Professor Joe Serres, J.D., M.B.A. Unit 1 SeminarMonday, May 23, 2011 Unit 1 Planning for Economic Growth & Development 1. Class Introductions 2. Review Syllabus 3. Discuss and review key terms and Unit lessons 4. Review Major Concepts 5. Looking forward Waterfall, Butte Fork Applegate River Red Buttes Wilderness, Spring 2011 Course Syllabus Lets take some time and go through the course syllabus. Please refer to your syllabus as we go through the material. Note: ALTERNATIVE ASSIGNMENTS: If you are unable to attend a seminar, you may need to complete an alternative assignment. Alternative assignments will be explained by your professor at the beginning of the course, referenced in the syllabus, and typically available on your class discussion board. An example of an alternative assignment would be a 200-word essay about the seminar topic. It is important that if you are unable to attend a seminar you make sure that you clearly understand the alternative assignment so you do not lose any points. Please note: if you will be absent and unable to post for an entire week or more, you MUST communicate with your professor. Rough & Ready Creek Kalmiopsis Wilderness, Spring 2011 Unit 1 Planning for Economic Growth eTextbook: Taylor and Weerapana Chapter 1: The Central Idea Chapter 2: Observing and Explaining the Economy Chapter 7: The Spending Allocation Model Chapter 9: Productivity and Economic Growth Access eTextbook files in Doc Sharing. Economic Growth is typically defined as the increase (though it could be negative) in a nations, regions or states productive output, usually over one year. Economic Development is usually defined as the distribution of this output across income classes, regions or some other demographic distinction. Economic growth carries with it attendant fiscal, monetary and regulatory policies aimed at promoting economic gains overall, while economic development demands such policies aimed at the promotion of more specific goals designed to distribute the benefits of growth according to the preferences of prevailing governing majorities. Economics~ Central Idea TIGER WOODS EXAMPLE (Interesting how much that story has changed since printed in your text! Do you think theyll use Tiger for reprint of this text?!) Economics is the study of how people deal with scarcity. Scarcity: the situation in which the quantity of resources is insufficient to meet all wants. Scarcity implies that people must make a choice to forgo, or give up, one thing in favor of another. Economic interactions between people occur every time they trade or exchange goods with each other. Economic interactions typically take place in a market. Choosing one item means that you have to give up other items. The opportunity cost of a choice is the value of the next-best forgone alternative that was not chosen. There are gains from trade because the trade reallocates goods between the two individuals in a way that they both prefer. Economic interaction allows for specialization: people concentrating their production efforts on what they are good at. A division of labor occurs when some workers specialize in one task while others specialize in another task. Comparative advantage: a situation in which a person or group can produce one good at a lower opportunity cost than another person or group. Economics~ Define Concepts Production possibilities: alternative combinations of production of various goods that are possible, given the economys resources. Increasing opportunity cost: a situation in which producing more of one good requires giving up an increasing amount of production of another good. Production possibilities curve: a curve showing the maximum combinations of production of two goods that are possible, given the economys resources. Figure(s) 2-4, p Text The production possibilities curve is bowed out because of increasing opportunity costs. Points inside the curve are inefficient. Points on the curve are efficient. Points outside the curve are impossible. The production possibilities curve shifts out as resources increase. Outward shifts of the production possibilities curve or moves from inefficient to efficient points are the reasons why the economy is not a zero-sum game, despite the existence of scarcity and choice. MARKET ECONOMIES AND THE PRICE SYSTEM What is to be produced? How are these goods to be produced? For whom are the goods to be produced? Market & Command Economies Broadly speaking, the market economy and the command economy are two the market economy and the command economy are two alternative approaches to answering these questions. In a market economy, most decisions about what, how, and for whom to produce are made by individual consumers, firms, governments, and other organizations interacting in markets. In a command, or centrally planned, economy, most decisions about what, how, and for whom to produce are made by those who control the government, which, through a central plan, commands and controls what people do. Key Elements of a Market Economy In a market economy, most prices are freely determined by individuals and firms interacting in markets. These freely determined prices are an essential characteristic of a market economy. Property rights are another key element of a market economy. Property rights give individuals the legal authority to keep or sell property, whether land or other resources. Freedom to Trade at Home & Abroad Government Role Private Organizations Role What do Economists do? Economics is a way of thinking. It entails accurately describing economic events, explaining why the events occur, predicting under what circumstances such events might take place in the future, and recommending appropriate courses of action. Relative price: the price of a particular