Principles of macroeconomics Quiz
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spptchap003.pptxNobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.
―Friedrich Hayek
Economic Institutions
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Introduction:
Thinking Like an Economist
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CHAPTER 2
CHAPTER 3
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Chapter Goals
Define market economy and compare and contrast
socialism with capitalism
List and discuss the various roles of government.
Describe the role of businesses and households in a market economy
Explain why global policy issues differ from national
policy issues.
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Economic Systems
The U.S. economy is a market economy, which is an economic system based on private property and the markets in which, in principle, individuals decide how, what, and for whom to produce
Markets work through a system of rewards and payments
Individuals are free to do whatever they want as long as it is legal
Fluctuations in prices play a central role in coordinating individuals’ wants in a market economy
Most economists believe the market is a good way to coordinate economic activity
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Capitalism and Socialism
Capitalism is an economic system based on the market in which the ownership of the means of production resides with a small group of individuals (called capitalists)
Socialism is an economic system based on individuals’ goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce
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Economic Institutions in a Market Economy
GOVERNMENT
(Consumption)
HOUSEHOLDS
GOODS MARKET
INTERNATIONAL CONNECTION
INTERNATIONAL CONNECTION
BUSINESS
(Production)
FACTORMARKET
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Business
Businesses produce what they believe will sell and make a profit
Businesses in the U.S. decide what to produce, how much to produce, and for whom to produce it
By channeling the desire to make a profit for the general good of society, the U.S. economic system allows the invisible hand to work
Although businesses decide what to produce, they are guided by consumer sovereignty
Businesses are private producing units in our society
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Forms of Business
Sole proprietorships – businesses that have only one owner
Partnerships – businesses with two or more owners
Corporations – businesses that are treated as a person, and are legally owned by their stockholders, who are not liable for the actions of the corporate “person”
Flexible-purpose Corporations, Benefit Corporations
(B-corporations), L3C
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Households
The largest source of household income is wages and salaries
Households supply the labor with which businesses produce and government governs
In the economy, households vote with their dollars to determine what businesses produce
Besides being suppliers of labor, households make a significant number of the decisions in the economy
Households are groups of individuals living together making joint decisions
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The Roles of Government
An actor who collects money in taxes and spends that money on projects, such as defense and education
A referee who sets the rules that determine relations between businesses and households
The government plays two general roles in the economy:
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Six Roles of a Government in a Market
These roles include:
Providing a stable set of institutions and rules
Promoting effective and workable competition
Correcting for externalities
Ensuring economic stability and growth
Providing public goods
Adjusting for undesirable market results
In its role as both an actor and a referee, government plays a variety of specific roles in the economy
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Market Failures and Government Failures
Government failures are situations in which the government intervenes and makes things worse
Market failures are situations in which the market does not lead to a desired result
Policy makers must decide which failure is the least problematic, a market or government failure
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Global Institutions and Corporations
U.S. economic institutions are integrated with the world’s economy
The U.S. economy makes up about 20% of the world output and consumption, but only 6% of the world’s land mass and just over 4% of the world’s population
Global corporations are corporations with substantial operations in both production and sales in more than one country
Global corporations create jobs, bring new technologies, and provide competition for domestic companies
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Coordinating Global Issues
There is no global government to regulate global corporations but governments have developed international institutions to promote negotiations and coordinate economic relations among countries
Some examples of international institutions:
The United Nations is an organization designed to achieve international cooperation but it has no ability to tax or enforce its policies on its members
The World Bank is a multinational, international financial institution that works to secure loans for developing countries
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Coordinating Global Issues
The International Monetary Fund (IMF) is a multinational, international financial institution concerned with monetary issues
The Group of Eight (G8) meets to promote negotiations and coordinate economic relations among nations. These five countries include Japan, Germany, Britain, France, United States, Canada, Italy and Russia
The North American Free Trade Act (NAFTA) is an organization devoted to reducing trade barriers between the U.S., Mexico, and Canada
Additional examples of international institutions:
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Chapter Summary
The U.S. economy is a market economy (capitalistic) that gives property rights to individuals and relies on market forces to solve the what, how, and for whom problems
Socialism is based on government ownership of the means of production with economic activity governed by central planning
Businesses decide what, how much, and for whom decisions in production
The three main forms of businesses are proprietorships, partnerships, and corporations
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Chapter Summary
Households supply labor and influence business decisions through consumer sovereignty
The six roles for government include:
Providing a stable set of institutions and rules
Promoting effective and workable competition
Correcting for externalities
Ensuring economic stability and growth
Providing public goods
Adjusting for undesirable market results
Because there is no world government, governments enter voluntary organizations that regulate international markets
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