UNIT 10- THE ECONOMY AND ECONOMIC PERFORMANCES

GOVERNMENT SPENDING AND TAXING- FISCAL POLICY

A. there are three types of budgets:1. balanced – revenues equal expenditures2. surplus – revenues exceed expenditures3. deficit – expenditures exceed revenues

GOVERNMENT SPENDING AND TAXING- FISCAL POLICY

B. the president and staff (or governor and staff) prepare a budget and present it to Congress for approval

REVENUE

C. characteristics of a good tax:1. simplicity – easy to understand and keep records of the

tax2. efficiency – must be able to pay and collect without

wasting too much time3. certainty – should be clear when, how much, and how it

should be paid4. equity – no one should bear too much or too little of the

burden

REVENUE

D. types of taxes:1. excise tax – tax on the sale or manufacture of a good,

such as gasoline2. estate tax – tax on total value of the money and

property of a person who has died3. gift tax – tax on money or property given to another4. import tax (tariff) – tax on good brought into the country5. income tax – tax on individuals or corporations (national

and most states)6. sales tax- tax on goods (most states and local

governments)7. property tax- such as houses, boats and cars (most local

governments)

REVENUE

E. other types of taxes:1. proportional – pay a constant percentage of income

(also known as a flat tax)2. progressive – pay a larger percentage as income

increases (ex. federal income tax)3. regressive – pay a smaller percentage as income

increases (ex. sales tax)

US TAX CODE

• https://www.law.cornell.edu/uscode/text/26

IS THE US PROGRESSIVE OR REGRESSIVE?

EXPENDITURES

F. federal government spending:1. entitlement programs – Social Security, Medicare,

Medicaid, retirement benefits for federal workers, veteran’s pensions, unemployment, etc.

2. discretionary spending – defense, education, scientific research, student loans, technology, national parks/monuments, law enforcement, housing, transportation, disaster aid, foreign aid

3. aid to state/local governments – education, low income housing, mass transit, healthcare, employment training

EXPENDITURES

G. state and local government spending:1. state – education, public welfare, hospitals, health,

police protection, corrections, arts and recreation, administration, etc.

2. local – education, hospitals, health, police/fire protection, public goods, elections, social services, transportation

UNEMPLOYMENT

A. measurements of unemployment:1. employed (actively working or temporarily on leave)2. unemployed (those who do not have a job but are

actively looking for one)3. not in labor force (persons without jobs who are not

actively seeking jobs like housewives, students, etc.)

UNEMPLOYMENT

A.types of unemployment:1.frictional: people take time to find a job (laid off, change jobs, time off after schooling, etc.)

2.seasonal: change in season causes change in production (farmers, ski lodges, swimming pools, etc.)

3. structural:1. caused by mismatch between job seekers and job

openings2. five causes of structural unemployment:

a. development of new technologyb. discovery of new resourcesc. changes in consumer demandd. globalizatione. lack of education

4. cyclical: rises during economic downturns and falls when economy improves (ex. Great Depression)

5. full employment: when there is no cyclical unemployment

INFLATION

• consumer price index (CPI) shows how the average price of a certain group of goods changes over time• hyperinflation: inflation out of control (money

loses much of its value and it leads to total economic collapse)

INFLATION

• three explanations of inflation:• quantity theory: too much money in the

economy• demand-pull theory: occurs when the

demand for goods/services exceeds existing supplies• cost-push theory: occurs when producers

raise prices in order to meet increased costs (wage increases for workers most common cause)• What are some effects of inflation?

DOLLA DOLLA…

BUSINESS CYCLES

• there are four phases in a business cycle:• expansion: period of economic growth measured by a rise in

the real GDP (plenty of jobs, falling unemployment rate, and business prosperity)

• peak: height of economic expansion• contraction: economic decline marked by falling real GDP

(unemployment rises)• trough: economy has bottomed out where real GDP stops

falling

BUSINESS CYCLES

• contractions can be described in the following ways:• recession: prolonged economic

contraction of at least 6 months• depression: recession that is

especially long and severe• stagflation: decline in real GDP

(output) with a rise in prices (inflation)

THE FEDERAL RESERVE

• make up of the Fed (established in 1913):• board of governors makes decisions for the

Fed (chair is Ben Burnanke)• 12 district banks responsible for monitoring

and reporting economic and banking conditions in their region• 4,000 member banks and 25,000 other

depository institutions

FED…WHO DEY?

• functions of the Fed:• serving the government:• acts as government’s banker (checking

account for Treasury Dept. and processes payments)• sells/transfers/redeems bonds, bills, notes,

and securities• issues single national currency

WHAT DEY DO?

