The GPI and the similar ISEW attempt to address many of the above criticisms by taking the same raw information supplied for GDP and then adjust for income distribution, add for the value of household and volunteer work, and subtract for crime and pollution.
Wealth Estimates.- The World Bank has developed a system for combining monetary wealth with intangible wealth (institutions and human capital) and environmental capital. Some people have looked beyond standard of living at a broader sense of quality of life or well-being. It also states that GDP is a statistic crucial to the success of a specified country
Private Product Remaining.- Murray Newton Rothbard and other Austrian economists argue that because government spending is taken from productive sectors and produces goods that consumers do not want, it is a burden on the economy and thus should be deducted. Rothbard argues that even government surpluses from taxation should be deducted to create an estimate of PPR.
European Quality of Life Survey.- This survey, the first wave of which was published in 2005, assessed quality of life across European countries through a series of questions on overall subjective life satisfaction, satisfaction with different aspects of life, and sets of questions used to calculate deficits of time, loving, being and having.
Gini Coefficient.- Considers the disparity of income within a nation.
Gross National Happiness.- The Centre for Bhutanese Studies in Bhutan is currently working on a complex set of subjective and objective indicators to measure 'national happiness' in various domains (living standards, health, education, cultural vitality and diversity, time use and balance, good governance, community vitality and psychological well-being). This set of indicators would be used to assess progress towards Gross National Happiness, which they have already identified as being the nation's priority, above GDP.
Happy Planet Index.- The Happy Planet Index (HPI) is an index of human well-being and environmental impact, introduced by the New Economics Foundation (NEF), in July 2006. It measures the environmental efficiency with which human well-being is achieved within a given country or group. Human well-being is defined in terms of subjective life satisfaction and life expectancy.
ECONOMIC GROWTH, DEVELOPMENT AND SUSTAINABILITY.-
Definition and measuring.- Economic growth is the increase in the amount of the goods and services produced by an economy over time and is dependent on an increase in the creation of money. Growth is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. GDP is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at “full employment” which is caused by growth in aggregate demand or observed output.
Distinction.- Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run.
Short-run.- The short-run variation of economic growth is termed the business cycle, and almost all economies experience periodical recessions
Long-run.- The long-run path of economic growth is one of the central questions of economics; in spite of the problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects. A growth rate of 2.5% per annum will lead to a doubling of GDP within 28 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 9 years. This exponential characteristic can exacerbate differences across nations. A growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80%.
Econometrics.- In the early 20th century, it became the policy of most nations to encourage growth of this kind. To do this required enacting policies, and being able to measure the results of those policies. This gave rise to the importance of econometrics, or the field of creating measurements for underlying conditions. Terms such as "unemployment rate", “Gross Domestic Product” and "rate of inflation" are part of the measuring of the changes in an economy.
Increase GDP without creating inflation.- In mainstream economics, the purpose of government policy is to encourage economic activity without encouraging the rise in the general level of prices. This combination is seen as, at the macro-scale to be indicative of an increasing stock of capital. The argument runs that if more money is changing hands, but the prices of individual goods are relatively stable, then it is proof that there is more productive capacity, and therefore more capital, because it is capital that is allowing more to be made at a lower cost per unit.
Definition.- The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).
Peak.- All the economic activity is in a period of prosperity
Recession.- A recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. An economic crisis is a sharp transition to a recession.
Depression.- A depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle. Considered a rare and extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.
Expansion.- The expansion is an increase in the level of economic activity, and of the goods and services available in the market place. Its is a period of economic growth as measured by a rise in real GDP. Typically it relates to an upturn in production and utilization of resources.
Negative effects of the growth.-
Crime or pollution.- Growth has negative effects on the quality of life such as crime, prisons, or pollution
Consumerism.- Growth encourages the creation of artificial needs. Industry cause consumers to develop new tastes, and preferences for growth to occur.
GEO-4.- The 2007 United Nations GEO-4 report warns that we are living far beyond our means. This report supports the basic arguments and observations made by Thomas Malthus in the early 1800s, that is, economic growth depletes non-renewable resources rapidly.
Distribution of income.- The gap between the poorest and richest countries in the world has been growing.. Although mean and median wealth has increased globally, it adds to the inequality of wealth.
Austrian School.- The Austrian School argues that the concept of "growth" or the creation and acquisition of more goods and services is dependent upon the relative desires of the individual. Someone may prefer having more leisure time to acquiring more goods and services, but this fulfillment of desires would have a negative effect on GDP increase. Also, they claim that the notion of growth implies the need for a "central planner" within an economy. To Austrian economists, such an ideal is antithetical to the concept of a free market economy, which best satisfies the wants of consumers. As such, Austrian economists believe that the individual should determine how much "growth" s/he desires.
David Suzuki.- Canadian scientist, David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.5-3% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest. Some think this argument can be applied even to more developed economies.
Economic growth and development of Andalusia.-
Introduction.- The Andalusian economy is third in Spain in terms of Gross Domestic Product. The tertiary sector is the most important. Tourism is very important in this community and it's the first community in income in this field. Agriculture has a great importance in the primary sector. The industry is located mainly in the west, on the coasts and in main cities.
A high unemployment rate (higher than in the rest of Spain)
Negative trade balance which is getting worse due to our dependence on oil and consumer goods imports
Less importance of the primary sector in the Gross Value Added (GVA), a 5.5% in 2005
A great importance of construction, with 13% of the Gross Value Added (GVA) in 2005
A minimal increasing in the industry, over all the food and agriculture industry, 12% of the Gross Value Added
The tertiary sector makes up 62% of the Gross Value Added (GVA). Tourism is very important in this sector, with more than 23 million of tourists in 2005
Andalusia continues approaching the European standard, modifing its productive structure, diversifing its industry and progressively decreasing the importance of the primary sector in its economy
Andalusian economic indicators.-
The Andalusian Gross Domestic Product at market prices was 127.681 million euros in 2005, which implies an average growth of 3.65% between 2000 and 2005, bigger than the rate of growth of Spain and the Eurozone
Therefore, the participation of the Andalusian economy in the national economy has grown 5 tenths (from the year 2000) up to 13.8% of the national production. Although, in the same period the Andalusian population has grown a lot (459,000 people between 2000-2005), mostly due to inmigration, therefore the Gross Domestic Product per capita is about 16,200 €. this GDP per capita is 75.5% of the average of EU-25, that is to say, outside the objective of the convergence, at least during the period 2007-2013
According to the regional accounting made by the National Institute of Statistics, the GDP per capita was 17,251 €, one of the smallest of Spain. Though the growth of the community, especially in the industry and services sector, was higher than the average of Spain, it isn't if it is compared to the more dynamic communities and the Eurozone, therefore it is foreseeable that at this rate of growth the breach will continue in the next years.
GDP, GDP PER CÁPITA, NUMBER OF WORKERS AND PERCENTAGE OF PARTICIPATION TO THE GDP REGARDING THE TOTAL OF ANDALUSIA
GDP (thousands of €)
GDP per capita
Number of workers (in thousands)
TOPIC V.- THE DECISION MAKING AND THE INTERVENTION OF THE GOVERNMENT IN THE ECONOMY
THE ROLE OF THE PUBLIC SECTOR.-
Definition.- The public sector is a part of the state that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal.
Examples.- Examples of public sector activity range from delivering social security, administering urban planning and organizing national defence.
Forms.- The organization of the public sector (public ownership) can take several forms, including:
Direct administration.- Direct administration funded through taxation; the delivering organization generally has no specific requirement to meet commercial success criteria, and production decisions are determined by government.
Publicity owned corporations.- (In some contexts, especially manufacturing, “state-owned-enterprises”); which differ from direct administration in that they have greater commercial freedoms and are expected to operate according to commercial criteria, and production decisions are not generally taken by government (although goals may be set for them by government).
Partial outsourcing.- (Of the scale many businesses do, e.g. for IT services), is considered a public sector model.
Borderline form.- A borderline form is Complete outsourcing or contracting out, with a privately owned corporation delivering the entire service on behalf of government. This may be considered a mixture of private sector operations with public ownership of assets, although in some forms the private sector's control and/or risk is so great that the service may no longer be considered part of the public sector.
Public companies.- In spite of their name, public companies are not part of the public sector; they are a particular kind of private sector company that can offer their shares for sale to the general public.
Matters for the public sector.- The decision about what are proper matters for the public sector as opposed to the private sector is probably the single most important dividing line among socialist, liberal, conservative, and libertarian political philosophy, with (broadly) socialists preferring greater state projects or enterprise in the economy, libertarians favoring minimal state involvement, and conservatives and liberals favoring state involvement in some aspects of the economy but not others.
Definition.- The economic policy refers to the actions that governments take in the economic field.. It covers the systems for setting interest rates and government deficit as well as the labour market, national ownership, and many other areas of government.
Influence.- Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.
Types of economic policy.-
Stabilization.- Macroeconomic stabilization policy tries to keep the money supply growing, but not so quick that it results in excessive inflation.
Trade policy.- It refers to tariffs, trade agreements and the international institutions that govern them.
Growth.- Policies designed to create Economic growth
Development.- Policies related to development economics.
Redistribution.- Of income, property, or wealth
Macroeconomic stabilization policy.- The Macroeconomic stabilization policy attempts to stimulate an economy out of recession or constrain the money supply to prevent excessive inflation.
Fiscal policy.- Fiscal policy, often tied to Keynesian economics, uses government spending and taxes to guide the economy.
Deficit.- The size of the deficit
Tax policy.- The taxes used to collect government income.
Government spending.- Government spending on just about any area of government
Monetary policy.- It controls the value of currency by lowering the supply of money to control inflation and raising it to stimulate economic growth. It is concerned with the amount of money in circulation and, consequently, interest rates and inflation.
Interest rates.- If set by the Government
Income policies.- And price controls that aim at imposing non-monetary controls on inflation
Reserve requirements.- Which affect the money multiplier
Tools and goals.-
Goals.- Policy is generally directed to achieve particular objectives, like targets for inflation, unemployment, or economic growth. Sometimes other objectives, like military spending or nationalization are important.
Tools.- Governments use policy tools which are under the control of the government to achieve these goals. These generally include the interest rate and money supply, tax and government spending, tariffs, exchange rates, labour market regulations, and many other aspects of government.
Selecting tools and goals.- Government and central banks are limited in the number of goals they can achieve in the short term. For instance, there may be pressure on the government to reduce inflation, reduce unemployment, and reduce interest rates while maintaining currency stability. If all of these are selected as goals for the short term, then policy is likely to be incoherent, because a normal consequence of reducing inflation and maintaining currency stability is increasing unemployment and increasing interest rates.
Demand-side vs supply-side tools.- This dilemma can in part be resolved by using microeconomic, supply-side policy to help adjust markets. For instance, unemployment could potentially be reduced by altering laws relating to trade unions or unemployment insurance, as well as by macroeconomic (demand-side) factors like interest rates.
Discretionary policy vs policy rules.-
Discretionary policy.- For much of the 20th century, governments adopted discretionary policies like demand management designed to correct the business cycle. These typically used fiscal and monetary policy to adjust inflation, output and unemployment.
Stagflation.- However, following the stagflation of the 1970s, policymakers began to be attracted to policy rules.
Dynamic inconsistency.- A discretionary policy is supported because it allows policymakers to respond quickly to events. However, discretionary policy can be subject to dynamic inconsistency: a government may say it intends to raise interest rates indefinitely to bring inflation under control, but then relax its stance later. This makes policy non-credible and ultimately ineffective.
Ruled-based policies.- A rule-based policy can be more credible, because it is more transparent and easier to anticipate. Examples of rule-based policies are fixed exchange rates, interest rate rules, the stability and growth pact and the Golden Rule (a rule adopted in the UK by The Treasury to provide guidelines for fiscal policy).. Some policy rules can be imposed by external bodies, for instance the Exchange Rate Mechanism for currency.
Independent body.- A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body. For instance, the Federal Reserve Bank, European Central Bank, Bank of England and Reserve Bank of Australia all set interest rates without government interference, but do not adopt rules.
IMF.- Another type of non-discretionary policy is a set of policies which are imposed by an international body. This can occur (for example) as a result of intervention by the International Monetary Fund.
ANALYSIS OF THE COMPONENTS OF A PUBLIC BUDGET. PUBLIC INCOMES AND EXPENSES.-
The budget.- The budget of a government is a summary or plan of the intended revenues and expenditures of that government.
