©2011 Cengage Learning. Chapter 3 GOVERNMENT’S ROLE IN THE ECONOMY ©2011 Cengage Learning.

Chapter 3GOVERNMENT’S ROLE IN THE ECONOMY


Imperfect MarketsWhen a group of buyers or sellers are able to

directly influence prices!An exclusive patentOwnership (a scarce commodity)Control (a transportation route)


To help balance inequities created by imperfect markets :

1890 - Sherman Antitrust Act - forbade combinations that restricted competition.

1897 - Interstate Commerce Commission - regulated monopolistic sellers of interstate products.

1890-1970s - general increase in regulations.


Government Intervention in the Economy

Regulation EffectsBusiness prices & volume flexibilityEase of new business start up


Deregulation MovesAirlines TruckingBanking


Summary of Government activities in regulating the economy and private business

Changes in spending on the federal, state and local level.

Regulatory agencies at the federal, state and local level.

Welfare programsWetland protectionEndangered speciesPlanning/Zoning



The Search for Balance

PrivateGoals

PublicGoals

Reasons for those who favor regulations:

Capitalism tends to create imperfect markets.Need for protection and national defense require the

consumption of resources.Social goals require government programs.Segments in the population desire government to provide

service that are offered by private enterprise.

Reasons for those who favor less regulation:Private enterprise is more efficient at allocating resources.Government creates unnecessary cost.


Product MarketGoods and

Services

Resource MarketFactors of Production

Individuals andHouseholds

Business

Lan

d, la

bor,

and

cap

ital

Receive g

oods and services

Sel

l go

ods

and

ser

vice

s

Supply

SupplyDemand

Demand

The Circular Flow of Economygoods and services



Services



Business

(rent, wages, interest)

$$ E

xpen

ses

$$ Income(rent, w

ages, interest)$$ E

xpenditures$$ Spend IncomeRevenue $$

Supply

SupplyDemand

Demand

The Circular Flow of EconomyDollars



Services



Business

(rent, wages, interest)

Land

, lab

or, a

nd c

apita

l

$$ E

xpen

ses

$$ Income (rent, wages, interest)

$$ Expenditures

Receive goods and services

$$ Spend IncomeRevenue $$

Supply

SupplyDemand

Demand

The Circular Flow of Economy- Revisited

Sel

l goo

ds a

nd s

ervi

ces


Flow of the EconomyPeople and companies pay taxes to or buy

services from governments.The money is used to buy goods & services

from the public.


Local real estate markets are heavily influenced by changes in the local and national economy

GDP- “gross domestic product” the total market value of all goods and

services produced domestically in US The national economy is growing

if the GDP is increasing


Measuring the Economy

GDP is acquired by consumers, business, government, and foreign markets

Customers: personal consumption expenditures

Business: gross private domestic investment

Government: includes federal, state, and local agencies

Exports: trade


GDP and InflationInflation distorts comparison of GDP from

different time periods.GDP adjusted for inflation is called “real

GDP”.


Economic IndicatorsPersonal income: individual income before

taxes.Disposable personal income: take-home pay -

measures consumer purchasing power.Discretionary income: money remaining after

paying necessities.


Changes in Economic ActivitySeasonal FluctuationsBusiness Cycles- typically 3 to 6 yearsLong-term Secular Trends - occurs over an

extended period of time (examples include: family size, shorter work week,

increases in per capita income, and changes in life span)


The Four stages of the business cycle:

1.Prosperity2.Recession3.Depression4.Recovery


Business Cycle CausesWar, natural disasters and international

conflicts.The introduction of innovations including the

development of cereal, automobile, steam engine, & use of steel in buildings.

Erratic spending patterns of consumers, business, and government.

Changes in the amount of money and credit in circulation.

The psychological frame of mind of businesspeople and consumers.


Forecasting Changes in Economic ActivityEconomic forecasting is one way of reducing

uncertainty (reducing risk).Investors should define the investment

requirements and expectations.Forecasting the amount of money received each

year and the reversion during the holding period is considered a cash flow analysis.

Economic forecasting is an art, not a science.


Long-run trends in real estate economics appear to be influenced by gradual changes in population, age distribution, marriage rates, income levels, construction costs, taxes, and transportation patterns. Short-run trends are heavily influenced by the availability and cost of mortgage money and the current state of the national and local economy.

(On average long real estate cycles are approximately 18 years of prosperity, recession, depression, and recovery.)


Fiscal and monetary policies are used to fight inflation, unemployment, and recession

Fiscal policy includes taxing and spending power.

Monetary policy is changes in the supply of money to encourage or discourage consumer spending and business investments.


Government Tools to Fight Economic Problems

Fiscal and monetary policies are tools the government uses to fight inflation, unemployment, and recession.


Special Interest TopicsGNPStagflationMeasurement Problems


©2011 Cengage Learning. Chapter 3 GOVERNMENT’S ROLE IN THE ECONOMY ©2011 Cengage Learning.

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