good compared to the price of other things. Gas prices example Economists have to think carefully about the limitations of the data they use. For example, when studying changes over time, it is important to correct for changes in the overall price level, which can otherwise lead you to misleading conclusions. Explaining Economics An economic variable is any economic measure that can vary over a range of values. Two variables are said to be correlated if they tend to move up or down at the same time. There is a positive correlation if the two variables move in the same direction when one goes up, the other goes up. There is a negative correlation if the two variables move in opposite directions when one goes up, the other goes down. There is a difference between causation and correlation. Correlation means that one event is usually observed to occur along with another. Causation means that one event brings about another event. But correlation does not imply causation. ECONOMIC MODELS In order to explain economic facts and observations, one needs an economic theory, or a model. An economic model is an explanation of how the economy or a part of the economy works. In practice, most economists use the terms theory and model interchangeably, although sometimes the term theory suggests a general explanation and the term model suggests a more specific explanation. The term law is also typically used interchangeably with the terms model and theory in economics. Microeconomics studies the behavior of individual firms and households or specific markets. Macroeconomics focuses on the whole economythe whole national economy or even the whole world economy. The most comprehensive measure of the size of an economy is the gross domestic product (GDP). GDP is the total value of all goods and services made in the country during a specific period of time, such as a year. Figure 5-6, p.33 Text Positively related: a situation in which an increase in one variable is associated with an increase in another variable; also called directly related. Negatively related: a situation in which an increase in one variable is associated with a decrease in another variable; also called inversely related. POLICIES Capitalism: an economic system based on a market economy in which capital is individually owned, and production and employment decisions are decentralized. Socialism: an economic system in which the government owns and controls all the capital and makes decisions about prices and quantities as part of a central plan. Mixed economy: a market economy in which the government plays a very large role. Positive economics: economic analysis that explains what happens in the economy and why, without making recommendations about economic policy. Normative economics: economic analysis that makes recommendations about economic policy. Council of Economic Advisers: a three- member group of economists appointed by the president of the United States to analyze the economy and make recommendations about economic policy. The Spending Allocation Model We know that GDP is divided into four components: consumption, investment, government purchases, and net exports. Symbolically, Y= C + I + G + X where Y equals GDP, C equals consumption, I equals investment, G equals government purchases, and X equals net exports. This equation is the starting point. The consumption share of GDP is the proportion of GDP that is used for consumption- equals consumption divided by GDP, or C/Y. Investment share: the proportion of GDP that is used for investment; equals investment divided by GDP, or I/Y. Sometimes called investment rate. Net exports share: the proportion of GDP that is equal to net exports; equals net exports divided by GDP, or X/Y. Government purchases share: the proportion of GDP that is used for government purchases; equals government purchases divided by GDP, or G/Y. Interest Rates & Spending Shares The price of consumption today relative to the price of consumption tomorrow is the real interest rate. The Consumption Share and the Real Interest Rate A higher real interest rate discourages consumption and encourages saving. Therefore, the share of GDP allocated to consumption will decrease in the long run. See Figure 2, p.175 of your text Investment: A similar inverse, or negative, relationship exists between investment and the real interest rate. When businesses decide to invest, by buying new machines and equipment or by building a new factory, they need funds for this purpose. Typically, they acquire these funds by borrowing. Higher real interest rates raise the cost of borrowingthe firm would need to produce enough additional output to pay back the loan plus interest, which implies that it would be willing to borrow only if it were confident about the success of the investment project. Net Exports Net exports are also negatively related to the real interest rate. The story behind this relationship is somewhat more involved than that for investment or for consumption. The exchange ratethe rate at which one countrys currency can be exchanged for anotherwill play an integral role in this relationship. There is a downward-sloping relationship between the real interest rate and each of these three shares. Changes in the real interest rate are reflected as movements along these curves. Other factors besides the interest rate may also affect consumption, investment, and net exports. When one of these factors changes, the relationship between the interest rate and consumption, investment, or net exports shifts. Equilibrium interest rate: The interest rate that equates the sum of the consumption, investment, and net exports shares to the share of GDP available for nongovernment use. The sum of the consumption, investment, and net exports