Preparation and aprobation.- The Spain budget is prepared once a year by the Treasury Department (General Secretary of Budget and Expenditure, through three general managements: General Management of Budget, General Management of Staff Costs and Public Pensions and General Management of Community Funds) and approved by the government as a project. The government submits it to congress, which first votes its admission in generic terms or an entire rejection of the proposed project, that if it prospers, the project is given back to the government. If the project passes this step, the capacity of alteration for partial amendments must respect the budgetary balance. After that, the project passes to the senate, which reads it a second time, but can modify it very little, then the project passes to the congress. If the budget doesn't pass, the previous will continue.
Budget of the state.- House of His Majesty (the King), General Courts, Ombudsman, Court of Auditors, Council of State, etc.
Budget of the autonomous bodies of the civil service.- Spanish Agency of International Cooperation, Vehicle Pool of the State, Traffic Headquarters, etc.
Budget of the National Insurance.-
Budgets of the state agencies.- Cervantes Institute, State Agency of Protection of Information, National Centre of Intelligence, State's Agency for Tax Administration, National Committee of the Competition, Economic and Social Council, Spanish Institute of Foreign Trade, Nuclear Security Council and Museum of the Prado
Budgets of the public bodies with specific rules that limit the credits in its expenditure budget
Budgets of the state mercantile's companies
Budgets of the fund of the state public sector
Budgets of the public business bodies and the rest of the public bodies
Budgets of the fund without judicial entity
Direct taxes and contributions
Other direct taxes
Added value tax
Specific consumptions taxes
Foreign trade tax
Other indirect taxes
Fees, public prices and other incomes
Other incomes from the service agreement
Sale of goods
Repayment of current operations
From autonomous bodies
From the national insurance
From corporations, public business bodies, funds and the rest of bodies of the public sector
From autonomous communities
Incomes from public property not open to public use
Interests of advances and loans
Interests of deposits
Dividends and shares in profits
Income from property
Products of dealerships and special uses
Sales of real investments
From other real investments
Repayments from operations of capital
Transfers of capital
From autonomous bodies
From autonomous comunities
Repayments of loans given to the public sector
Repayments of loans given out of the public sector
No financial operations
Current expenses in goods and services
Fund of contingency and other unforeseen events
Operations of capital
Transfers of capital
Financial liabilities (-)
Transfers among subsectors
INTERPRETATION OF FISCAL POLICIES AND ITS EFFECTS IN THE INCOME DISTRIBUTION.-
Definition of fiscal policy.- Fiscal policy is the use of government spending and revenue collection to influence the economy
Fiscal policy vs monetary policy.- Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
Aggregate demand and the level of economic activity
The pattern of resource allocation
The distribution of income.
Stances.- Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contractionary:
Neutral.- A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
Expansionary.- An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.
Contractionary.- A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.
Keynes.- Fiscal policy was invented by John Maynard Keynes in the 1930s.
Economic effects of fiscal policy.-
Aggregate demand.- Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool in providing the framework for strong economic growth and working toward full employment. The government can implement these deficit-spending policies due to its size and prestige and stimulate trade. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.
Budget surplus.- During periods of high economic growth, a budget surplus can be used to decrease activity in the economy. A budget surplus will be implemented in the economy if inflation is high, in order to achieve the objective of price stability. The removal of funds from the economy will, by Keynesian theory, reduce levels of aggregate demand in the economy and contract it, bringing about price stability.
The multiplier effect.-
Definition.- In economics, the multiplier effect or spending multiplier is the idea that an initial amount of spending (usually by the government) leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending. In other words, an initial change in aggregate demand causes a change in aggregate output for the economy that is a multiple of the initial change.
Ralph George Hawtrey.- The existence of a multiplier effect was initially proposed by Ralph George Hawtrey in 1931. It is particularly associated with Keynesian economics; some other schools of economic though reject, or downplay the importance of multiplier effects, particularly in the long run. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.
Factory.- For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to builders, revenue to suppliers etc. The builders will have higher disposable income as a result, consumption rises as well, and hence aggregate demand will also rise. Suppose further that recipients of the new spending by the builder in turn spend their new income, this will raise consumption and demand further, and so on.
GDP.- The increase in the gross domestic product is the sum of the increases in net income of everyone affected. If the builder receives $1 million and pays out $800,000 to sub contractors, he has a net income of $200,000 and a corresponding increase in disposable income (the amount remaining after taxes).
Cycle.- This process proceeds down the line through subcontractors and their employees, each experiencing an increase in disposable income to the degree the new work they perform does not displace other work they are already performing. Each participant who experiences an increase in disposable income then spends some portion of it on final (consumer) goods, according to his or her marginal propensity to consume, which causes the cycle to repeat an arbitrary number of times, limited only by the spare capacity available.
Another example.- When tourists visit somewhere they need to buy the plane ticket, catch a taxi from the airport to the hotel, book in at the hotel, eat at the restaurant and go to the movies or tourist destination. The taxi driver needs petrol (gasoline) for his cab, the hotel needs to hire the staff, the restaurant needs attendants and chefs, and the movies and tourist destinations need staff and cleaners
JOHN MAYNARD KEYNES’ THEORIES.-
Say’s Law.- Some classical economists had believed in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation.
Stimulate the economy.- Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment
Full employment.- A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a general tendency towards an equilibrium. In the “neoclassical synthesis”, which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to achieve this goal.
FISCAL POLICY CRITICISM.-
Stagflation.- Stagflation is an economic situation in which inflation and economic stagnation (a prolonged period of slow economic growth) occur simultaneously and remain unchecked for a period of time
Classical and neoclassical economists.- Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View (fiscal policy has no effect on unemployment, even during times of economic recession) and categorically rejected by Keynesian economics. The Treasury View refers to the theoretical positions of classical economists in the British Treasury who opposed Keynes call for fiscal stimulus in the 1930s.
Time.- Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who otherwise would have had a job, the stimulus is increasing demand while labor supply remains fixed, leading to inflation.
Crowding out.- In economics, crowding out is any reductions in private consumption or investment that occurs because of an increase in government spending. If the increase in government spending is financed by a tax increase, the tax increase would tend to reduce private consumption. If instead the increase in government spending is not accompanied by a tax increase, government borrowing to finance the increased government spending would increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject, as different schools of economic thought differ on how households and financial markets would react to more government borrowing
Provoke trade deficit.- In recession, countries issue public debt to finance themselves. if the titles are bought by foreigners, their own coin will raise in value. That will make the exports go down (because will be more expensive to buy for foreigners), and this can’t happen in a recession
The intervention of the Public Sector in the Andalusian economy.-
In Andalusia, as in the rest of Spain, the Public Sector takes part to control the economy and to avoid the problems that rise with a pure market economy
VALORATION OF THE EFFECTS OF THE DEVELOPMENT OF THE WELFARE STATE.-
Interpretations.- There are two main interpretations of the idea of a welfare state:
Model.- A model in which the state assumes primary responsibility for the welfare of its citizens. This responsibility in theory ought to be comprehensive, because all aspects of welfare are considered and universally applied to citizens as a "right".
Net.- Welfare state can also mean the creation of a “social safety net” of minimum standards of varying forms of welfare. Here is found some confusion between a "welfare state" and a "welfare society" in common debate about the definition of the term.
Modern welfare states.-
Europe.- In the period following the Second World War, many countries in Europe moved from partial or selective provision of social services to relatively comprehensive coverage of the population.
Pensions, etc.- The activities of present-day welfare states extend to the provision of both cash welfare benefits (such as old-age pensions or unemployment benefits) and in-kind welfare services (such as health or childcare services).
National insurance.- In 1942, the Social Insurance and Allied Services was created by Sir William Beveridge in order to aid those who were in need of help, or in poverty. Beveridge worked as a volunteer for the poor, and set up national insurance. He stated that 'All people of working age should pay a weekly national insurance contribution. In return, benefits would be paid to people who were sick, unemployed, retired or widowed.' The basic assumptions of the report were the National Health Service, which provided free health care to the UK. The Universal Child Benefit was a scheme to give benefits to parents, encouraging people to have children by enabling them to feed and support a family. This was particularly beneficial after the second world war when the population of the United Kingdom declined. Universal Child Benefit may have helped drive the Baby boom. The impact of the report was huge and 600,000 copies were made.
Before 1939.- Beveridge recommended to the government that they should find ways of tackling the five giants, being Want, Disease, Ignorance, Squalor and Idleness. He argued to cure these problems, the government should provide adequate income to people, adequate health care, adequate education, adequate housing and adequate employment. Before 1939, health care had to be paid for, this was done through a vast network of friendly societies, trade unions and other insurance companies which counted the vast majority of the UK working population as members. These friendly societies provided insurance for sickness, unemployment and invalidity, therefore providing people with an income when they were unable to work. But because of the 1942 Beveridge Report, in 5 July 1948, the National Insurance Act, National Assistance Act and National Health Service Act came into force, thus this is the day that the modern UK welfare state was founded.
Development.- Welfare systems were developing intensively since the end of the World War II. At the end of century due to their restructuring part of their responsibilities started to be channeled through non-governmental organizations which became important providers of social services.
Two forms of the welfare state.-
First model.- According to the first model the state is primarily concerned with directing the resources to “the people most in need”. This requires a tight bureaucratic control over the people concerned, with a maximum of interference in their lives to establish who are "in need" and minimize cheating. The unintended result is that there is a sharp divide between the receivers and the producers of social welfare, between "us" and "them", the producers tending to dismiss the whole idea of social welfare because they will not receive anything of it. This model is dominant in the US.
Second model.- According to the second model the state distributes welfare with as little bureaucratic interference as possible, to all people who fulfill easily established criteria (e.g. having children, receiving medical treatment, etc). This requires high taxing, of which almost everything is channeled back to the taxpayers with minimum expenses for bureaucratic personnel. The intended – and also largely achieved – result is that there will be a broad support for the system since most people will receive at least something. This model was constructed by the Scandinavian ministers Karl Kristian Steincke and Gustav Möller in the 30s and is dominant in Scandinavia.
Citizens dependent.- A welfare state makes citizens dependent and less inclined to work.
Theft.- Another criticism characterizes welfare as theft of property or labour. This criticism is based upon the liberal human right to obtain and own property, wherein every human being owns his body, and owns the product of his body's labour (i.e. goods, services, land, or money). It follows that the removal of money by any state or government mechanism from one person to another is argued to be theft of the former person's property and/or labor and a violation of his property rights, even if the mechanism was legally established by a democratically elected assembly.
Fraud.- A third criticism is that the welfare state allegedly provides its dependents with a similar level of income to the minimum wage. Critics argue that fraud and economic inactivity are apparently quite common now in the United Kingdom and France. Some conservatives in the UK claim that the welfare state has produced a generation of dependents who, instead of working, rely solely upon the state for income and support; even though assistance is only legally available to those unable to work. The welfare state in the UK was created to provide certain people with a basic level of benefits in order to alleviate poverty, but that as a matter of opinion has been expanded to provide a larger number of people with more money than the country can ideally afford. Some feel that this argument is demonstrably false: the benefits system in the UK provides individuals with considerably less money than the national minimum wage, although people on welfare often find that they qualify for a variety of benefits, including benefits in-kind, such as accommodation costs which usually make the overall benefits much higher than basic figures show.
High taxes.- A fourth criticism of the welfare state is that it results in high taxes. This is usually true, as evidenced by places like Denmark (tax level at 48.9% of GDP in 2007) and Sweden (tax level at 48.2% of GDP in 2007). Such high taxes do not necessarily mean less income for the nation overall, since the state taxes ideally go directly to the people it is taxed from. These high taxes are argued to result in a major redistribution of that income from the citizens who do not accept welfare to the citizens who do accept welfare.
More expensive.- A fifth criticism of the welfare state is the belief that welfare services provided by the state are more expensive and less efficient than the same services would be if provided by private businesses.
Anarchists.- The most extreme criticisms of states and governments, are from anarchists, who believe that all states and governments are undesirable and/or unnecessary. Most anarchists believe that while social welfare gives a certain level of independency from the market and individual capitalists, it creates dependence to the state, which is the institution that, according to this view, supports and protects capitalism in the first place.
