Political Economy The study of how politics and economics are related and how their relationship shapes the balance of freedom and equality Components of Political Economy Markets and Property Sellers seek to create products that will be in demand Buyers seek to buy the best or most goods at the lowest price Markets are the medium through which buyers and sellers exchange goods Markets emerge spontaneously and are not easily controlled by the state Money Inflation and Unemployment States need to foster economic growth Money Nothing more than a medium of exchange Central Bank An institution that controls how much money is flowing through he economy Controls the cost of borrowing money Lowers interest rates to stimulate the economy Raises interest rates to check inflation Inflation The rise of the cost of gen goods and services over a period of time Hyperinflation Inflation that is more than 50 a month for more than 2 months in a row Deflation Period of falling prices and values for goods services investments and wages Regulation Rules or orders that set the boundaries of a given procedure May be fundamentally economic in nature Ex States can control what firms or industries can operate in what markets May be essentially social in nature Deal with managing risk I e safety and environmental standards Trade Tariffs Taxes on imported goods Quotas Limit the quantity of goods coming into the country Nontariff Regulatory Barriers Limits on imports through means other than taxation Comparative Advantage The ability to produce a particular good or service more efficiently relative to other countries efficiency in producing the same good or service Liberalism Unemployment is inevitable even desirable a part of market flexibility Taxes should be low State as a night watchman intervening to defend the public only when crises Articulated the idea that economic development requires limited government Adam Smith Wealth of Nations interference Mercantilism The invisible hand Focuses on the state and its position in the international system Economic weakness undermines national sovereignty Political power must be backed by wealth and wealth should be directed towards national ends Market s role should be limited Direct the economy and achieve power through an active industrial policy May rely on partial or full state ownership of specific industries Strong use of tariffs Limit social expenditures to keep taxation to the minimum Encourage higher public savings which can be then borrowed by state or bus Low interest rates set by the central bank to encourage borrowing and investment Friedrich List National System of Political Economy Argued that states must play a strong role in protecting and developing the national economy against foreign competitors
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