shares of GDP is called the nongovernment share of GDP. It is negatively related to the interest rate because each of the individual components is negatively related to the interest rate. Once we find the equilibrium interest rate, we can then find the shares of consumption, investment, and net exports by looking at the graphs of those relationships. Saving & Investment Relationship National saving rate: the proportion of GDP that is saved, neither consumed nor spent on government purchases; equals national saving (S) divided by GDP, or S/Y. The national saving rate equals the investment share plus the net exports share. Since national saving is defined as Y - C - G, we can show that national saving is equal to the sum of investment and net exports. Expressing this relationship as shares of GDP in the long run, we can show that the national saving rate equals the sum of the investment share and the net exports share of GDP. Practically speaking, if the rising demands of an aging society cause budget deficits as a percentage of GDP in the United States to increase (thus reducing the government saving rate), then one or more of the following outcomes will occur: 1. The private saving rate will have to increase, meaning that consumers will most likely have to cut back on spending. 2. The investment rate will decrease, which means less capital accumulation and the likelihood for slower economic growth in the future. 3. The trade balance will worsen, and we will buy more foreign goods while foreigners will buy less of our goods. Productivity & Economic Growth Productivity: output per hour of work. Diminishing returns: a situation in which successive increases in the use of an input, holding other inputs constant, will eventually cause a decline in the additional production derived from one more unit of that input. Capital: The total amount of capital in the economy increases each year by the amount of net investment during the year. Technology- A broad definition of technology is that it is anything that raises the amount of output that can be produced with a given amount of inputs (labor and capital). Diminishing returns imply that the additional output obtained by increasing these inputs becomes smaller and smaller, eventually leading to no further economic growth. In order for output to grow over the very long run, we need not just to increase inputs, but also to get more output from existing inputs. Technology is what enables us to get more output from a given quantity of inputs. Examples of Changes in Technology That Increased Productivity More on Technology Invention: a discovery of new knowledge. Innovation: application of new knowledge in a way that creates new products or significantly changes old ones. Diffusion: the spreading of an innovation throughout the economy. Laborsaving technological change means that fewer workers are needed to produce the same amount of output; capital-saving technological change means that fewer machines are needed to produce the same amount of output. Human capital: a persons accumulated knowledge and skills. Special Features of Technology Nonrivalry- This means that one persons use of the technology does not reduce the amount that another person can use. Nonexcludability-This occurs when the inventor or the owner of the technology cannot exclude other people from using it. Growth accounting formula: an equation that states that the growth rate of productivity equals capitals share of income times the growth rate of capital per hour of work plus the growth rate of technology. Key Terms Unit 1 PP430: Planning for Economic Growth and Development Key Terms | Unit 1 Capitalism: An economic system based largely on private ownership of the means of production and the use of free markets in economic interactions Command Economy: An economy characterized largely by the control of all economic actions by a government Comparative Advantage: An instance in which a group or nation can produce a good at a lower opportunity cost than another group or nation Consumption share: The proportion of GDP derived from consumers expenditures Crowding Out: The decline in private investment affected by increased government borrowing in the capital markets Diminishing Returns: Given a fixed amount of other inputs, the likelihood that, with each additional unit of a given input, the increase in the output derived will slow, if not eventually decline Division of Labor: The assignment of responsibilities and inputs within an organization based on specialized uses of labor, skills and talents aimed at maximizing returns and minimizing costs Economic Development: The methods by which economic growth is distributed across income classes, employed across production sectors and used by government entities for public purposes Economic Interactions: Exchanges of goods and services between/among people Gains from trade: Improvements in a persons economic welfare derived from economic interactions Economic Growth: Typically, a Nations annual percentage change in Gross Domestic Product (GDP, see below) Economic Infrastructure: Public infrastructure required for day-to-day economic activity, such as transportation and utilities Government Failure: An instance in which government solutions fail to correct, or even worsen, a market failure Government Share: The proportion of GDP derived from governments expenditures Gross Domestic Product (GDP): The annual value of all final goods and services produced in a nation Unit 1 PP430: Planning for Economic Growth and Development Growth Accounting Formula: An equation that states the growth rate of productivity equals capitals share of income times the growth rate of capital per hour of work plus the growth rate of technology Key Terms Innovation: An