The welfare state and social expenditure.-
Rich countries - poor countries.- Welfare provision in the contemporary world tends to be more advanced in countries with stronger developed economies. Poor countries tend to have limited resources for social services. There is very little correlation between economic performance and welfare expenditure.
European Union.- There are individual exceptions on both sides, but the higher levels of social expenditure in the European Union are not associated with lower growth, lower productivity or higher unemployment, nor with higher growth, higher productivity or lower unemployment.
Free market.- Likewise, the pursuit of free market policies leads neither to guaranteed prosperity or social collapse.
Expenditure.- Countries with more limited expenditure, like Australia, Canada and Japan do no better or worse economically than countries with high social expenditure, like Belgium. Germany and Denmark.
The overall impression.- There is a slight positive correlation between increased spending on social services and higher GDP per capita as well as higher Human Development Index (HDI) rating.
DEBATE ABOUT ACTUAL ECONOMIC QUESTIONS BASED ON THE OPINIONS AND RESPECT OF OTHER PEOPLE.-
Growth of China
TOPIC VI.- FINANCIAL ASPECTS OF THE ECONOMY.-
Types of money-
M0.- Notes and coins (currency) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. M0 is usually called the monetary base. The designation M0 may lead to confusion because it seems to imply that M0 is part of M1, which is not strictly the case.
M1.- Equals M0 + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits) + traveler's checks. M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. Although checks linked to checking deposits are gradually becoming less popular, debit cards linked to these deposits are becoming more popular. Like checks, debit cards, as a means to complete a transaction through their links to checkable deposits, can also be considered as a form of money.
M2.- Equals M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.
M3.- Equals M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. M3 is no longer published or revealed to the public by the US central bank. However it is estimated by a web site called Shadow Government Statistics.
Medium of exchange.- When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the “double coincidence of wants” problem.
Unit of account.- A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a 'unit of account', whatever is being used as money must be:
Divisible.- Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
Fungible.- That is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.
Weight, measure or size.- A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value.- To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or electronic money no longer backed by gold in most countries is not considered by some economists to be a store of value.
CREATION OF MONEY.- In the current economics systems, money is created by two ways:
Central bank money.- All money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks)
Commercial bank money.- Money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money
AMOUNT LOANED OUT
THE INFLATION AND ITS CONSEQUENCES ON THE CITIZENS AND ON THE ECONOMY OF A COUNTRY.-
Definition.- In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time
Consumer Price Index.- Inflation is usually measured by calculating the inflation rate of a price index, usually the Consumer Price Index. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time.
Nominal value vs real value.- In economics, nominal value refers to any price or value expressed in money of the day, as opposed to real value, which adjusts for the effect of inflation. Examples include a bundle of commodities, such as gross domestic product, and income. Nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year. Thus, the real values index the quantities of the commodity bundle or the purchasing power of the money incomes for each year in the series
Calculate the real GDP.- Calculate the real GDP of 2008 if the nominal GDP was 40,000 and the CPI was 130%. GDPreal = (GDPnominal/CPI) x 100 = (40,000/130) x 100 = 30,769.23
Calculate the nominal GDP.- Calculate the nominal GDP of 2008 if the real GDP was 70,000 and the CPI was 120%. GDPnominal = (GDPreal/100) x CPI = (70,000/100) x 120 = 84,000
Types of inflation according to its size.-
Hyperinflation.- Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply
Moderate inflation.- Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Money supply.- Monetarists believe the most significant factor influencing inflation or deflation is the management of money supply through the easing or tightening of credit. They consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation.
Monetary phenomenon.- Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The quantity theory of money, simply stated, says that the total amount of spending in an economy is primarily determined by the total amount of money in existence.
A major cause.- Keynesian economic theory proposes that changes in money supply do not directly affect prices, and that visible inflation is the result of pressures in the economy expressing themselves in prices. The supply of money is a major, but not the only, cause of inflation.
Three types.- There are three major types of inflation, as part of what Robert J. Gordon calls the “triangle model”
Demand-pull inflation.- It’s caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion.
Cost-push inflation.- It is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.
Built-in inflation.- It’s induced by adaptative expectations, and is often linked to the “Price/wage spiral”. It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'.
Monetarists - Keynesians.- Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand).
Fixed exchange rates.-
Stabilize the value.- Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
Exchange rates.- Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the later part of the 20th century (e.g. Argentina (1991-2002), Bolivia, Brazil, and Chile).
Convertible into gold.- The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie.
Form of money.- Gold was a common form of representative money due to its rarity, durability, divisibility, fungibility, and ease of identification. Representative money and the gold standard were used to protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. That system eventually collapsed in 1971, which caused most countries to switch to fiat money, backed only by the laws of the country. Austrian economists strongly favour a return to a 100 percent gold standard.
Rate of inflation.- Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output. Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining, which some believe contributed to the Great Depression.
Wage and price controls.-
In wartime.- Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon..
Temporary.- In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term.
Liberalize prices.- Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labour or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.
COLA.- The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as social security) are tied to a cost-of-living index, typically to the consumer price index. A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.
Predetermined future.- Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living increases because of their similarity to increases tied to externally-determined indexes. Many economists and compensation analysts consider the idea of predetermined future "cost of living increases" to be misleading for two reasons: (1) For most recent periods in the industrialized world, average wages have increased faster than most calculated cost-of-living indexes, reflecting the influence of rising productivity and worker bargaining power rather than simply living costs, and (2) most cost-of-living indexes are not forward-looking, but instead compare current or historical data.
THE FINANCIAL SYSTEM AND THE RUNNING OF THE EUROPEAN CENTRAL BANK.-
Definition of Financial System.- The financial system is the system that allows the transfer of money between savers and borrowers. It's made up of banks, savings banks, insurance companies, the stock exchange, etc.
European Central Bank.- The ECB is the central bank for Europe's single currency, the euro. The euro area comprises the 17 European Union countries that have introduced the euro since 1999.
The European System of Central Banks.- The ESCB comprises the ECB and the national central banks (NCBs) of all EU Member States whether they have adopted the euro or not.
The Eurosystem.- The Eurosystem comprises the ECB and the NCBs of those countries that have adopted the euro. The Eurosystem and the ESCB will co-exist as long as there are EU Member States outside the euro area.
Powers and objectives of the European Central Bank.-
Price stability.- The primary objective of the ECB is to maintain Price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%. Unlike for example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it.
Key tasks.- The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the money market infrastructure under the Target payment system
Euro banknotes.- Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins). The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system. In December 2007 the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.
Commercial banks (typical operations).-
Passive operations(to borrow money).-
Active operations (to lend money).-
Loans.- The user receives the entire agreed amount from the beginning, obliging him to return this and all interests on certain dates established beforehand
Current account credits.- The bank allows the client credit for a certain period of time and up to a determined amount, obliging the client to pay a commission and to repay the amounts desired within the stipulated time limit.
Bill of exchange discount.- The bank advances a person the amount of a bill of exchange
Definition.- A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities.
Types of markets.-
Primary market.- The primary market is that part of the capital markets that deals with the issuance of new securities.
Secondary market.- The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold
Liquidity.- Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated. As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market.
Mesh.- Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time.
Accurate share price.- Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matters in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers, and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
Control.- The Comisión Nacional del Mercado de Valores (CNMV) is the agency in charge of supervising and inspecting the Spanish Stock Markets and the activities of all the participants in those markets.
MONETARY POLICY AND ITS EFFECTS ON INFLATION, GROWTH AND WELFARE.-
Definition of monetary policy.- Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Supply of Money.- Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.
Types.- A policy is referred to as contractionary if it reduces the size of the money supply or raises the interest rate. An expansionary policy increases the size of the money supply, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.
Tools.- There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the Money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.
Open market operations.- The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various credit instruments, foreign currencies or commodities. All of these purchases or sales result in more or less base currency entering or leaving market circulation.
Short term interest rate target.- Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold
Other primary means.- The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the market).
Credible announcements.- It is important for policymakers to make credible announcements and degrade interest rates as they are non-important and irrelevant in regarding to monetary policies. If private agents (consumers and firms) believe that policymakers are committed to lowering inflation, they will anticipate future prices to be lower than otherwise (how those expectations are formed is an entirely different matter; compare for instance rational expectations with adaptative expectations). If an employee expects prices to be high in the future, he or she will draw up a wage contract with a high wage to match these prices. Hence, the expectation of lower wages is reflected in wage-setting behaviour between employees and employers (lower wages since prices are expected to be lower) and since wages are in fact lower there is no demand pull inflation because employees are receiving a smaller wage and there is no cost push inflation because employers are paying out less in wages.
History of monetary policy.-
Beginnings.- Monetary policy is primarily associated with interest rate and credit. For many centuries there were only two forms of monetary policy: (i) Decisions about coinage; (ii) Decisions to print paper money to create credit. Interest rates, while now thought of as part of monetary authority, were not generally coordinated with the other forms of monetary policy during this time. Monetary policy was seen as an executive decision, and was generally in the hands of the authority with seigniorage, or the power to coin. With the advent of larger trading networks came the ability to set the price between gold and silver, and the price of the local currency to foreign currencies. This official price could be enforced by law, even if it varied from the market price.
Bank of England.- With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established. The goal of monetary policy was to maintain the value of the coinage, print notes which would trade at par to specie, and prevent coins from leaving circulation. The establishment of central banks by industrializing nations was associated then with the desire to maintain the nation's peg to the gold standard, and to trade in a narrow band with other gold-backed currencies. To accomplish this end, central banks as part of the gold standard began setting the interest rates that they charged, both their own borrowers, and other banks who required liquidity. The maintenance of a gold standard required almost monthly adjustments of interest rates.
Central banking system.- During the 1870-1920 period the industrialized nations set up central banking systems, with one of the last being the Federal Reserve in 1913. By this point the role of the central bank as the "lender of last resort" was understood. It was also increasingly understood that interest rates had an effect on the entire economy, in no small part because of the marginal revolution in economics, which focused on how many more, or how many fewer, people would make a decision based on a change in the economic trade-offs. It also became clear that there was a business cycle, and economic theory began understanding the relationship of interest rates to that cycle. (Nevertheless, steering a whole economy by influencing the interest rate has often been described as trying to steer an oil tanker with a canoe paddle.) Research by Cass Business School has also suggested that perhaps it is the central bank policies of expansionary and contractionary policies that are causing the economic cycle; evidence can be found by looking at the lack of cycles in economies before central banking policies existed.
Monetarist macroeconomists.- Monetarist macroeconomists have sometimes advocated simply increasing the monetary supply at a low, constant rate, as the best way of maintaining low inflation and stable output growth. However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to be impractical, because of the highly unstable relationship between monetary aggregates and other macroeconomic variables. Even Milton Friedman acknowledged that money supply targeting was less successful than he had hoped, in an interview with the Financial Times on June 7, 2003. Therefore, monetary decisions today take into account a wider range of factors, such as:
short term interest rates;
long term interest rates;
velocity of money through the economy;
bonds and equities (corporate ownership and debt);
government versus private sector spending/savings;
international capital flows of money on large scales;
financial derivatives such as options, swaps, futures contracts, etc.
Return to the Gold standard.- A small but vocal group of people advocate for a return to the gold standard (the elimination of the dollar's fiat currency status and even of the Federal Reserve Bank). Their argument is basically that monetary policy is fraught with risk and these risks will result in drastic harm to the populace should monetary policy fail. Others see another problem with our current monetary policy. The problem for them is not that our money has nothing physical to define its value, but that fractional reserve lending of that money as a debt to the recipient, rather than a credit, causes all but a small proportion of society (including all governments) to be perpetually in debt.
Disagree.- In fact, many economists disagree with returning to a gold standard. They argue that doing so would drastically limit the money supply, and throw away 100 years of advancement in monetary policy. The sometimes complex financial transactions that make big business (especially international business) easier and safer would be much more difficult if not impossible. Moreover, shifting risk to different people/companies that specialize in monitoring and using risk can turn any financial risk into a known dollar amount and therefore make business predictable and more profitable for everyone involved.
Trends in central banking.-
Influences interest rates.- The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank. The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements. If the central bank wishes to lower interest rates, it purchases government debt, thereby increasing the amount of cash in circulation or crediting bank’s reserve accounts. Alternatively, it can lower the interest rate on discounts or overdrafts (loans to banks secured by suitable collateral, specified by the central bank). If the interest rate on such transactions is sufficiently low, commercial banks can borrow from the central bank to meet reserve requirements and use the additional liquidity to expand their balance sheets, increasing the credit available to the economy. Lowering reserve requirements has a similar effect, freeing up funds for banks to increase loans or buy other profitable assets.
