Introduction to Macroeconomics in the Global
Economy
Survey
Before we begin post your answer to the following question on the
discussion
forum. There is no right answer. What I want is your own thoughts
and opinion.
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QUESTION:
A. Should We Have Free Trade With Other
Countries?
B. Why or Why Not?
By "free trade" I mean that our government doesn't
try to restrict trade through taxes or other
means.
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Why "Macroeconomics in the Global Economy"?
At Harper we have no prerequisite for ECO 212 Macroeconomics,
therefore, even though most students have already taken ECO 211
Microeconomics, many have not. Since some students have not had an
economics course before we must cover the introductory chapters that
most have already studied in their Microeconomics course. To make
these introductory chapters interesting and new we will discuss them
in the context of the global economy. This allows us to review the
basic concepts in a slightly different light and hopefully gain from
the experience.
Also, global economics is "in the news". Words like
"globalization", "international trade", "NAFTA", and "trade promotion
authority" can be heard often in the daily news. In our first unit we
will learn why.
Introduction to Structural Adjustment Programs
What is Economics?
Definition:
Economics is the study of how people CHOOSE to use
LIMITED RESOURCES to obtain the MAXIMUM SATISFACTION of
UNLIMITED human WANTS
The GOAL of economics:
to reduce scarcity OR to maximize society's
satisfaction.
Scarcity and Choice
What do economists mean by "Scarcity"? Economics is the study
of making decisions because of scarcity. As we will see throughout
this semester that many terms used by economists have different
meanings than most people would believe (more on this later). So
what do economists mean by the term "SCARCITY"? Scarcity does not
mean that only a little of something is available. For example, I
grew up in northeastern Minnesota . About 30 miles away from my
hometown was the town of Erskine, Minnesota. Just outside of town
a certain type of rock exists that occurs nowhere else in the
world. They have named it "Erskinite". Erskinite is only found
near Erskine, Minnesota and only a little of it has ever been
found. BUT IT IS NOT SCARCE -- WHY? - - -
Because nobody wants it. For there to be scarcity things
must be LIMITED and WANTED.
Since economists assume that human wants are unlimited (do you
agree?) and resources used to satisfy these want are limited, we
all suffer from scarcity. Even in the United States - one of the
richest countries in the world we have scarcity because<
according to the study of economics, we have not satisfied ALL of
our wants. We always want more. To deal with scarcity (and we all
must because our wants are unlimited) we must make choices -
personal choices, or collective choices in the form of government
economic policies. This brings us to the global economy.
Governments all over the world are choosing to reduce scarcity by
undertaking structural adjustment programs (SAPs).
What is Structural Adjustment?
Definition: Structural adjustment is a series of economic
policies designed to lessen the role of government in an economy
and move it closer to a market economy.
The goal of SAPs is to reduce scarcity and increase society's
satisfaction -- to satisfy more of their unlimited wants.
Economic Systems
Structural adjustment, or "globalization" involves a
change in the economic system. An economic system is the way a
country deals with scarcity. Because of scarcity all economies
(and individuals) must make choices. Economics have identifies
four fundamental questions (choices) that scarcity forces a
country to answer:
4 Fundamental Questions
- What to produce?
- How to produce?
- for whom to produce?
- How does the system adapt to change?
A Continuum
Even though we will list and describe the "types" of economic
systems, we must understand that in reality every country's
economic system is unique. So there are nearly 200 hundred
different economic systems. It is best to think of a continuum of
types. Each one is slightly different from its neighbor on the
continuum.
So the economy of the United States would fall close to
the "Pure Capitalism" end of the continuum and that of Cuba would
be close to the "Command Economy" end, and most other countries
would fall somewhere in between.
Criteria
In order to place an economic system on our continuum we need
to to define different types of economic systems we need to
identify some criteria. Economist use two criteria to define an
economic system:
- WHO OWNS? (Who owns the resources?)
- WHO DECIDES (Who makes the basic economic decisions or
answers the five fundamental questions?)
Types of Economic Systems
Based on this criteria, economists have identified three types
of economic systems
- Pure Capitalism
- Command Economy
- Mixed Systems
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TYPE OF SYSTEM
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WHO OWNS?
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WHO DECIDES?
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Pure Capitalism:
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private ownership
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the market system
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Command Economy:
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government ownership
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centralized (or gov't)
decision-making
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Based on this criteria, there are two EXTREME types of economic
systems. Both DO NOT EXIST.
Pure capitalism (often called a "market economy") is an
economic system where private individuals (not the government) own
the resources (factories, mines, businesses, etc.) and the MARKET
makes the decisions. When we say "the market decides" we really
mean that CONSUMERS make the decisions. Who decided to produce
more music CDs and fewer cassette tapes? I would say that
consumers "voted" for CDs with their purchases (sometimes these
are called "dollar votes"). We wanted to buy more CDs and were
willing to pay more for them, therefore business simply responded
to this decision. This is called "consumer sovereignty" - the
consumer is sovereign or the ruler and makes the decisions.
A command economy is one where the government own the resources
( industries, natural resources, etc.) and the government makes
the decisions. the government decides What to produce?, How to
produce?, For whom to produce?, and How the system adapts to
change? Many people call command economies "socialism" or even
"communism".
