Three Overlapping Components

1. A Move Toward Capitalism (structural adjustment)

2. Freer Trade

3. Economic Development

What is Economics?

DEFINITION

• the study of scarcity
• the study of how a society uses its limited resources to obtain the maximum satisfaction of its unlimited wants

THE 5 Es of ECONOMICS

• Economic Growth
• Productive Efficiency
• Allocative Efficiency
• Equity
• Full Employment

   

What is Capitalism?

CAPITALISM

An economy where economic resources are privately owned and economic decisions are answered by the marketplace with a limited role for government

COMMAND ECONOMY

An economic system where economic resources are owned by the government and the government makes all economic decisions

MIXED ECONOMIC SYSTEM

• ALL economic systems are mixed systems
• PURE capitalism and PURE command economies do not exist

CAPITALISM vs. COMMAND ECONOMY 

Structural Adjustment

DEFINITION

A Series of economic policies designed to reduce the role of government in economy replacing government control with market incentives. [figure]

POLICIES

1. Privatization
2. Promotion of Competition
3. Limited and Reoriented Role for Government
4. Price Reform: Removing Controls
5. Joining the World Economy / Free Trade
6. Macroeconomic Stability

BENEFITS

 Of the 5Es of economics, a market system (capitalism) achieves:

• allocative efficiency
• productive efficiency

PROBLEMS

Common problems associated with structural adjustment programs include:

• inflation
• unemployment
• a less equal distribution of income

Free Trade

1. Should the United States have free trade with Mexico?
2. Why or why not?

MORE

Why do most economists support free trade?

Take this quiz. Do you think like an economist?

Most economists would answer "A" to all questions on the quiz. The goal of economic activity is to produce more products for us, NOT to make us work more.

Free trade leads to a more efficient use of resources (productive efficiency) and higher standards of living

Free trade changes the jobs in a formerly closed economy, but it has little effect on the unemployment rate.

 

Economic Development

Economic Development is a difficult concept to define and to achieve. Economists often use and increase in GDP per capita as the measure of economic development.

We have reviewed the Measures of Economic Development already. Here we will focus on:

• the role of international aid in third world development
• export oriented industrialization vs. import substitution industrialization

QUIZ

What fraction of the U. S. federal government's budget is spent on FOREIGN AID?

1%

5%

10%

15%

20%

25%

The US compared to other MDCs: foraidg.gif

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FOREIGN AID QUIZ ANSWER: 

What fraction of the U. S. federal government's budget is spent on FOREIGN AID?

1%

5%

10%

15%

20%

25%

 

The US spends about 1 % of its federal government budget on foreign aid. Over half of this aid goes to just two or three countries: Israel, Egypt, and Russia.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPORT ORIENTED INDUSTRIALIZATION:

• an economic development strategy which emphasizes production for export and few restrictions on imports
• the leading development strategy today
• EXAMPLE: South Korea

 IMPORT SUBSTITUTION INDUSTRIALIZATION:

• an economic development strategy which restricts imports to generate a domestic market for the country's products
• common in the past, less common today
• EXAMPLES FROM THE PAST: India, Sri Lanka

SUMMARY

• all over the world countries are moving to a more capitalistic economic system
• these structural adjustment policies include:
  • freer trade
  • privatization of industries
  • allowing markets to set prices
  • smaller role for government
• The goal of these structural adjustment policies is greater efficiency and economic growth
• the hazards of these structural adjustment policies include economic instability (unemployment and inflation) and inequities
• free trade results in a more efficient use of resources and therefore greater production
• export oriented industrialization has resulted in higher rates of economic growth than import substitution policies
• some of these policies are controversial mainly because they may contribute to greater economic inequality