Unit 2 - Academic

Government and Trade

A. Federal Programs1. Mandatory Spending (Entitlements)

a. Social Security ($644 billion)i. Social Security has been expanded since 1935 to include disability benefits and Medicare.ii. These benefit programs face financial problems with more recipients living longer.

b. Interest Payments ($260 billion)2. Discretionary

a. Defense ($515 billion + 70 billion for War on Terror)b. Education ($59.2 billion)c. Art ($46 million)d. Science ($24 billion including NASA)e. Transportation ($11.5 billion)f. In the 50’s & 60’s, the DOD received more than half the federal budget.g. Defense now constitutes about one-sixth of all federal expenditures.

B. State and Local Government1. Day to Day Expenses must be paid2. Investments are made3. Bonds are sold4. State and local govt’s must balance the budget5. Programs

a. Educationb. Transportation

C. Fiscal Policy1. What is it?

a. Budget set for fiscal year (October 1 to September 30) to avoid elections

b. Office of Management & Budget (executive) and Congressional Budget Office (legislative) : make suggestions.

c. General Accounting Office keeps departments in check.d. Each house has an Appropriations Committeee. Incrementalism

i. The idea that last year’s budget is the best predictor of this year’s budget, plus some.

ii. Agencies can safely assume they will get at least what they got last year.

iii. Focus & debate on the increase over last year.iv. The budgets tend to go up a little each year.

2. Expanding the economya. Increase Government Spendingb. Cut Taxes

3. Contracting the economya. Increase Taxesb. Decrease Spending

4. Laissez Faire up till 1932a. Invisible Handb. No government interventionc. Supply and Demand

5. Keynesian Economics from 1932-1981a. Spend out of a recessionb. Used by most Developed nations.

6. Supply-Side Economics (Reagan Era 1981 ---)a. Taxation affects economy.b. Laffer Curve proves that high taxes hurts the economy.

D. Deficits and Debt1. Balancing

a. Expenditures: What the government spends money on.b. Revenues: Sources of money for the government.c. Surplus – making $ (Clinton)d. Deficit – losing $ (most of the time) (now $407 billion)e. Debt – overall losses (last paid off: Jackson)f. Fiscal Conservatives have pushed for balanced budget amendment

to Constitutiong. That would tie the gov’ts hands if there was an emergency

2. Debt a. Interest payments make up about fifteen percent of budget.b. World Crisis could bring doomed US economy if debt persists.c. 2009 – $10.4 trilliond. Average person’s share: $34,666

3. Borrowinga. The Treasury Department sells bonds - this is how the government

“borrows” money.b. The federal debt is the sum of all the borrowed money that is still

outstanding.c. The government competes with other lenders.d. Government does not have a capital budget.

E. Partisan Spending

1. Republicans – Traditionally in favor of Laissez Faire.

2. Democrats – Keynesian economics, especially FDR.

3. Both parties try to outspend each other on the military.

4. Elected officials spend on special projects known as earmarks or parks in their communities to get re-elected.

F. Taxes1. Federal government uses IRS to collect wage taxes.

a. Social Securityb. Income

i. Shares of individual wages and corporate revenues.ii. The 16th Amendment permitted Congress to levy an Income tax.

c. Progressive – percentage of income taken increases with your wealth.d. Six brackets of Americanse. 0 - $8,000 = 10%f. $8,000-32 = 15%g. $32,000-77= 25%h. $77,000-160 = 28%i. $160,000-350 = 33%j. Over $350,000 = 35%

2. Flat – same percentage for everyone: 18% national, NO DEDUCTIONS!3. Regressive: Percentage taken from income increases the poorer you get

a. Sales – state tax is 6%b. National would be 23%

G. How a Budget is Made

1. Federal departments & independent agencies submit budgets.

2. Office of Management & Budget (OMB) which is part of Executive Office of President, creates spending plan for exec branch.

3. Prez must submit budget by first Monday in Feb.

4. United States House & Senate Committees on Budget must finalize legislative procedure on budget.

5. This must be approved by a floor vote.6. Both House & Senate must have similar bills, if not, approved by

conference committee. 7. 13 appropriation bills are passed by their respective committees &

on the floor following budget procedure OR one big budget bill called and Omnibus Spending Bill can be passed.

8. Bills must be identical from both houses, if not, they are resolved by a conference committee.

9. Congress will get advice from the Congressional Budget Office. 10. They must be signed by the president.

Part 2 - International Economics

A. Global Economy1. Distribution

i. Not all nations have natural resources.ii. USA – rare minerals from Africa, oil from

Mid-eastiii. Following supply and demand, tech/labor

is cheaper elsewhere.iv. If a country has a comparative advantage,

then the domestic price will be below the world price, and the country will be an exporter of the good.