Independent monetary policy.- A central bank can only operate a truly independent monetary policy when the Exchange rate is floating. If the exchange rate is pegged or managed in any way, the central bank will have to purchase or sell foreign exchange. These transactions in foreign exchange will have an effect on the monetary base analogous to open market purchases and sales of government debt; if the central bank buys foreign exchange, the monetary base expands, and vice versa. But even in the case of a pure floating exchange rate, central banks and monetary authorities can at best "lean against the wind" in a world where capital is mobile.
Sterilize.- Accordingly, the management of the exchange rate will influence domestic monetary conditions. In order to maintain its monetary policy target, the central bank will have to sterilize or offset its foreign exchange operations. For example, if a central bank buys foreign exchange (to counteract appreciation of the exchange rate), base money will increase. Therefore, to sterilize that increase, the central bank must also sell government debt to contract the monetary base by an equal amount. It follows that turbulent activity in foreign exchange markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate.
Central bank independent.- In the 1980s, many economists began to believe that making a nation's central bank independent of the rest of executive government is the best way to ensure an optimal monetary policy, and those central banks which did not have independence began to gain it. This is to avoid overt manipulation of the tools of monetary policies to effect political goals, such as re-electing the current government. Independence typically means that the members of the committee which conducts monetary policy have long, fixed terms. Obviously, this is a somewhat limited independence.
Inflation target.- In the 1990s, central banks began adopting formal, public inflation targets with the goal of making the outcomes, if not the process, of monetary policy more transparent. In other words, a central bank may have an inflation target of 2% for a given year, and if inflation turns out to be 5%, then the central bank will typically have to submit an explanation.
Smooth business cycles.- The debate rages on about whether monetary policy can smooth business cycles or not. A central conjecture of Keynesian economics is that the central bank can stimulate aggregate demand in the short run, because a significant number of prices in the economy are fixed in the short run and firms will produce as many goods and services as are demanded (in the long run, however, money is neutral, as in the neoclassical model). There is also the Austrian school of economics, which includes Friedrich von Hayek and Ludwig von Mises' arguments, but most economists fall into either the Keynesian or neoclassical camps on this issue.
Problems.- Developing countries may have problems establishing an effective operating monetary policy. The primary difficulty is that few developing countries have deep markets in government debt. The matter is further complicated by the difficulties in forecasting money demand and fiscal pressure to levy the inflation tax by expanding the monetary base rapidly. In general, the central banks in many developing countries have poor records in managing monetary policy. This is often because the monetary authority in a developing country is not independent of government, so good monetary policy takes a backseat to the political desires of the government or are used to pursue other non-monetary goals. For this and other reasons, developing countries that want to establish credible monetary policy may institute a currency board or adopt dollarization. Such forms of monetary institutions thus essentially tie the hands of the government from interference and, it is hoped, that such policies will import the monetary policy of the anchor nation.
Implement monetary policy.- Recent attempts at liberalizing and reforming the financial markets (particularly the recapitalization of banks and other financial institutions in Nigeria and elsewhere) are gradually providing the latitude required in order to implement monetary policy frameworks by the relevant central banks.
Types of monetary policy.-
CPI.- Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price index, within a desired range.
Interbank rate.- The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar.
Open market operations.- The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.
Taylor rule.- Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap.
Price level targeting.-
Subsequent.- Price level targeting is similar to inflation targeting except that CPI growth in one year is offset in subsequent years such that over time the price level on aggregate does not move.
Sweden.- Something similar to price level targeting was tried by Sweden in the 1930s, and seems to have contributed to the relatively good performance of the Swedish economy during the Great Depression. As of 2004, no country operates monetary policy based on a price level target.
1980s.- In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.
Monetarism.- This approach is also sometimes called monetarism.
Focus.- While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities.
Fixed exchange rate.-
Degrees.- This policy is based on maintaining a fixed Exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation.
Fiat fixed rates.- Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency trades at its market/unofficial rate.
Bands.- Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero.)
Currency board.- Under a system of fixed exchange rates maintained by a currency board every unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency.
Dollarization.- Under dollarization, foreign currency (usually the US dollar, hence the term "dollarization") is used freely as the medium of exchange either exclusively or in parallel with local currency. This outcome can come about because the local population has lost all faith in the local currency, or it may also be a policy of the government (usually to rein in inflation and import credible monetary policy).
Abdicate monetary policy.- These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels and other economic factors.
Definition.- The gold standard is a system in which the price of the national currency is measured in units of gold bars and is kept constant by the daily buying and selling of base currency to other countries and nationals. (i.e. open market operations). The selling of gold is very important for economic growth and stability.
Special case.- The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity Price Index".
Not used.- Today this type of monetary policy is not used anywhere in the world, apart from Switzerland (one of the world's most stable economies), although a form of gold standard was used widely across the world prior to 1971.
Monetary policy tools.-
Monetary base.- Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.
Reserve requirements.- The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.
Discount window lending.- Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans or extending new loans, the monetary authority can directly change the size of the money supply.
Interest rates.- The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. By raising the interest rate(s) under its control, a monetary authority can contract the Money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply.
Currency board.- A currency board is a monetary arrangement which pegs the monetary base of a country to that of an anchor nation. As such, it essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives.
Open market operations.- Open market operations are the means of implementing monetary policy by which a central bank controls its national Money supply by buying and selling government securities, or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation
TOPIC VII.- THE INTERNATIONAL CONTEXT OF THE ECONOMY
Definition.- International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power. Without international trade, nations would be limited to the goods and services produced within their own borders.
Comparative advantage.- Comparative advantage refers to the ability of a person or a country to produce a particular good at a lower marginal cost and opportunity cost than another person or country. It is the ability to produce a product most efficiently given all the other products that could be produced. It can be contrasted with absolute advantage which refers to the ability of a person or a country to produce a particular good at a lower absolute cost than another. Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade.
Regulation of international trade.-
Overview.- Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in the United Kingdom, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then. In the years since the Second World War, controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial.
Free trade.- Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.
Agricultural interest.- Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.
Recessions.- During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
Regulation.- The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of Latin American nations. Similar agreements such as the Multilateral agreement on Investment (MAI) have also failed in recent years.
Definition.- Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade are kept to a minimum. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and workers within a country by restricting or regulating trade with foreign nations.
Mercantilism.- Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers. Virtually all modern day economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. Economics Nobel prize winner and trade theorist Paul Krugman once famously stated that, "If there were an Economist’s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'."
Recent examples.- Recent examples of protectionism in first world countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs. However, most economists agree that the benefits from free trade in the form of consumer surplus and increased efficiency outweigh the losses of jobs by at least a margin of 2 to 1, with some arguing the margin is as high as 100 to 1 in favour of free trade.
Tariffs.- Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented.
Import quotas.- To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.
Administrative Barriers.- Countries are sometimes accused of using their various administrative rules (eg. Regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports.
Anti-dumping legislation.- Supporters of anti-dumping laws argue that they prevent “dumping” of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters.
Direct Subsidies.- Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against foreign imports. These subsidies are purported to "protect" local jobs, and to help local firms adjust to the world markets.
Export Subsidies.- Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies.
Exchange Rate manipulation.- A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports.
Common Agricultural Policy (CAP).- Some major critics of the Common Agricultural Policy reject the idea of protectionism, either in theory, practice or both. Free market advocates are among those who disagree with any type of government intervention because, they say, a free market without interference will allocate resources more efficiently. The setting of 'artificial' prices inevitably leads to distortions in production, with over-production being the usual result. The creation of Grain Mountains, where huge stores of unwanted grain were bought directly from farmers at prices set by the CAP well in excess of the market is one example. Subsidies allowed many small, outdated, or inefficient farms to continue to operate which would not otherwise be viable. A straightforward economic model would suggest that it would be better to allow the market to find its own price levels, and for uneconomic farming to cease. Resources used in farming would then be switched to a myriad of more productive operations, such as infrastructure, education or healthcare.
Definition.- Free trade is a type of trade policy that allows traders to act and transact without interference from government. Thus, the policy permits trading partners mutual gains from trade, with goods and services produced according to the theory of comparative advantage.
Adam Smith and David Ricardo.- The value of free trade was first observed and documented by Adam Smith in his magnum opus, The Wealth of Nations in 1776. Later, David Ricardo demonstrated the benefits of trading via specialization.
Protectionism-free trade.- The countries mainly protect their agricultural and basic or strategic industries. Free trade is more than anything for nonessential goods.
Preferential trade area.-
Definition.- A preferential trade area (also Preferential trade agreement, PTA) is a trading bloc which gives preferential access to certain products from the participating countries. This is done by reducing tariffs, but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.
Examples.- The EU and the ACP countries; India and Afghanistan or India and Mauritius.
Free trade area.-
Definition.- Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union.
Rules of origin.- Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements are not entitled for the special treatment envisioned in the free trade area provisions.
Example.- The European Free Trade Association (EFTA). Today Iceland, Norway, Switzerland and Liechtenstein are members of EFTA.
Definition.- A customs union is a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency. Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Customs union is established through trade pact.
Example.- The Southern Common Market (MERCOSUR) is a Regional Trade Agreement (RTA) among Argentina, Brazil, Paraguay and Uruguay.
Definition.- A common market is a customs union with common policies on product regulation, and freedom of movement of the factors of production (capital and labour) and of enterprise. The goal is that the movement of capital, labour, goods, and services between the members is as easy as within them. This is the fourth stage of economic integration.
Example.- The Andean Community (CAN) is a trade bloc comprising the South American countries of Bolivia, Colombia, Ecuador and Peru.
Economic and monetary union.-
Definition.- An economic and monetary union is a common market with a common currency. This is the fifth stage of economic integration. EMU is established through a currency-related trade pact.
Example.- The euro is used by seventeen European Union member states: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
THE WORLD TRADE ORGANIZATION (WTO).-
Presentation.- The World Trade Organization (WTO) is an international organization designed by its founders to supervise and liberalize trade. The organization officially commenced on 1 January 1995, under the Marrakesh Agreement, succeeding the 1947 General Agreement on Tariffs and Trade (GATT).
Regulation.- The World Trade Organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalising trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round (1986-1994). The organization is currently endeavouring to persist with a trade negotiation called the Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance equitable participation of poorer countries which represent a majority of the world's population. However, the negotiation has been dogged by "disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a 'special safeguard measure' to protect farmers from surges in imports. At this time, the future of the Doha Round is uncertain.
History.- The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation - notably the Bretton Woods institutions known as the World Bank and the International Monetary Fund. A comparable international institution for trade, named the International Trade Organization was successfully negotiated. The ITO was to be a United Nations specialized agency and would address not only trade barriers but other issues indirectly related to trade, including employment, investment, restrictive business practices, and commodity agreements. But the ITO treaty was not approved by the United States and a few other signatories and never went into effect. In the absence of an international organization for trade, the GATT would over the years "transform itself" into a de facto international organization
Divergence.- Free trade leads to a divergence instead of convergence of income levels within rich and poor countries (the rich get richer and the poor get poorer). Smaller countries have less negotiation power.
Labour relations and environment.- The issues of labour relations and environment are steadfastly ignored
Decision.- The decision making in the WTO is complicated, ineffective, unrepresentative and non-inclusive.
THE WORLD BANK.- The World Bank is an international financial institution that provides leveraged loans to developing countries for capital programs with the stated goal of reducing poverty. The World Bank is one of two major financial institutions created as a result of the Bretton Woods Conference in 1944. The International Monetary Fund, a related but separate institution, is the second. Delegates from a wide variety of countries attended the Bretton Woods Conference, but the most powerful countries in attendance, the United States and Britain, mainly shaped negotiations
THE INTERNATIONAL MONETARY FUND (IMF).-
Presentation.- The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on Exchange rates and the balance of payments. It is an organization formed to stabilize international exchange rates and facilitate development. It also offers highly leveraged loans mainly to poorer countries. Its headquarters are located in Washington, D.C., USA.