application of new knowledge to existing products or services or even leads to new ones Invention: An improvement to an existing concept, technique or technology, or an entirely new one Investment Share: The proportion of GDP derived from individuals and corporations investments Market: An arrangement, formal or informal, in which people engage in commerce Market economy: An economy characterized largely by the use of the free exchange of goods and services in markets Market failure: An instance in which the use of free markets fails to yield a sufficiently efficient economic outcome, thereby affording the opportunity for government-based solutions Mixed Economy: An economy in which both private individuals, organizations and governments play substantial roles National Saving rate: The proportion of a nations income not used as expenditures by individuals, corporations or governments in a given year Productivity: The quantity of output per hour of labor supplied in its creation Property Rights: The respect for and enforcement of the rights of owners of property (physical, intellectual, etc.) to use and sell it, and to keep the proceeds from such sales Public goods: Those goods which, once produced and offered in a market, cannot be limited to certain users Socialism: An economic system based largely on government ownership of the means of production and usually controls economic decisions and interactions Technological Change: Improvements in technology and their related techniques over time Discussion Board Topic: Defining Economic Growth and Development Our Discussion this week will focus on properly defining Economic Growth and Development so that we are all on the same page. It is essential, especially when working in groups that we all agree on the most basic, but important concepts. After completing this weeks readings, answer the following questions. What experiences from your own life can you relate to the course material so far? Think about things that you may have done or observed that you can apply the concepts just learned and interpret them in terms of Economic Growth and Development. What are your initial reactions to the description of the concepts covered and how they are measured and used to formulate public policies? What stands out as their most important facets and values? Describe how the concepts you learned in earlier classes are now applied to these concepts and real-life examples. Darlingtonia Californica Near Rough & Ready Creek Kalmiopsis Wilderness FINAL PROJECT In a 6-8 page paper, assess President Obama and the Congressional Majority Democrats stimulus, budgetary, and health care initiatives in the context of promoting Economic Growth and Development. In your view, are the Democrats policy initiatives aimed more at encouraging Economic Growth or Economic Development? Or are they aimed at both? Defend your assessment accordingly. In doing so address these questions: What were the challenges that these policy makers perceived at the time in terms of both the Business Cycle and broader social policy? What theories did the Democrats use to justify their policies, both enacted and proposed, regarding taxes, spending, and the historic health care reform bill? Can one theory account for all of these policies? Perhaps it was more than academic theories and immediate macroeconomic conditions. What ideological legacies may have been motivating the Democrats in their choice of eventual policy initiatives when they finally returned to power in 2009? As such, maybe the related planks in their 2008 National Platform offer some useful insights. Along these lines, briefly explain why Republicans were almost unanimous in their opposition to these initiatives. In your assessment, do not get caught up in the minute details of the bills, just their broader economic and political significance when taken together and their role in encouraging Economic Growth and/or Development. Since it remains an open question as to just how effective these policy initiatives have been or will be, do not feel that you must offer definitive data in some form here. Just present your best arguments and supporting data as concisely and clearly as possible. The length of the paper is 6-8 pages. Disciplined writing demands respect for such guidelines. However, you are welcome to include graphics, tables, and any other complementary materials and these will not be counted against the page limit. In addition to the course materials, you are free to incorporate any outside sources that you deem appropriate as long as they are cited properly. Below are three internet-based stories/essays that can help to place the economic and political aspects of the Democrats initiatives in a working context. Sources: A relatively non-partisan analysis from Time Magazine An essay from the Conservative Washington Examiner A story from the Liberal New York Times In addition to fulfilling the specifics of the assignment, a successful paper must also meet the following criteria: Length should be 6-8 pages, excluding cover page and references. Assignment should follow the conventions of Standard American English (correct grammar, punctuation, etc.). Writing should be well ordered, logical and unified, as well as original and insightful. Your work should display superior content, organization, style, and mechanics. You should also make sure to: Include a title page with full name, class name, section number, and date Include an introductory and concluding paragraph and demonstrate college-level communication through the composition of original materials in Standard American English Use double-space and Arial or Times New Roman in 12 point font size Use examples to support your discussion The assignment is due at the end of Unit 9.