• serving the banks:• check clearing• supervises lending practices (enforces

truth-in-lending laws, etc.)• banks can borrow money from the Fed in an

emergency• regulating banking system:• controlling reserves• examine banks to make sure they obey

laws and regulations

ALL ABOUT DAT GREEN

• regulating the money supply:• reduce reserve requirements (allows banks

to make more loans)• increase reserve requirements (forces

individuals to pay off loans – not done often)

MONETARY POLICY

• monetary policy is the actions taken by the Fed to control the nation’s money supply and interest rate to achieve desired economic objectives

• there are two types of monetary policy:• tight money policy (restricts available credit, forcing interests rates to go

up):• Fed increases discount rate (rate to member banks) on loans to member banks• Fed increases reserve requirements for member banks (less money to loan

out)• Fed sells government securities to banks

• easy money policy (expands money supply and reduces interest rates);• Fed decreases discount rate on loans to member banks• Fed decreases reserve requirements for member banks (more money to loan)

• Fiscal policy- using taxes and government spending to influence the economy

MONETARY V. FISCAL POLICY

• https://www.youtube.com/watch?v=SQCClT41ss0

MEASURING THE NATION’S ECONOMIC HEALTH

• the Gross Domestic Product (GDP) measures how an economy is performing:• nominal GDP (or just GDP) measures the total dollar amount

of final goods and services produced within the United States• What are some weaknesses of using GDP to measure an

economy?• real GDP- factors in inflation• per capita GDP

GDP

• the government uses the GDP to do the following:• comparisons from year to year in the country• comparisons with other countries• the GDP is not the “perfect” measuring stick because it does

not take into account non-market activities underground economy, not considering the value of a clean environment or quality of life

NOMINAL GDP

GDP PER CAPITA

POVERTY

• the poverty threshold is the income level below which income is insufficient to support a family or household (poverty line); approximately $24,250 for family of four with two children

• the poverty rate is the percentage of people who live in households whose income is below the poverty line

• What are some causes of poverty?

GOVERNMENT AND ECONOMIC PROBLEMS

A.America has seven economic goals:1.price stability – inflation less than 3%2.full employment (around 95% of working adults)3.economic growth (GDP increases 3% each year)4.economic opportunity – everyone should have same

advantages to improve5.economic freedom – free to choose which job and how

to spend money6.economic security – protection against adverse

conditions in one’s life7.economic efficiency – produce the maximum of goods

and services with the nation’s limited resources

GOVERNMENT AND ECONOMIC PROBLEMS

B. the government tries to ensure fair business practices to make sure that one company won’t create a monopoly: Sherman Antitrust Act (1890), Clayton Antitrust Act (1914)

C.the government has the responsibility of protecting the workers:

1.National Labor Relations Act (1935): required employers to bargain with unions and set up the NLRB

2.Fair Labor Standards Act (1938): the Labor Dept. would help ensure minimum wage and a limit on the number of hours in a work week

3.Child labor laws: set limit on how many hours a week a child could work and at what age

4.Occupational Safety and Health Administration (OSHA): provided safe working conditions and sets and enforces safety and health standards in the workplace

D. the government has the responsibility of protecting the consumer against unsafe products:1.Food and Drug Administration (FDA): sees that all

goods are labeled correctly, are safe, and have been tested before they go on the market

2.Consumer Product Safety Commission (CPSC): sets safety standards for products you find around the house

E. the Environmental Protection Agency (EPA) controls pollution from businesses and puts a limit on how much can go into the air, water, and soil the government also protects the elderly and the poor:1.Social Security Act (1935): provides monthly payment

to workers or their families to replace income lost when a person retires, is injured, dies, or faces unemployment

2.The government provides public assistance to help people in need like food stamps and aid to families with dependent children

F. the government also ensures economic opportunity:1.Equal Opportunity Act: outlawed any type of

discrimination in hiring based on race, sex, religion, or national origin

2.Equal Pay Act (1963): required males and females in the same job to receive the same pay

3.Equal Employment Opportunity Commission (1964): handles complaints on job discrimination and will take companies to court if necessary

G. monetary policy is when the Federal Reserve controls the nation’s money supply and interest rates to achieve desired economic objectives

H. fiscal policy is the use of government spending and taxing to achieve desired economic objectives

INTERNATIONAL TRADE

A.Countries trade to take advantage of strengths of different countries (together everyone achieves more)

B.Export- Good sent to another countryC.Import- Good brought in from another countryD.Tariff- A tax on a good from another countryE.Often, countries reach agreements to reduce

eliminate tariffs for each other such as the North American Free Trade Agreement (NAFTA)- agreement between Canada, Mexico and the United States

F. Restriction of tariffs is called free trade

G. Trade surplus- when a country exports more goods than it imports (also known as favorable balance of trade)

H.Trade deficit- when a country exports less goods than it imports

I. Comparative Advantage- all nations will have more goods if they specialize in producing those items in which they have the greatest relative efficiency and import those things in which they have the least relative efficiency (specialization)

J. Goods and services being supplied by someone outside the company/country is called outsourcing