Rodrigo Rato.- Rodrigo Rato became the ninth Managing Director of the IMF on June 7, 2004 and resigned his post at the end of October 2007
THE EUROPEAN UNION (UE).-
Presentation.- The European Union (EU) is an economic and political union of 27 member states, located primarily in Europe. It was established by the Treaty of Maastricht on 1 November 1993, upon the foundations of the pre-existing European Economic Community. With a population of almost 500 million, the EU generates an estimated 30% share (US$ 18.4 trillion in 2008) of the nominal gross world product.
Freedom of movement.- The EU has developed a common market through a standardised system of laws which apply in all member states, ensuring the freedom of movement of people, goods, services and capital. It maintains common policies on trade, agriculture, fisheries, and regional development. A common currency, the euro, has been adopted by seventeen member states constituting the Eurozone. The EU has developed a limited role in foreign policy, having representation at the WTO, G8 summits, and at the UN. It enacts legislation in justice and home affairs, including the abolition of passport controls between many member states which form part of the Schengen Area. Twenty-one EU countries are members of NATO.
The European Commission.- The European Commission acts as the EU's executive arm and is responsible for initiating legislation and the day-to-day running of the EU. It is intended to act solely in the interest of the EU as a whole, as opposed to the Council which consists of leaders of member states who reflect national interests. The commission is also seen as the motor of European integration. It is currently composed of 27 commissioners for different areas of policy, one from each member state. The President of the Commission and all the other commissioners are nominated by the Council. Appointment of the Commission President, and also the Commission in its entirety, have to be confirmed by Parliament
The European Parliament.- The European Parliament forms one half of the EU's legislature. The 785 Members of the European Parliament (MEPs) are directly elected by EU citizens every five years. Although MEPs are elected on a national basis, they sit according to political groups rather than their nationality. Each country has a set number of seats. The Parliament and the Council form and pass legislation jointly, using co-decision, in certain areas of policy. This procedure will extend to many new areas under the proposed Treaty of Lisbon, and hence increase the power and relevance of the Parliament. The Parliament also has the power to reject or censure the Commission and the EU budget. The President of the European Parliament carries out the role of speaker in parliament and represents it externally. The president and vice presidents are elected by MEPs every two and a half years.
The Council of the European Union.- The Council of the European Union (sometimes referred to as the Council of Ministers) forms the other half of the EU's legislature. It consists of a government minister from each member states and meets in different compositions depending on the policy area being addressed. Notwithstanding its different compositions, it is considered to be one single body. In addition to its legislative functions, the Council also exercises executive functions in relations to the Common Foreign and Security Policy..
The European Court of Justice.- The judicial branch of the EU consists of the European Court of Justice (ECJ) and the Court of First Instance. Together they interpret and apply the treaties and the law of the EU. The Court of First Instance mainly deals with cases taken by individuals and companies directly before the EU's courts, and the ECJ primarily deals with cases taken by member states, the institutions and cases referred to it by the courts of member states. Decisions from the Court of First Instance can be appealed to the Court of Justice but only on a point of law
BALANCE OF PAYMENTS (BOP).-
Definition.- In economics, the balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow.
Balance of payments identity.- The balance of payments identity states that: Current Account = Capital Account + Financial Account + Net Errors and Omissions. This is a convention of double entry accounting, where all debit entries must be booked along with corresponding credit entries such that the net of the Current Account will have a corresponding net of the Capital and Financial Accounts.
The balance of trade.- The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period of time. It is the relationship between a nation's imports and exports. A favourable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavourable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance
The net factor income.- The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as inflows. Income refers not only to the money received from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc.
Net transfer payments.- Such as foreign aid.
The capital account.-
Shows.- The capital account in the international accounts shows (1) capital transfers receivable and payable; and (2) the acquisition and disposal of nonproduced nonfinancial assets.
Investments.- The capital account records all transactions between a domestic and foreign resident that involves a change of ownership of an asset. It is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, portfolio investment (such as changes in holdings of stocks and bonds) and other investments (such as changes in holdings in loans, bank accounts, and currencies).
Capital inflow – capital outflow.- From a domestic point of view, a foreign investor acquiring a domestic asset is considered a capital inflow, while a domestic resident acquiring a foreign asset is considered a capital outflow.
May also include.- Along with transactions pertaining to non-financial and non-produced assets, the capital account may also include debt forgiveness, the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, patents, copyrights, royalties, and uninsured damage to fixed assets.
Controls.- Countries can impose capital controls to control the flows into and out of their capital accounts. Countries without capital controls are said to have full Capital Account Convertibility.
The financial account.- The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents.
Net Errors and Omissions.-
Variation of gold and foreign currency reserves.- The Central Bank reduces its foreign currency reserves when there is a deficit in balance of payments
RUNNING OF THE FOREIGN EXCHANGE MARKET AND ITS EFFECTS ON THE EXCHANGE RATE.-
Definition of exchange rate.- The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 102 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 102 is worth the same as USD 1. The foreign Exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.
Spot exchange rate and forward exchange rate.- The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.
Nominal and real exchange rates.- The nominal exchange rate is the price in foreign currency of one unit of a domestic currency. The real exchange rate is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices.
EXCHANGE RATE SYSTEMS.-
Fixed exchange rate.-
Definition.- A fixed exchange rate, sometimes called a pegged exchange rate, is a type of Exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.
Stabilize.- A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. This facilitates trade and investments between the two countries, and is especially useful for small economies where external trade forms a large part of their GDP.
Inflation.- It is also used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
Floating exchange rate.-
Definition.- A floating exchange rate or a flexible exchange rate is a type of Exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign Exchange market. A currency that uses a floating exchange rate is known as a floating currency. The opposite of a floating exchange rate is a fixed Exchange rate.
Preferable.- There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to pre-empt the possibility of having a balance of payments crisis. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the South-east Asia countries before the Asian currency crisis. The debate of making a choice between fixed and floating exchange rate regimes is set forth by Mundell-Fleming model, which argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It can choose any two for control, and leave third to the market forces.
Managed float.- In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.
Fear of floating.-
Emerging economies.- A free floating exchange rate increases foreign exchange volatility. There are economists who think that this could cause serious problems, especially in emerging economies. These economies have a financial sector with one or more of following conditions: high liability dollarization, financial fragility, and strong balance sheet effects
Liabilities.- When liabilities are denominated in foreign currencies while assets are in the local currency, unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and threaten the stability of the domestic financial system.
Intervention.- For this reason emerging countries appear to face greater fear of floating, as they have much smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and reserve movements. This is the consequence of frequent free floating countries' reaction to exchange rate movements with monetary policy and/or intervention in the foreign exchange market.
Number.- The number of countries that present fear of floating increased significantly during the nineties
Running.- If imports increase, the U.S. dollar demand increases and the exchange rate euro/U.S. dollar increases, as a consequence the imports decrease and the exports increase and, therefore, the U.S. dollar demand decreases, going back to a balance
The gold standard.-
Definition.- In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned) gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold.
Running.- If imports increase the total amount of gold in a country decreases, as a consequence the domestic prices decrease, therefore, the exports increase and the imports decrease going back to a balance
Limited.- The total amount of gold that has ever been mined has been estimated at around 142,000 tonnes. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to $8 trillion. However, this is specifically a perceived disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary whilst others who are not opposed to fractional reserve banking argue that only base currency and not deposits would need to be replaced. The amount of such base currency M0) is only about one tenth as much as (M1).
Stabilize.- Most mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.
Gold production.- Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression.
Speculative attacks.- Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak. For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency.
FIAT money.- If a country wanted to devalue its currency, it would produce sharper changes, in general, than the smooth declines seen in fiat currencies (FIAT money is money that the government declares cannot be refused in settlement of a debt), depending on the method of devaluation
Definition.- This system allows a fluctuation of 2% in either direction of the fixed exchange rate for the Central Bank
Running.- In this 2%, if the imports increase, the U.S. dollars demand increase and the exchange rate euro/U.S: dollar increases; the Central Bank increases the U.S: dollars supply, therefore the exchange rate euro/U.S. dollar decreases and returns to equilibrium
Type of imbalance.- It was difficult to determine if the imbalance was temporary or not
Sharp adjustments.- The countries clung to the exchange rates, therefore the adjustments were sharp
Countries with surplus.- Countries with surplus were unwilling to raise the exchange rate of the currencies
No autonomy.- Countries left their autonomy in terms of the monetary policy (because they were allowed very limited action)
Dollar dependence.- This system depended on only one currency, the U.S. dollar. the loss of trust in this currency forced this system to be abandoned
GLOBALIZATION. REPERCUSSIONS IN THE ANDALUSIAN ECONOMY.-
Definition.- Globalization or (globalisation) is the process by which the people of the world are unified into a single society and function together. Globalization is often used to refer to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. This process is usually recognized as being driven by a combination of economic, technological, sociocultural, political and biological factors. The term can also refer to the transnational dissemination of ideas, languages, or popular culture.
History of modern globalization.-
Bretton Woods conference.- Globalization, since World War II, is largely the result of planning by politicians to breakdown borders hampering trade to increase prosperity and interdependence thereby decreasing the chance of future war. Their work led to the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, and the founding of several international institutions intended to oversee the processes of globalization.
Institutions.- These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade.
GATT.- Since World War II, barriers to international trade have been considerably lowered through international agreements - GATT. Particular initiatives carried out as a result of GATT and the World Trade Organization (WTO), for which GATT is the foundation, have included:
Promotion of free trade.- Elimination of tariffs; creation of free trade zones with small or no tariffs
Transportation.- Reduced transportation costs, especially resulting from development of containerization for ocean shipping.
Capital controls.- Reduction or elimination of capital controls
Subsidies.- Reduction, elimination, or harmonization of subsidies for local businesses and Creation of subsidies for global corporations
Intellectual property.- Harmonization of intellectual property laws across the majority of states, with more restrictions
Patents.- Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)
Cultural globalization.- Cultural globalization, driven by communication technology and the worldwide marketing of Western cultural industries, was understood at first as a process of homogenization, as the global domination of American culture at the expense of traditional diversity. However, a contrasting trend soon became evident in the emergence of movements protesting against globalization and giving new momentum to the defence of local uniqueness, individuality, and identity, but largely without success.
Uruguay Round.- The Uruguay Round (1986 to 1994) led to a treaty to create the WTO to mediate trade disputes and set up an uniform platform of trading. Other bilateral and multilateral trade agreements, including sections of Europe's Maastritch Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.
Rose.- World exports rose from 8.5% of gross world product in 1970 to 16.1% of gross world product in 2001.
Possitive effects of the globalization.-
Industrial.- Emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries.
Financial.- Emergence of worldwide financial markets and better access to external financing for borrowers. As these worldwide structures grew more quickly than any transnational regulatory regime, the instability of the global financial infrastructure dramatically increased, as evidenced by the financial crises of late 2008.
Economic.- Realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets, however meant that an economic collapse in any one given country could not be contained.
Political.- Some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers; in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power.
Informational.- Increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephone and Internet.
Language.- The most popular language is English. About 35% of the world's mail, telexes, and cables are in English. Approximately 40% of the world's radio programs are in English. About 50% of all Internet traffic uses English.
Competition.- Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition.
Ecological.- The advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living.
Cultural.- Growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the resulting consumerism and loss of languages.
Multiculturalism.- Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples.
Travel and tourism.- Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any time.
Inmigration.- Greater inmigration, including ilegal inmigration.
Local consumer products.- Spread of local consumer products (e.g. food) to other countries (often adapted to their culture).
Social.- Development of the system of non-governmental organisations as main agents of global public policy, including humanitarian aid and developmental efforts.
Technical.- Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones.
Standards applied globally.- Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements.
Legal/Ethical.- The creation of the international criminal court and international justice movements. Crime importation and raising awareness of global crime-fighting efforts and cooperation. The emergence of Global administrative law.
Delocalization.- It is too easy to look at the positive aspects of Globalization and the great benefits that are apparent everywhere, without acknowledging several negative aspects. They are often the result of globalized corporations and the delocalization of economies that were once self-sustaining.
