Introduction to Macroeconomics in the Global Economy

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QUESTION:
A. Should We Have Free Trade With Other Countries?
B. Why AND Why Not?

  • Spend a few minutes writing down your ideas.
  • State your opinion and defend it

By "free trade" I mean that our government doesn't try to restrict trade through taxes or other means.

I will tally the results, summarize the reasons, and post them on the discussion forum.

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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

Scarcity and Choice

In other word, economics is the study of making decisions because of scarcity. As we will see throughout this semester many terms used by economists have different meanings than most people would believe (more on this later). So back to 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.

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 under take 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.

 

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 five fundamental questions (choices) that scarcity forces a country to answer:
4 Fundamental Questions
  1. What to produce?
  2. How to produce?
  3. for whom to produce?
  4. 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:

  1. WHO OWNS? (Who owns the resources?)
  2. 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

  1. Pure Capitalism
  2. Command Economy
  3. Mixed Systems

TYPE OF SYSTEM
WHO OWNS?
WHO DECIDES?

Pure Capitalism:
private ownership
the market system

Command Economy:
government ownership
centralized (or gov't) decision-making

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.

READ: http://www.csmonitor.com/durable/1998/04/01/p7s1.htm
Read this article from the Christian Science Monitor. It discusses the successes of Structural Adjustment Programs in Africa. As you read the article, try to answer the following:

  1. What are they doing? (POLICIES)
  2. Why are they doing it? (BENEFITS)
  3. What negative effects might arise? (COSTS)

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 :

  1. What are they doing? (POLICIES)
  2. Why are they doing it? (BENEFITS)
  3. What negative effects might arise? (COSTS)
    • Go to http://search.npr.org/cf/cmn/cmnps05fm.cfm?SegID=23228 (4:46)
      Click on "Listen to Segment"
      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 probl.em common to many SAPs "things will get worse before they get better".

    • Go to http://search.npr.org/cf/cmn/cmnps05fm.cfm?SegID=24065
      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".

OPTIONAL: You may want to take a look at these additional news articles:
 

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,

For example see:

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.