B. Why we are Interdependent1. Self-sufficiency/protectionism

a. Barriersi. Import quotas.ii. Export restraints.iii. Tariffsiv. Results

a) Increased pricesb) Trade Warsc) Both tariffs and import quotas . . .d) raise domestic prices.e) reduce the welfare of domestic consumers.f) increase the welfare of domestic producers.g) cause deadweight losses.

b. Protectionisma. Jobs b. National Security c. Infant Industryd. Unfair Competitione. Protection-as-a-Bargaining Chip

2. Cooperation

a. Free Trade - One of the few things Adam Smith believed the government should protect.

b. David Ricardo – nations with the lowest opportunity cost should produce a particular good or service.

c. Reciprocal Trade Act of 1934

d. World Trade Organization 1995

i. Ensures compliance with General Trade Agreements of Tariffs and Trade.

ii. European Union

iii. NAFTA – North American Free Trade Agreement

C. Absolute and Comparative Advantage

1. Absolute advantage = those that can produce the most using the resources they have.

2. Comparative Advantage = producing the most with the smallest opportunity cost.

1. Positive Attributesa. Receiving goods & services produced better abroad allow for

cheaper prices, efficiency.b. Domestic consumers of the good are better offc. Trade raises the economic well-being of the nation as a whole.d. Creates peacee. Third World Nations have…

i. Higher employmentii. Larger tax baseiii. Infrastructure

f. USA i. World’s leading exporter.ii. Largest importer.

2. Negative Impact a. Laborers disadvantages in low skill jobs, skilled or high tech jobs are

and advantage.b. International Corporations - Free trade has allowed international

companies to exist that may dominate industries.c. Domestic producers of the good are worse off.d. Third World nations face…

i. Large companies with low wagesii. Pollution and labor hazardsiii. Can be overwhelmed with cheap manufactured goods from

developed nations.

C. Classifying Development

1. Levelsa. Developed, less developed

b. 1st (demo), 2nd(Communist), 3rd

c. Core, semi-periphery, periphery,

2. Measuringa. GDP

b. Life expectancy

c. Infant Mortality Rate

d. Energy Consumption

D. Banking and Loans

1. New Organizations are developed to help poor countries.

2. International Monetary Fund – monitors exchange rates and policies of nations.

a. President is a Europeanb. Has isolated inflation problemsc. Helps advise poorer nations fix economies.

3. World Bank – provides monetary assistance to developing nations.

a. President is always Americanb. Loans to nations to build infrastructurec. Is accused of setting unrealistic goals

E. Africa

1. Pre-colonial stage saw exchange of minerals and resources for crafts and salt.

2. African elite sold slave labor to Arabs and Europeans.

3. Europe ignored direct contact until 19th century.

4. Colonial or Imperial Era

a. British, Portuguese, Belgians, French, Spanish, and Germans divided continent.

b. Brutal oppression of kingdoms and tribes, sometimes with assistance of African elite.

c. Paternalistic approach taken, but really on by British.

d. French hoped to assimilate Africans.e. Portuguese and Belgians used torture and

mutilation to gain economic advantage.f. Continent emptied of many valuables.

5. Independencea. Some states retained independence (Liberia, South Africa, Egypt,

Ethiopia).b. WWII helped awaken self-determination. c. Urban growth led to large concentration of labor, unions, and strikes.d. Unrest led to riots in some colonies. e. Britain attempted to guide states to independence such as in Ghana or

Gold Coast.f. France

i. Hoped to retain Africans until they became French too.ii. Prize colony was Algeria = part of Franceiii. Military torture was used to root out rebels.iv. Colonists and local military revolted when France decided to give up colony.

g. Belgium left the Congo without putting any effort into bettering the nation.h. Portuguese brutally oppressed colonies until death toll was skyrocketing.

6. Aftermath

a. South Africa was left with decades of Apartheid and eventual equality and light manufacturing.

b. Saharan states like Libya and Egypt have oil wealth, but dictatorships.

c. Somalia, Sudan, and Ethiopia have weak governments, actual chaos.

d. Mineral wealth such as in the Congo leaves spoils for military juntas and corrupt leaders.

e. Little investment made due to riskf. An attempt at African Union has been fruitless.

E. China1. Great Leap Forward – disaster, Mao thought having everyone producing steel was

bad because.a. It took workers from other industries.b. They had little or no knowledge of making steel.c. Different metals were melted down to make brittle, useless beams.

2. Post-Mao Zedong government has encouraged foreign investment and local control.

3. Rapid growth in GDP.4. Rapid modernization.5. Urban life is Westernized.6. On the heel of USA as most powerful economy. 7. Owns large chunk of USA debt from purchasing bonds. 8. Negative

a. Pollutionb. Income gap (between rich and poor)c. Homelessnessd. Rural povertye. Big swings in economic performance

F. India

1. Growth due to cheap labor and strong education among advanced students.

2. English compatibility due to colonialism.

3. Technological advancements.

4. Negativea. Caste system segregation

b. Hundreds of millions of poor

c. Slums next to skyscrapers.

d. Sprawling government and Hindu v. Muslim conflict.