Iniquality and environmental degradation.- Globalization –the growing integration of economies and societies around the world– has been one of the most hotly-debated topics in international economics over the past few years. Rapid growth and poverty reduction in China, India, and other countries that were poor 20 years ago, has been a positive aspect of globalization. But globalization has also generated significant international opposition over concerns that it has increased inequality and environmental degradation. In the Midwestern United States, globalization has eaten away at its competitive edge in industry and agriculture, lowering the quality of life in locations that have not adapted to the change
Repercussions in the Andalusian economy.-
Caviar.- The fish farm of Riofrio, in Granada, exports up to 40% of its production of caviar. It competes in international markets with Russian and Iranian caviar
Focus.- Commerce is focused on the export of food and agricultural products and on the import of energy products. The three main countries that buy Andalusian products are Germany, France and Italy with 33% of the total exports. The economies of these countries buy the majority of the food and Andalusian agricultural products. On the other side, Algeria, Nigeria and Russia are the main sellers of oil with 24.2% of imports. The challenge for Andalusia in the future is to diversify its exports to include other more elaborate products with a higher added value and to reduce its dependence of the import of energy products
TOPIC VIII.- ACTUAL ECONOMIC UMBALANCES
THE CYCLICAL CRISIS OF THE ECONOMY.-
Marxian economics.- For Marx the economy based on production of commodities to be sold in the market is intrinsically prone to crisis. In the Marxian view profit is the major engine of the market economy, but business (capital) profitability has a tendency to fall that recurrently creates crises, in which mass unemployment occurs, businesses fail, remaining capital is centralized and concentrated and profitability is recovered. In the long run these crises tend to be more severe and the system will eventually fail. Some Marxist authors such as Rosa Luxemburg viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one. Indeed a number of modern authors have tried to combine Marx's and Keynes's views. Others have contrarily emphasized basic differences between the Marxian and the Keynesian perspective: while Keynes saw capitalism as a system worth maintaining and susceptible to efficient regulation, Marx viewed capitalism as a historically doomed system that cannot be put under societal control
1860.- In 1860, French economist Clement Juglar identified the presence of economic cycles 8 to 11 years long, although he was cautious not to claim any rigid regularity. Later, Austrian economist Joseph Schumpeter argued that a Juglar cycle has four stages: (i) expansion (increase in production and prices, low interests rates); (ii) crisis (stock exchanges crash and multiple bankruptcies of firms occur); (iii) recession (drops in prices and in output, high interests rates); (iv) recovery (stocks recover because of the fall in prices and incomes). In this model, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices.
Typology of business cycles.- In the mid-20th century, Schumpeter and others proposed a typology of business cycles according to its periodicity, so that a number of particular cycles were named after their discoverers or proposers:
Kitchin.- The Kitchin inventory cycle of 3–5 years (after Joseph Kitchin);
Juglar.- The Juglar fixed investment cycle of 7–11 years (often identified as 'the' business cycle);
Kuznets.- The Kuznets infrastructural investment cycle of 15–25 years (after Simon Kuznets);
Kondratiev.- The Kondratiev wave or long technological cycle of 45–60 years (after Nikolai Kondratiev).
Little support.- Interest in these different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles.
Economic stabilization.- Business cycles after World War II were generally more restrained than the earlier business cycles. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worse excesses of business cycles. Automatic stabilization due to the aspects of the government's budget also helped defeat the cycle even without conscious action by policy-makers.
Voluntary and involuntary.- Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behavior. On the other hand, cyclical unemployment, structural unemployment, and classical unemployment, are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical unemployment may result from the legislative and economic choices made by labor unions and/or political parties. So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment, for which macroeconomic forces lead to microeconomic unemployment.
Frictional.- Frictional unemployment occurs when a worker moves from one job to another. While he searches for a job he is experiencing frictional unemployment. This applies for fresh graduates looking for employment as well. This is a productive part of the economy, increasing both the worker's long term welfare and economic efficiency, and is also a type of voluntary unemployment. It is a result of imperfect information in the labor market, because if job seekers knew that they would be employed for a particular job vacancy, almost no time would be lost in getting a new job, eliminating this form of unemployment. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or deceases in unemployment are normally under-represented in the simple statistics
Classical.- Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. Libertarian economists like F.A. Hayek argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those with jobs. For example, minimum wages raise the cost of labourers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. They believed that laws restricting layoffs made businesses less likely to hire in the first place, as hiring becomes more risky, leaving many young people unemployed and unable to find work. Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market clearing level.
Cyclical or Keynesian.- Cyclical or Keynesian unemployment, also known as demand deficient unemployment, occurs when there is not enough aggregate demand in the economy. This is caused by a business cycle recession, and wages not falling to meet the equilibrium level.
Definition.- Structural unemployment is caused by a mismatch between jobs offered by employers and potential workers. This may pertain to geographical location, skills, and many other factors. If such a mismatch exists, frictional unemployment is likely to be more significant as well. For example, in the late 1990s there was a tech bubble, creating demand for computer specialists. In 2000-2001 this bubble collapsed. A housing bubble soon formed, creating demand for real estate workers, and many computer workers had to retrain to find employment.
Permanent.- André Gorz believes that structural unemployment could be permanent in modern society, as the microchip revolution and the explosion in computer science and robotising of work even in less developed industrialized countries increase productivity.
Paul Krugman.- Nobel Prize winning economist, Paul Krugman has attacked this view, arguing that "One problem capitalism does not suffer from ... is being too productive for its own good."
Seasonal.- Seasonal unemployment results from the fluctuations in demands for labour in certain industries because of the seasonal nature of production.In such industries there is a seasonal pattern in the demand for labor. During the period when the industry is at its peak there is a high degree of seasonal employment, but during the off-peak period there is a high seasonal unemployment. Seasonal unemployment occurs when an occupation is not in demand at certain seasons.
Cost of unemployment.-
Individual.- Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction. Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression. According to a study published in Social Indicator Research, even those who tend to be optimistic find it difficult to look on the bright side of things when unemployed. Using interviews and data from German participants aged 16 to 94 – including individuals coping with the stresses of real life and not just a volunteering student population – the researchers determined that even optimists struggled with being unemployed.
Production possibility frontier.- An economy with high unemployment is not using all of the resources, i.e. labour, available to it. Since it is operating below its production possibility frontier, it could have higher output if all the workforce were usefully employed. However, there is a trade off between economic efficiency and unemployment: if the frictionally unemployed accepted the first job they were offered, they would be likely to be operating at below their skill level, reducing the economy's efficiency.
Skills – life.- During a long period of unemployment, workers can lose their skills, causing a loss of human capital. Being unemployed can also reduce the life expectancy of workers by about 7 years
Xenophobia and protectionism.- High unemployment can encourage xenophobia and protectionism as workers fear that foreigners are stealing their jobs. Efforts to preserve existing jobs of domestic and native workers include legal barriers against "outsiders" who want jobs, obstacles to inmigration, and/or tariffs and similar trade barriers against foreign competitors.
Oligopsony.- Finally, a rising unemployment rate concentrates the oligopsony power of employers by increasing competition amongst workers for scarce employment opportunities
Eurostat.- Eurostat, the statistical office of the European Union, defines unemployed as those persons age 15 to 74 who are not working, have looked for work in the last four weeks, and ready to start work within two weeks, which conform to ILO standards. Eurostat also includes a long-term unemployment rate. This is defined as part of the unemployed who have been unemployed for an excess of 1 year.
Three methods.- Three methods of data collection are used in the European Union. The European Union Labour Force Survey (EU-LFS) collects data on all member states each quarter. For monthly calculations, national surveys or national registers from employment offices are used in conjunction with quarterly EU-LFS data. Monthly unemployment rates are interpolated from monthly data from member states to provide "harmonized data."
Germany.- At this time Germany's unemployment data are collected separately from the (EU-LFS).
Spain.- Mainly, the unemployment is mesured monthly with the “Encuesta de Población Activa” (epa)
Definition.- In economics, the people in the labor force are the suppliers of labor. The labor force is all the nonmilitary people who are employed or unemployed. In 2005, the worldwide labor force was over 3 billion people.
Working age.- Normally, the labor force of a country (or other geographic entity) consists of everyone of working age (typically above a certain age (around 14 to 16) and below retirement age who are participating workers, that is people actively employed or looking for work. Child labor laws in the United States forbid employing people under 18 in hazardous jobs.
Unemployment rate.- The fraction of the labor force that is seeking work but cannot find it determines the unemployment rate.
THE ENVIRONMENT AS A SENSITIVE AND LIMITED RESOURCE .-
The limits to growth.-
1972.- The limits to Growth is a 1972 book modeling the consequences of a rapidly growing world population and finite resource supplies, commissioned by the Club of Rome. Its authors were Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III. The book used the World3 model to simulate the consequence of interactions between the Earth's and human systems. The book echoes some of the concerns and predictions of the Reverend Thomas Robert Malthus in An Essay on the Principle of Population (1798).
Five variables.- Five variables were examined in the original model, on the assumptions that exponential growth accurately described their patterns of increase, and that the ability of technology to increase the availability of resources grows only linearly. These variables are: world population, industrialization, pollution, food production and resource depletion. The authors intended to explore the possibility of a sustainable feedback pattern that would be achieved by altering growth trends among the five variables.
Recent updated version.- The most recent updated version was published on June 1, 2004 by Chelsea Green Publishing Company and Earthscan under the name Limits to Growth: The 30-Year Update. Donnella Meadows, Jørgen Randers, and Dennis Meadows have updated and expanded the original version. They had previously published Beyond the Limits in 1993 as a 20 year update on the original material.
Graham Turner.- In 2008 Graham Turner at the Commonwealth Scientific and Industrial Research Organisation (CSIRO) in Australia published a paper called "A Comparison of `The Limits to Growth` with Thirty Years of Reality". It examined the past thirty years of reality with the predictions made in 1972 and found that changes in industrial production, food production and pollution are all in line with the book's predictions of economic collapse in the 21st century.
Oceans.- Ocean circulation patterns have a strong influence on climate and weather and, in turn, the food supply of both humans and other organisms. Scientists have warned of the possibility, under the influence of climate change, of a sudden alteration in circulation patterns of ocean currents that could drastically alter the climate in some regions of the globe. Major human environmental impacts occur in the more habitable regions of the ocean fringes – the estuaries, coastline and bays. Ten per cent of the world's population – about 600 million people – live in low-lying areas vulnerable to sea level rise. Trends of concern that require management include: over-fishing (beyond sustainable levels); coral bleaching due to ocean warming and ocean acidification due to increasing levels of dissolved carbon dioxide; and sea level rise due to climate change. Because of their vastness oceans also act as a convenient dumping ground for human waste. Remedial strategies include: more careful waste management, statutory control of overfishing by adoption of sustainable fishing practices and the use of environmentally sensitive and sustainable aquaculture and fish farming, reduction of fossil fuel emissions and restoration of coastal and other marine habitat.
Toxic subtances.- Synthetic chemical production has escalated following the stimulus it received during the second World War. Chemical production includes everything from herbicides, pesticides and fertilizers to domestic chemicals and hazardous substances. Apart from the build-up of greenhouse gas emissions in the atmosphere, chemicals of particular concern include: heavy metals, nuclear waste, chlorofluorocarbons, persistent organic pollutants and all harmful chemicals capable of bioaccumulation. Although most synthetic chemicals are harmless there there needs to be rigorous testing of new chemicals, in all countries, for adverse environmental and health effects. International legislation has been established to deal with the global distribution and management of dangerous goods.
Erosion, etc.- Environmental issues can include erosion, formation of sinkholes, loss of biodiversity, and contamination of soil, groundwater and surface water by chemicals from mining processes. In some cases, additional forest logging is done in the vicinity of mines to increase the available room for the storage of the created debris and soil. Besides creating environmental damage, the contamination resulting from leakage of chemicals also affect the health of the local population. Mining companies in some countries are required to follow environmental and rehabilitation codes, ensuring the area mined is returned to close to its original state. Some mining methods may have significant environmental and public health effects.
Arsenic, etc.- Mining can have adverse effects on surrounding surface and ground water if protective measures are not taken. The result can be unnaturally high concentrations of some chemicals, such as arsenic, sulfuric acid, and mercury over a significant area of surface or subsurface. Runoff of mere soil or rock debris -although non-toxic- also devastates the surrounding vegetation. The dumping of the runoff in surface waters or in forests is the worst option here. Submarine tailing disposal is regarded as a better option (if the soil is pumped to a great depth. Mere land storage and refilling of the mine after it has been depleted is, of course, even better; if no forests need to be cleared for the storage of the debris. There is potential for massive contamination of the area surrounding mines due to the various chemicals used in the mining process as well as the potentially damaging compounds and metals removed from the ground with the ore. Large amounts of water produced from mine drainage, mine cooling, aqueous extraction and other mining processes increases the potential for these chemicals to contaminate ground and surface water. In well-regulated mines, hydrologists and geologists take careful measurements of water and soil to exclude any type of wáter contamination that could be caused by the mine's operations. The reducing or eliminating of environmental degradation is enforced in modern American mining by federal and state law, by restricting operators to meet standards for protecting surface and ground water from contamination. This is best done trough the use of non-toxic extraction processes as Bioleaching. If the project site becomes nonetheless polluted, mitigation techniques such as acid mine drainage (AMD) need to be performed.
