Chapter 8 Political Economy Politics and economics combine to create political economy Politics and Economics the two become more and more entwined as time passes A Political Economic Framework Factors Firms and Households Consumers SEE FIGURE 8 1 In exchanges between firms and households each actor increases their utility overall happiness in exchanges of goods and services Barter system exists in every system called good for good exchange Good for money exchanges tend to dominate Supply and Demand If demand is low price reduces If demand is high price goes up At an equilibrium point supply and demand reaches a perfect balance point Firms are successful if there is an excess of payments over profit Getting and Spending Economic Growth If more goods are produced bought sold and consumed by all the actors in the economic system The State Joins In Why would a state intervene in economy Socially important good that a firm cannot produce for a profit Good that requires a scale beyond a firm s capacity national defense State needs to enforce behavior by households and firms State must protect people from dangerous or illegal goods State has a policy goal of offering a good to someone who cannot afford it State s goal is to redistribute goods and wealth from some to others Ways the state can affect the economic system Be a consumer Replace a household controls certain factors of pre production Produce a good replace a firm Regulate by enacting policies that encourage or prevent actions by firms and households Tax any actor Transfer payments The World Joins In state s boundaries Typically seen as positive Exports All goods and factors of production that are sold to actors outside the Imports Goods that a country s actors purchase from firms in another country Free trade can be enacted where the state doesn t attempt to influence trade However they can discourage imports by taxing them on entry tariffs or limiting how much is allowed quotas As the global economy increases the state has less influence over regulation of firms The Economy Strikes Back Some large actors have heavy influence Large corporations operating in the country Their prosperity can be influenced by the gov t prosperity and are therefore very interested in policy politics Multinational corporations They have significant influence and can threaten to move business to another country Small businesses are the source of job growth and the heart of a functioning economic system Their survival is essential to the gov t Interest groups are well funded and heavily influential and can change political economy substantially Powerful organizations in the global financial community can make significant change European Central Bank or World Bank Measuring Economic Prosperity Gross Domestic Product GDP total value of all the final goods produced by a state s economic actors during a certain time period Gross National Income GNI includes the production of all citizens of the state whether they are in the state s boundaries or not Attempts to compare the two above between countries divide the amount by the number of citizens as per capita However there are 3 major flaws with the GDP and GNI They don t measure prosperity distribution Only goods that enter the monetary section are monitored So bartering household work and black market exchanges are not included which can be a large amount of a country s economic activity GDP per capita and GNI per capita compares among countries but can be misleading according to exchange rates rice in Japan and India cost radically different amounts In response to the third one Purchasing Power Parity PPP correcting monetary indicators to reflect the amount of currency required in that country to buy certain standard goods Genuine Process Indicator GPI adds economic value to those things that increase quality of life and increase environmental sustainability and it subtracts the costs of those economic activities that reduce quality of life Two Ideal Type Political Economies Keep in mind ideal type means what it would be like in pure form that doesn t really exist in the world Market Economy Total Private Control Total private control All firms decisions on what to produce are based on their own assessments of how they can achieve maximum profits The invisible hand of the market sets the value based on equilibrium of supply and demand Opportunity cost the resources someone will give to acquire it Market decides who gets which factors and goods The state is passive May have minimal taxes and may purchase from the firms Command Economy Total State Control The state assumes total control of almost all the significant factors of production The state devises an economic plan that specifies which good will be produced Competition is eliminated because the state sets values on goods and servies The state is active in good distribution among the population Optimal bundle to all citizens The state is a dominant overwhelming role in this government Problems of Market Command Economies See table 8 2 for more Market Economy Resource inequality and hardship Production for profit not need Severe economic cycles of boom and bust Command Economy Limited Incentives for Efficiency and quality Unresponsive production Leads to oversupply of some goods and severe shortages of others due to little consumer producer interaction Over centralization and Inflexibility The Mixed Economy An attempt to combine the strengths of these two ideal type economies while also minimizing their shortcomings Control of factors of production is shared btwn state and private actors Production decisions are driven by market mechanism Private and public interact and compete but public has small control over private sector Value of most goods is established as in a market economy through the process of supply and demand but state may interfere to ensure national priorities are protected In decisions of distribution private actors can take actions to maximize profits but the state then imposes taxes and can take resources from private firms The state is more active than a market economy but far less control than in a command economy Politics Plus Political Economy The other Isms The Three Isms that directly link politics to economy Capitalism private economic actors are free from state constraints private property rights are fundamental and the state engages in few actions that might shift resources among private actors Founded on laissez faire