The Role of the Government in the Market Place BEC 30325 Managerial Economics Sajitha Dishanka.
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Transcript of The Role of the Government in the Market Place BEC 30325 Managerial Economics Sajitha Dishanka.
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The Role of the Government in the Market Place
BEC 30325Managerial Economics
Sajitha Dishanka
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SCARCITYNEEDS & WANTS
MARGINALITYOPPORTUNITY COST
ALTERNATIVES
CHOICE / DECISION
Economic Rationale
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Rationale of the Market Economy
CHOICE / DECISION
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Activities in a Market Economy(Circular Flow of Income & Expenditure)
Factors of Production
Factor Payments
Goods & Services
Expense on Goods & Services
FINANCIALSECTOR
GOVERNMENT
INTERNATIONALSECTOR
Imports (M)
Exports (X)
Investment (I)
Savings (S)
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Composition of GDP
• When economists think about year-to-year movements in economic activity;– they focus on the interaction between production, income
and demand
Production Income
Demand
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Cyclical Effect
1. Changes in the demand for goods lead to changes in production
2. Changes in production lead to changes in income
3. Changes in income lead to changes in the demand for goods
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Demand for Goods
• Decision to go to a restaurant by a consumer (C)
• Purchase of a machine by a firm (I)• Purchase of combat airplanes by the central
government (G)• Aggregate Demand GDP
– Trade balance– Inventory investment
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Composition of GDP($ billions) % of GDP
1. Consumption (C) 7,064 69
2. Investment (I)
- Non-residential 1,246 12
- Residential 446 1,692 5 17
3. Gov. spending (G) 1,839 18
4. Net exports
- Exports (X) 1,051 11
- Imports (M) -1,380 -329 -14 -3
5. Inventory invest. -58 -1
GDP (Y) 10,208 100
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Macroeconomic Policies
• Demand-side policies– Affect aggregate demand/expenditure– Short-run focus
• Supply-side policies– Affect aggregate supply/output– Long-run focus
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Demand-side Policies
• Major macroeconomic policies– Monetary Policy
• Changes in the money supply implemented by the government– Fiscal Policy
• Changes in government spending and/or taxes
• How & when to apply...?– Expansionary effects
• Increase aggregate demand if the economy is below its potential output
– Contractionary effects• Decrease aggregate demand if the economy is above its potential
output10
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Supply-side Policies
• To increase potential output by encouraging– Labour productivity – Innovation (R&D)– Investment– Technology advancement
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Competitiveness of an Economy
Source: GCR 2014/2015
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Factor-driven Stage
• Countries compete based on factor endowments– primarily unskilled labor and natural resources
• Companies compete on the basis of price and sell basic products or commodities– low productivity reflected in low wages
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Required…in the factor-driven stage
• well-functioning public and private institutions• appropriate infrastructure• stable macroeconomic framework• healthy and literate workforce
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Efficiency-driven Stage
• Wages rise with advancing development• More efficient production processes and increase
product quality• Competitiveness is increasingly driven by;
– higher education and training– efficient goods markets– well-functioning labor markets– sophisticated financial markets– large domestic or foreign market– ability to harness the benefits of existing technologies
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Innovation-driven Stage
• Sustain higher wages and the associated standard of living by;– competing with new and unique products
• Companies must compete through;– new and different goods (innovation)– using the most sophisticated production processes
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Weights of the three main groups of pillars at each stage of
development
Pillar Group
Factor-driven
Stage (%)
Efficiency-driven
Stage (%)
Innovation-driven
Stage (%)
Basic requirements 60 40 20
Efficiency enhancers 35 50 50
Innovation & sophistication factors
5 10 30
Source: GCR 2014/201517
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The Concept of Political Economy
• Collectivism– “Individual rights should be sacrificed for the good
of the majority and that property should owned in common.”
- Plato (427–347 BC)
• Individualism– “Private property is more highly productive than
communal property and will thus stimulate progress.”
- Aristotle (384–322 BC)
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Overview of Economic SystemsMajor types Main characteristics National differences
Planned economy • State control• Collectivist ideology
• North Korea – highly authoritarian
• Cuba – some liberalization
Liberal market economy
• Capitalist free market• Individualist• Democratic values• Minimum government
intervention
• US – free market model, but increased role of government
• UK – elements of social market models, belief in self regulation
Social market economy
• Markets tempered by social values
• Democratic values• Government welfare role
• Scandinavian – emphasis on social welfare, extensive state ownership
• Northern European – emphasis on social protections, state ownership in key sectors
Mixed economy• Capitalist elements• Elements of state control• Weak individualism
• China – strong state intervention, authoritarian political system
• India – market reforms under state guidance, democratic political system
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Economic TransitionPolitical System
Economic System
Democratic
Totalitarian
Planned Mixed Market
Russia China Chile
UK
India
Mexico
Russia
IndiaChile
Mexico
China
UK
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