ALL ECONOMIC SYSTEMS ARE MIXED SYSTEMS. Pure market economies
and pure command economies do not exist. They are the extremes.
All systems are mixed - but some lean more toward command
economies (like Cuba) and others are closer to capitalism (like
the United States).
Examples of Structural Adjustment
Structural adjustment then is moving the economy away
from a command economy toward a capitalist economy - less
government ownership and decision-making and more private
ownership and a greater reliance on market decision-making.
The following internet links will allow you to access National
Public Radio (NPR) Real Audio archives from their radio news
programs. Each discusses problems with structural
adjustment in China. Please listen to each short program take
notes on :
- What are they doing? (POLICIES)
- Why are they doing it? (BENEFITS)
- What negative effects might arise? (COSTS)
- Go to http://www.npr.org/features/feature.php?wfId=1023228
(4:46)
Click on "Morning Edition Audio"
Wednesday, January 06,1999 Morning Edition
China's Economic Reforms
NPR's Mary Kay Magistad reports on the state of China's
economic reforms in 1999. Last spring, Zhu Rongji pledged
dramatic and speedy reforms of state enterprises. The
government intended to make them self-supporting,
strengthening the country's economy. However, the Asian
economic crisis threw a wrench into the plan, resulting in
massive layoffs, bubbling unrest and a decision to scale
back the pace of reforms.
This news reports highlight China's attempt to reform their
economy (moving toward capitalism) while retaining strong
communist control of the political system. It highlights
some of the problems with SAPs and it asks the question:
"should reforms be implemented slowly or quickly (shock
therapy)?
Finally, it points out a problem common to many SAPs "things
will get worse before they get better".
- Go to http://www.npr.org/features/feature.php?wfId=1024065
Click on "Listen to Segment"
Thursday, November 05,1998 Morning Edition
CHINA'S ECONOMIC REFORMS NPR's Mary Kay Magistad reports
the Chinese government is scaling back its economic reforms.
Chinese officials had promised to turn the country's clunky
state economy into free market efficiency in just three
years. President Jiang Zemin has called for a self-imposed
slowdown, after seeing many state businesses fail, rising
unemployment and protests by retirees who aren't receiving
benefits. (5:53)
Moving from a command economy to a capitalist economy is not
easy. This news segment highlights a problem of capitalism:
EQUITY. There is nothing in a purely capitalistic economic
system that assures a fair distribution of income. Even
thogh the capitalist economy may be prospering, some people
may be desperately poor. This may lead us to a discussion of
a possible role for the government - providing a "Social
Safety Net".
So the question is: should the government own the factories
and employ the workers or should the factories be privatized
to gain efficiency and the government s role is to assure
that there are no "holes in the safety net".
- READ - The mystical power of free trade:
http://cnn.com/ALLPOLITICS/time/1999/12/06/free.trade.html
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OPTIONAL: You may want to take a look at this
additional news article:
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Summary
WHAT ARE THEY DOING? - Structural Adjustment Program policies
There are a great variety of policies that comprise
Structural Adjustment. Here is a list of some of the most
important ones:
- Privatization - the selling of government owned
industries to the private sector. This is a fundamental change
that is occurring around the world - even in the United
States.
- Promotion of Competition - we'll find out that the
word "competition" has a special meaning in economics, but here
all we mean is that many firms compete with each other for your
business.
- Reduced Role of Government - but we are not saying
no government. How much the govenment should get involved in
the economy is currently an important political question.
- Removing Price Controls - As we will see, a
fundamental part of structural adjustment is to allow markets
to set prices rather than the government. If people are used to
government controlled LOW prices they often oppose the removal
of these oprice controls.
- Freer Trade and Convertible Currency - another major
change occurring worldwide is the removal of trade barriers.
More on this later
- Foreign Investment - along with free trade goes the
free movement of capital.
WHY ARE THEY DOING IT? - Goals of SAPs
We can assume that the governments that are undertaking
structural adjustment programs want to improve the standard of
living for their citizens. They hope to do this by achieving
economic EFFICIENCY. We will discuss efficiency in detail in the
next lesson.
They also want to achieve:
- full employment
- low inflation
- economic growth
As we will see later, these are the ISSUES that are studied in
macroeconomics. So it definitely makes sense to include Structural
Adjustment in this course.
WHAT NEGATIVE EFFECTS MIGHT ARISE? - Problems
Often, as countries begin to implement their structural
adjustment policies, things get worse before they get better - or
they get worse for some and better for others. Common problems
associated, at least initially, with structural adjustment
programs would include.
- Inflation as the governments removes price controls
- Rising unemployment as people are layed off from
inefficient government owned enterprises resulting in falling
output and lower living standards
- Inequality and other social costs as some people gain but
others lose
OVERALL ASSESSMENT OF SAPs
Although many people protest SAPs,
most economists, and governments, believe the benefits of greater
efficiency outweigh the costs discussed above.
Therefore all around the world goverments are moving their
economies from command economies towards capitalism. The goal of unit
1 is to learn some fundamental economic principles to help us better
understand these changes.