Definition.- The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC), an international environmental treaty produced at the United Nations Conference on treaty is intended to achieve "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system." The Kyoto Protocol establishes legally binding commitments for the reduction of four greenhouse gases (carbón dioxide, methane, nitrous oxide, sulphur hexafluoride), and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by industrialized nations, as well as general commitments for all member countries. As of January 2009 update, 183 parties have ratified the protocol, which was initially have been adopted for use on 11 December 1997 in Kyoto, Japan and which entered into force on 16 February 2005. Under Kyoto, industrialized countries agreed to reduce their collective GHG emissions by 5.2% compared to the year 1990. National limitations range from 8% reductions for the European Union and some others to 7% for the United States, 6% for Japan, and 0% for Russia. The treaty permitted GHG emission increases of 8% for Australia and 10% for Iceland.
Flexible mechanisms.- Kyoto includes defined "flexible mechanisms" such as Emissions Trading, the Clean Development Mechanism and Joint Implementation to allow Annex I economies to meet their greenhouse gas (GHG) emission limitations by purchasing GHG emission reductions credits from elsewhere, through financial exchanges, projects that reduce emissions in non-Annex I economies, from other Annex I countries, or from Annex I countries with excess allowances. In practice this means that Non-Annex I economies have no GHG emission restrictions, but have financial incentives to develop GHG emission reduction projects to receive “carbon credits" that can then be sold to Annex I buyers, encouraging sustainable development. In addition, the flexible mechanisms allow Annex I nations with efficient, low GHG-emitting industries, and high prevailing environmental standards to purchase carbon credits on the world market instead of reducing greenhouse gas emissions domestically. Annex I entities typically will want to acquire carbon credits as cheaply as possible, while Non-Annex I entities want to maximize the value of carbon credits generated from their domestic Greenhouse Gas Projects.
Authorities.- Among the Annex I signatories, all nations have established Designated National Authorities to manage their greenhouse gas portfolios; countries including Japan, Canada, Italy, the Netherlands, Germany, France, Spain, and others are actively promoting government carbon funds, supporting multilateral carbon funds intent on purchasing Carbon Credits from Non-Annex I countries, and are working closely with their major utility, energy, oil & gas and chemicals conglomerates to acquire Greenhouse Gas Certificates as cheaply as possible. Virtually all of the non-Annex I countries have also established Designated National Authorities to manage the Kyoto process, specifically the "CDM process" that determines which GHG Projects they wish to propose for accreditation by the CDM Executive Board.
REPERCUSSIONS OF THE ANDALUSIAN ECONOMIC GROWTH IN OUR ENVIRONMENT AND OUR STANDARD OF LIVING.-
Chemical industry.- Huelva and its nearby villages are tied, since the 60's, to the chemical industry (oil refinerys, natural gas or thermal power stations located in the city or in nearby villages). Its instalation in the area was due (among other aspects) to the high grade of underdevelopment and unemployment that in those days existed in the area, and also to the need of take advantage of the nearby mining industry allowing it to remain in the country
Advantages-disadvantages.- The development of Huelva is undeniable, but so are the serious illnesses associated with mining and major ecological steps backwards. In the past, the citizens were divided between those who saw the chemical area as the city's economic engine, and those that saw it as a major problem because of their health and the environment.
Important.- Nowadays, the area, with more than 1,500 hectares (half of the land of the city), is one of the most important industrial complexes in the country, with 16 firms and more than 6,000 workers.
Perez Cubillas.- As a consequence of the Fertiberia activities, and to a lesser degree the FMC Foret. another 1,200 hectares are used in an indirect way for the chemical industry. They are the fosfoyeso pools, which are located about 300 metres from the neighbourhood of Perez Cubillas of Huelva, one kilometre from the centre of the city. Greenpeace establishes that the cancer rate in Huelva is the highest in Spain and recently denounced that the fosfoyeso pools emit radiation 27 times more than the amount allowed. A city platform exists called the “Mesa de la Ría”, that shows its worry about the negative effects of the chemical industry, both in terms of the environment and health
AZNALCOLLAR DISASTER.- The residue pool at the mine burst in late April 1998 sending a toxic wave into Donana National Park, one of Europe's largest nature reserves. The spill caused damage over an area of around 30-kilometres, destroying rare plant and wildlife.
CONSUMER SOCIETY. CONSUMERISM.-
Definition.- Consumerism refers to economic policies placing emphasis on consumption. In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society (cf. Producerism, especially in the British sense of the term).
First civilizations.- Consumerism has strong links with the Western world, but is in fact an international phenomenon. People purchasing goods and consuming materials in excess of their basic needs (subjective) is as old as the first civilizations (Ancient Egypt, Babylon and Ancient Rome, for example).
Industrial Revolution.- A great turn in consumerism arrived just before the Industrial Revolution. While before the norm had been the scarcity of resources, The Industrial Revolution created an unusual situation: for the first time in history products were available in outstanding quantities, at outstandingly low prices, being thus available to virtually everyone. And so began the era of mass consumption, the only era where the concept of consumerism is applicable.
Alternative lifestyle.- It's still good to keep in mind that since consumerism began, various individuals and groups have consciously sought an alternative lifestyle, such as the “simple living”, “eco-conscious” and “localvore”/”buy local” movements.
20th century.- While consumerism is not a new phenomenon, it has become widespread over the course of the 20th century, and particularly in recent decades. The influence of neoliberal capitalism has made the citizens of capitalist countries extraordinarily wealthy compared to those living under economic systems subjugated by the Capitalist countries
Brands.- In many critical contexts, consumerism is used to describe the tendency of people to identify strongly with products or services they consume, especially those with commercial brand names and perceived status-symbolism appeal, e.g. a luxury automobile, designer clothing, or expensive jewelry. A culture that is permeated by consumerism can be referred to as a consumer culture or a market culture.
Status.- Opponents of consumerism argue that many luxuries and unnecessary consumer products may act as social mechanism allowing people to identify like-minded individuals through the display of similar products, again utilizing aspects of status-symbolism to judge socioeconomic status and social stratification. Some people believe relationships with a product or brand name are substitutes for healthy human relationships lacking in societies, and along with consumerism, create a cultural hegemony, and are part of a general process of social control in modern society. Critics of consumerism often point out that consumerist societies are more prone to damage the environment, contribute to global warming and use up resources at a higher rate than other societies
Trends.- In a capitalistic market aimed at selling, certain trends may emerge:
Needs and desires.- It is in the interest of product advertisers and marketers that the consumer's needs and desires never be completely or permanently fulfilled, so the consumer can repeat the consumption process and purchase more products.
Made-To-Break.- Made-To-Break products are more beneficial to the producer, marketer and thus the entire market. Thus, planned obsolescence is embedded in the manufacturing and marketing process of new goods and services.
Fashion.- It is also profitable to the producer to make their products part of a continuously changing fashion market. By doing this, items that are still in good condition and can last for many years are deemed in need of constant replacement, in order to keep in synch with current fashion trends.
Time.- In this way, steady profits are assured for this self-perpetuating system, but consumers are not comfortable or satisfied for a significant length of time with what they own.
Modern Consumerism in the 21st century.-
1990s.- Beginning in the 1990s, the most frequent reason given for attending college had changed to making a lot of money, outranking reasons such as becoming an authority in a field or helping others in difficulty. This statement directly correlates with the rise of materialism, specifically the technological aspect. At this time compact disc players, digital media, personal computers, and cellular telephones all began to integrate into the affluent American’s everyday lifestyle. Madeline Levine criticized what she saw as a large change in American culture – “a shift away from values of community, spirituality, and integrity, and toward competition, materialism and disconnection.”
Upper class.- Businesses have realized that wealthy consumers are the most attractive targets for marketing their products. The upper class' tastes, lifestyles, and preferences trickle down to become the standard which all consumers seek to emulate. The not so wealthy consumers can “purchase something new that will speak of their place in the tradition of affluence”. A consumer can have the instant gratification of purchasing an expensive item that will help improve their social status.
Celebrities.- Emulation is also a core component of 21st century consumerism. As a general trend, regular consumers seek to emulate those who are above them in the social hierarchy. The poor strive to imitate the wealthy and the wealthy imitate celebrities and other icons. The celebrity endorsement of products can be seen as evidence of the desire of modern consumers to purchase products partly or solely to emulate people of higher social status. This purchasing behaviour may co-exist in the mind of a consumer with an image of oneself as being an individualist.
Anti-consumerist movement.- There has always been strong criticism of the anti-consumerist movement. Most of this comes from libertarian thought.
Libertarian criticisms.- Libertarian criticisms of the anti-consumerist movement are largely based on the perception that it leads to elitism. Namely, libertarians believe that no person should have the right to decide for others what goods are necessary for living and which aren't, or that luxuries are necessarily wasteful, and thus argue that anti-consumerism is a precursor to central planning or a totalitarian society.
Definition.- Poverty is the shortage of common things such as food, clothing, shelter and safe drinking water, all of which determine the quality of life. It may also include the lack of access to opportunities such as education and employment which aid the escape from poverty and/or allow one to enjoy the respect of fellow citizens.
Causes of poverty.-
Recession.- In general the major fluctuations in poverty rates over time are driven by the business cycle. Poverty rates increase in recessions and decline in booms.
Economic inequality.- Even if average income is high it may be the case that the poverty rate is also high if incomes are distributed unevenly. However the evidence on the relationship between absolute poverty rates and inequality is mixed and sensitive to the inequality index used. For example, while many Sub-Saharan African countries have both high inequality and high poverty rates, other countries, such as India have low inequality and high poverty rates. In general the extent of poverty is much more closely related to average income than it is to the variance in its distribution. At the same time some research indicates that countries which start with a more equitable distribution of income find it easier to eradicate poverty through economic growth. In addition to income inequality, an unequal distribution of land can also contribute to high levels of poverty.
Shocks to food prices.- Poor people spend a greater portion of their budgets on food than richer people. As a result poor households, and those near the poverty threshold can be particularly vulnerable to increases in food prices.
Lacking democracy in poor countries.- "The records when we look at social dimensions of development—access to drinking water, girls' literacy, health care—are even more starkly divergent. For example, in terms of life expectancy, rich democracies typically enjoy life expectancies that are nine years longer than poor autocracies. Opportunities of finishing secondary school are 40 percent higher. Infant mortality rates are 25 percent lower. Agricultural yields are about 25 percent higher, on average, in poor democracies than in poor autocracies—an important fact, given that 70 percent of the population in poor countries is often rural-based.""Poor democracies don't spend any more on their health and education sectors as a percentage of GDP than do poor autocracies, nor do they get higher levels of foreign assistance. They don't run up higher levels of budget deficits. They simply manage the resources that they have more effectively."
Effectiveness.- The governance effectiveness of governments has a major impact on the delivery of socioeconomic outcomes for poor populations
Rule of law.- Weak rule of law can discourage investment and thus perpetuate poverty.
Resource curse.- Poor management of resource revenues can mean that rather than lifting countries out of poverty, revenues from such activities as oil production or gold mining actually leads to a resource curse.
Infrastructure.- Failure by governments to provide essential infrastructure worsens poverty.
Education.- Poor access to affordable education traps individuals and countries in cycles of poverty.
Corruption.- High levels of corruption undermine efforts to make a sustainable impact on poverty.
Welfare states.- Welfare states have an effect on poverty reduction. Currently modern, expansive welfare states that ensure economic opportunity, independence and security in a near universal manner are still the exclusive domain of the developed nations.
Demographic and social factors.-
Overpopulation.- Overpopulation and lack of access to birth control methods.
Historical factors.- For example imperialism, colonialism and Post-Communism.
Matthew effect.- It’s the phenomenon, widely observed across advanced welfare states, that the middle classes tend to be the main beneficiaries of social benefits and services, even if these are primarily targeted at the poor.
