BUSINESS CYCLE:
This is the cycle of business expansions and recessions. It is a characteristic of a capitalist economic system.
In an expansion, people are buying goods and services. Businesses get money. They can invest in new technology, buildings, and employment. The gross domestic product (GDP) of a country in expansion will go up. Unemployment will fall. The traders in stocks and bonds will talk about a bull market.
However, the economy may get saturated. Orders for new goods and services fall off. Businesses get less money. As this downward trend continues, businesses lose money and must start laying off workers. After a while, the economy goes into a recession. Traders in stocks and bonds will talk about a bear market.
But, because many people have lost jobs and money, businesses and individuals are willing to work or sell for less. The companies less damaged by recession will start recovering soon. A recovery begins. This is when the economy starts coming out of the recession. Usually, it is hard to notie the beginning of a recovery. Only when unemployment rates fall dramatically is the recovery noticeable to most people.
For politics and government, the business cycle is important. When a country goes into a recession, many people want the government to "DO SOMETHING!" The ideas of socialism and a command economy become attractive. Poorer people become very resentful and envious of those who have not been so badly harmed by the recession. There are calls to take from the wealthy and give to the poor. In America's Great Depression of 1929-42, President Herbert Hoover tried government interventions (including foregoing his own salary) to try to end the depression. He was unsuccessful, and lost the election to Franklin Roosevelt in 1932. Roosevelt also tried major government programs to end the depression. However, high taxes used to pay for these programs did not allow businesses to grow and recover. The Great Depression was not ended until the US entered World War II, and government demand for manufactured goods spurred the recovery of American industry.
The essay "I, Pencil", by Leonard Read, was written in 1958. Read criticized the idea that government guidance, control, and planning could keep the economy healthy. He observed that making a simple thing like a number 2 pencil really requires a complex network of producers, money, and resources; but no "master-mind". Hence, he did not believe that government planners could really help something as large and complex as the US economy.
Thursday, February 17, 2011
LSN Students: Important notes on economics
Know the following:
capitalism: An economic system with private ownership of the means of production, in which there are many choices for businesses and consumers. It was described by Adam Smith in his 1776 book Wealth of Nations. This was the economic system the USA and most western countries had during the 1800's and early 1900's.
Adam Smith advocated a laissez-faire policy, in which government stays out of economics. People and nations should be free to do what they do best to create and increase wealth.
socialism: An economic system in which the government controls and owns the means of production. A more extreme form is called communism, which dominated much of the world between 1917 and 1991. Karl Marx, a 19th century German philosopher, is associated with the rise of socialism. He believed that capitalism had solved the problem of scarcity, but left a problem of inequality, in which few wealthy people own and control the means of production, leaving a large proletariat that has no resource save its own labor.
welfare state: An economic system in which government provides many services to citizens and/or residents. It is a by-product of the socialist ideal. Usually, it is supported by high taxes and/or extensive government borrowing.
mixed economy: An economic system in which some businesses are privately owned, and some are government-owned. The USA currently has a mixed economy.
command economy: An economic system in which government exercises total control over all economic activity. It was especially associated with the Communist experiment in much of the world between 1917-1991. Many hoped that command economies would improve the lives of the world's poor people, but this hope did not materialize. For example, before the 1920's, the Ukraine was one of the world's richest farming areas. After the Communist revolution and imposition of aq command economy, its agricultural productivity decreased greatly.
scarcity: This is the fundamental economic problem. Society NEVER produces all the goods that all the people want all the time. If people have sufficient food, clothing, and shelter, they will want other things, such as cars, computers, better furniture, the latest fashions, etc.
gross national product: The sum of all goods and services produced in a country per year. If it is rising, the economy is healthy; if it is falling, the economy is in decline.
comparative advantage: This is what you or your country or state is good at doing. For instance, the area between North Dakota and Texas has good agricultural land, so its comparative advantage would be in agriculture.
inflation: A problem that happens when government debts are very large, and the government tries to pay them off by printing more and more money. The money loses its values because there are too many dollars (or marks, or pesos, or rupees, or yuan, or yen, or won, or pounds) chasing too few goods and services.
capitalism: An economic system with private ownership of the means of production, in which there are many choices for businesses and consumers. It was described by Adam Smith in his 1776 book Wealth of Nations. This was the economic system the USA and most western countries had during the 1800's and early 1900's.
Adam Smith advocated a laissez-faire policy, in which government stays out of economics. People and nations should be free to do what they do best to create and increase wealth.
socialism: An economic system in which the government controls and owns the means of production. A more extreme form is called communism, which dominated much of the world between 1917 and 1991. Karl Marx, a 19th century German philosopher, is associated with the rise of socialism. He believed that capitalism had solved the problem of scarcity, but left a problem of inequality, in which few wealthy people own and control the means of production, leaving a large proletariat that has no resource save its own labor.
welfare state: An economic system in which government provides many services to citizens and/or residents. It is a by-product of the socialist ideal. Usually, it is supported by high taxes and/or extensive government borrowing.
mixed economy: An economic system in which some businesses are privately owned, and some are government-owned. The USA currently has a mixed economy.
command economy: An economic system in which government exercises total control over all economic activity. It was especially associated with the Communist experiment in much of the world between 1917-1991. Many hoped that command economies would improve the lives of the world's poor people, but this hope did not materialize. For example, before the 1920's, the Ukraine was one of the world's richest farming areas. After the Communist revolution and imposition of aq command economy, its agricultural productivity decreased greatly.
scarcity: This is the fundamental economic problem. Society NEVER produces all the goods that all the people want all the time. If people have sufficient food, clothing, and shelter, they will want other things, such as cars, computers, better furniture, the latest fashions, etc.
gross national product: The sum of all goods and services produced in a country per year. If it is rising, the economy is healthy; if it is falling, the economy is in decline.
comparative advantage: This is what you or your country or state is good at doing. For instance, the area between North Dakota and Texas has good agricultural land, so its comparative advantage would be in agriculture.
inflation: A problem that happens when government debts are very large, and the government tries to pay them off by printing more and more money. The money loses its values because there are too many dollars (or marks, or pesos, or rupees, or yuan, or yen, or won, or pounds) chasing too few goods and services.
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