Cultural causes.- Which attribute poverty to common patterns of life, learned or shared within a community. For example, Max Weber argued that the Protestant work ethic contributed to economic growth during the industrial revolution.
Poor Access.- Poor access to affordable health care makes individuals less resilient to economic hardship and more vulnerable to poverty.
Nutritition.- Inadequate nutrition in childhood, itself an effect of poverty, undermines the ability of individuals to develop their full human capabilities and thus makes them more vulnerable to poverty. Lack of essential minerals such as iodine and iron can impair brain development.
Disease.- Specifically diseases of poverty: AIDS, malaria, and tuberculosis.
Clinical depression.- It undermines the resilience of individuals and when not properly treated makes them vulnerable to poverty.
Substance abuse.- Including for example alcoholism and drug abuse when not properly treated undermines resilience and can consign people to vicious poverty cycles
Erosion.- Intensive farming often leads to a vicious cycle of exhaustion of soil fertility and decline of agricultural yields and hence, increased poverty.
Desertification and overgrazing.-
Deforestation.- As exemplified by the widespread rural poverty in China that began in the early 20th century and is attributed to non-sustainable tree harvesting.
Natural factors.- Such as climate change or environment. Lower income families suffer the most from climate change; yet on a per capita basis, they contribute the least to climate change.
Geographic factors.- For example access to fertile land, fresh water, minerals, energy, and other natural resources. On the other hand, research on the resource curse has found that countries with an abundance of natural resources creating quick wealth from exports tend to have less long-term prosperity than countries with less of these natural resources.
Absolute poverty.- Absolute poverty refers to a set standard which is consistent over time and between countries. An example of an absolute measurement would be the percentage of the population eating less food than is required to sustain the human body (approximately 2000-2500 calories per day for an adult male).
Definition.- Relative poverty views poverty as socially defined and dependent on social context, hence relative poverty is a measure of income inequality. Usually, relative poverty is measured as the percentage of population with income less than some fixed proportion of median income. There are several other different income inequality metrics, for example the Gini coefficient or the Theil Index.
Measure.- Relative poverty measures are used as official poverty rates in several developed countries. As such these poverty statistics measure inequality rather than material deprivation or hardship. The measurements are usually based on a person's yearly income and frequently take no account of total wealth. The main poverty line used in the OECD and the European Union is based on "economic distance", a level of income set at 50% of the median household income.
Extreme poverty and moderate poverty.- The World Bank defines extreme poverty as living on less than US $1.25 Purchasing Power Parity (PPP) per day, and moderate poverty as less than $2 a day, estimating that "in 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day." The proportion of the developing world's population living in extreme economic poverty fell from 28 percent in 1990 to 21 percent in 2001. Looking at the period 1981-2001, the percentage of the world's population living on less than $1 per day has halved.
Poverty reduction estrategies.-
Distributional change.- Growth accompanied by progressive distributional change is better than growth alone.
Not sufficient.- Organizations such as the IMF and the World Bank see economic growth as a necessary but not sufficient condition for poverty reduction. Hence it is important to note that varying rates of poverty may not just simply be related to economic growth. Some research tends to show that some countries can have economic growth and reduce poverty while other poor nations cannot.
Good governance.- Good governance means efficient and fair government, government that is less corrupt and works for the long-term interests of the nation as a whole. Examples of good governance leading to economic development and poverty reduction can be seen in countries such as Thailand, Taiwan, Malaysia, South Korea and Vietnam.
Debt relief.- Given that many less developed nations have gotten themselves into extensive debt to banks and governments from the rich nations, and given that the interest payments on these debts are often more than a country can generate per year in profits from exports, cancelling part or all of these debts may allow poor nations "to get out of the hole". However the effectiveness of debt relief is uncertain and whether or not it has lasting effect is disputed. It may not change the underlying conditions that have led to less long-term development in the first place.
Import substitution and export industries.- The most widely used policies of the countries of East and Southeast Asia that have been successful at reducing poverty involve import substitution and the development of export industries.
Import substitution.- It simply means attempts to discourage imported goods so that the domestic economy of the less developed country can start making the products itself. Import substitution was carried out successfully in Taiwan. Another example is the South Korean ban on Japanese car imports that lasted for decades. This led to South Korea building up their own auto industry, now selling millions of highly rated automobiles in the United States and Europe.
Export industries.- There is also the common policy of export industries. With this policy the government helps stimulate the production of goods for exports to the rich nations to obtain a favorable balance of trade and the inflow of capital or funds for further investment. A flood of consumer goods such as televisions, radios, bicycles, and textiles into the United States, Europe, and Japan has helped fuel the economic expansion of Asian tiger economies in recent decades.
Microloans.- One of the most popular of the new technical tools for economic development and poverty reduction are microloans made famous in 1976 by the Grameen Bank in Bangladesh. The idea is to loan small amounts of money to farmers or villages so these people can obtain the things they need to increase their economic rewards. A small pump costing only $50 could make a very big difference in a village without the means of irrigation, for example. A couple of hundred dollars for a small bridge linking a village to a city where it can market farm products is another example. A specific example is the Thai government's People's Bank which is making loans of $100 to $300 to help farmers buy equipment or seeds, help street vendors acquire an inventory to sell, or help others set up small shops
Fair trade.- Another approach that has been proposed for alleviating poverty is Fair Trade which advocates the payment of an above market price as well as social and environmental standards in areas related to the production of goods. The efficacy of this approach to poverty reduction is controversial.
Development aid.- Most developed nations give development aid to developing countries. The UN target for development aid is 0.7% of GDP; currently only a few nations achieve this.
Critics.- Some non-governmental organizations (NGOs) have argued that Western monetary aid often only serves to increase poverty and social inequality, either because it is conditioned with the implementation of harmful economic policies in the recipient countries, or because it's tied with the importing of products from the donor country over cheaper alternatives, or because foreign aid is seen to be serving the interests of the donor more than the recipient. Critics also argue that some of the foreign aid is stolen by corrupt governments and officials, and that higher aid levels erode the quality of governance. Policy becomes much more oriented toward what will get more aid money than it does towards meeting the needs of the people.
Auditing.- Supporters argue that these problems may be solved with better auditing of how the aid is used. Aid from non-governmental organizations may be more effective than governmental aid; this may be because it is better at reaching the poor and better controlled at the grassroots level.
Millennium development goals.- Eradication of extreme poverty and hunger is the first Millennium Development Goal. One of the targets within this goal is the halving of the proportion of people living in extreme poverty by 2015. In addition to broader approaches, the Sachs Report (for the UN Millennium Project) proposes a series of "quick wins", approaches identified by development experts which would cost relatively little but could have a major constructive effect on world poverty. Some of these "quick wins" are these such as directly assisting local entrepreneurs to grow their businesses and create jobs, access to information on sexual and reproductive health, drugs for AIDS, tuberculosis, and malaria, free school meals for schoolchildren, legislation for women’s rights, providing soil nutrients to farmers in sub-Saharan Africa, Access to electricity, water and sanitation, upgrading slums and providing land for public housing, among other things.
Definition.- Underdevelopment is the state of an organization (e.g. a country) that has not reached its maturity. It is often used to refer to economic underdevelopment, symptoms of which include lack of access to job opportunities, health care, drinkable water, food, education and housing.
Overview.- Underdevelopment takes place when resources are not used to their full socio-economic potential, with the result that local or regional development is slower in most cases than it should be. Furthermore, it results from the complex interplay of internal and external factors that allow less developed countries only a lop-sided development progression. Underdeveloped nations are characterized by a wide disparity between their rich and poor populations, and an unhealthy balance of trade
Extended overview.- The economic and social development of many developing countries has not been even. They have an unequal trade balance which results from their dependence upon primary products (usually only a handful) for their export receipts. These commodities are often (a) in limited demand in the industrialized countries (for example: tea, coffee, sugar, cocoa, bananas); (b) vulnerable to replacement by synthetic substitutes (jute, cotton, etc); or (c) are experiencing shrinking demand with the evolution of new technologies that require smaller quantities of raw materials (as is the case with many metals). Prices cannot be raised as this simply hastens the use of replacement synthetics or alloys, nor can production be expanded as this rapidly depresses prices. Consequently, the primary commodities upon which most of the developing countries depend are subject to considerable short-term price fluctuation, rendering the foreign exchange receipts of the developing nations unstable and vulnerable. Development thus remains elusive
History.- The world consists of a group of rich nations and a large number of poor nations. It is usually held that economic development takes place in a series of capitalist stages and that today’s underdeveloped countries are still in a stage of history through which the now developed countries passed long ago. The countries that are now fully developed have never been underdeveloped in the first place, though they might have been undeveloped
Definition.- The modernization Theory is a socio-economic theory, also known as the Development theory. This highlights the positive role played by the developed world in modernizing and facilitating sustainable development in underdeveloped nations.
Consists of three parts.-
Identification.- Identification of types of societies, and explanation of how those designated as modernized or relatively modernized differ from others.
Specification.- Specification of how societies become modernized, comparing factors that are more or less conducive to transformation.
Generalizations.- Generalizations about how the parts of a modernized society fit together, involving comparisons of stages of modernization and types of modernized societies with clarity about prospects for further modernization.
Definition.- Dependence Theory is the body of theories by various intellectuals, both from the Third World and the First World, that suggest that the wealthy nations of the world need a peripheral group of poorer states in order to remain wealthy. Dependency theory states that the poverty of the countries in the periphery is not because they are not integrated into the world system, but because of how they are integrated into the system.
Poor nations – rich nations.- These poor nations provide natural resources, cheap labor, a destination for obsolete technology, and markets to the wealthy nations, without which they could not have the standard of living they enjoy. First world nations actively, but not necessarily consciously, perpetuate a state of dependency through various policies and initiatives. This state of dependency is multifaceted, involving economics, media control, politics, banking and finance, education, sport and all aspects of human resource development. Any attempt by the dependent nations to resist the influences of dependency could result in economic sanctions and/or military invasion and control. This is rare, however, and dependency is enforced far more by the wealthy nations setting the rules of international trade and commerce.
Definition.- External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other govenments, or international financial institutions such as the IMF and World Bank.
Developing countries' debt.-
Definition.- It is external debt incurred by the governments of Third World countries, generally in quantities beyond the governments' political ability to repay. "Unpayable debt" is a term used to describe external debt when the interest on the debt exceeds what the country's politicians think they can collect from taxpayers, based on the nation's Gross domestic product, thus preventing the debt from ever being repaid.
1973 oil crisis.- Much of the current levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited in western banks provided a ready source of funds for loans. While a proportion of borrowed funds went towards infrastructure and economic development financed by central governments, a proportion was lost to corruption and about one-fifth was spent on arms.
Arguments about Third World debt.-
Liability.- There is much debate about whether the poorest countries should be liable for debt. The legitimacy of such liability is little doubt in terms of international and contractual law, but many arguments in the debate have to do with the fairness or practicality of the system currently in place.
Refinance.- Critics of the practical point in this argument might question whether or not unpayable debt truly exists, since governments can refinance their debt via the IMF or World Bank, or come to a negotiated settlement with their creditors. However, this is not an argument that can withstand a glance at the state of the essential services supposedly being provided by many of the heavily indebted countries. There is overwhelming evidence that governments have financed their debts through instigation of austerity policies directed at essential services and subsidies for essential goods. The history of Mali, for example, from 1968 onwards, provides a clear illustration of this. In fact, the requirement that governments should service debts at the expense of their populations is integral to the strategies adopted by the Washington institutions in 1982 to solve the banking crisis triggered by the Mexican Weekend in August that year. Austerity was one of the ways in which interest payments could continue to be serviced, preventing liquidity problems in the US money-centre banks. The same principle is evident in the design of the Heavily Indebted Poor Countries Initiative. While refinancing has taken place (particularly to lessen private creditor exposure subsequent to 1982) this has come with conditions which have caused a crisis of development. Stuart Corbridge has described the 1982 debt crisis as a banking crisis which was transformed into a development crisis, brokered by the Washington Institutions
Consequences of debt abolition.- Some economists argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists often refer to this as “moral hazard” . But some critics and debt relief activists say the problem is not necessarily with borrowers, but with lenders, and thus the moral hazard is not necessarily immoral borrowing, but immoral lending
Recent Debt Relief.- A number of impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank.
Odious Debt.- In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion