Current Events:
We are heading in the direction of Argentina (an example of what happened there on YouTube).
Cf. http://www.youtube.com/watch?v=WgfnNVoorms
The problem in very recent history traces back to the September and October months of 2008, when Wall Street investment banks and the US banking system died. These banks have not and will not recover, since they died.
US Government 'hiding true amount of debt.'
Terms to know for the in-class assignment (email in with HW):
CBO
IMF
The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development through the enforcement of liberalising economic policies on other countries as a condition for loans, restructuring or aid. It also offers highly leveraged loans, mainly to poorer countries. Its headquarters are in Washington, D.C., United States. The IMF's relatively high influence in world affairs and development has drawn heavy criticism from some sources.
The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government. It is a government agency that provides economic data to Congress. The CBO was created as an independent nonpartisan agency by the Congressional Budget and Impoundment Control Act of 1974.
Chapter 1: What Is Economics?
Refer to your Quiz Prep page at:
http://shanawiki.wikispaces.com/Honors+Business+Economics+Chapter+1+Section+1
Preview:
Chapter 1 Section 2 Basic Economic Concepts
Overview: Section 2 Basic Economic Concepts
The concepts of goods, services, consumers, markets, factor markets, product markets, productivity, economic growth, and economic interdependence are explained and are linked in the circular flow diagram. Productivity is necessary for economic growth, and growth takes place when specialization and the division of labor are present. In addition, human capital, the sum of our skills, abilities, health, and motivations are other important components of growth.
As I pointed out yesterday, the next five terms are HW for tonight.
factor market
product market
economic growth
productivity
human capital
The remainder are for the week.
division of labor
specialization
economic interdependence
Academic Vocabulary
transferable
accumulation
mechanism
Productivity and Economic Growth, p. 16
Writers Talk Ross Gittins: Higher productivity, 3:45
Economics journalist Ross Gittins talks about his book Gittinomics and ways to create higher productivity.
In-class assignment: how does Gittins explain ways to increase productivity (email along with your HW for the day)?
Productivity
Investing in Human Capital
Division of Labor and Specialization, p. 17
In The Wealth of Nations, Adam Smith argued that economic growth occurred as a result of specialization and division of labor. If each household produced every commodity it consumed, the total level of consumption and production in a society will be small. If each individual specializes in the productive activity at which they are "best," total output will be higher. Specialization provides such gains because it:
* allows individuals to specialize in those activities in which they are more talented,
* individuals become more proficient at a task that they perform repeatedly, and
* less time is lost switching from task to task.
Increased specialization by workers requires a growth in trade. Adam Smith argued that growing specialization and trade was the ultimate cause of economic growth.
Adam Smith and David Ricardo argued that similar benefits accrue from international specialization and trade. If each country specializes in the types of production at which they are best suited, the total amount of goods and services produced in the world economy will increase. Let's examine these arguments a bit more carefully.
There are two measures that are commonly used to determine whether an individual or a country is "best" at a particular activity: absolute advantage and comparative advantage. These two concepts are often confused. An individual (or country) possesses an absolute advantage in the production of a good if the individual (or country) can produce more than can other individuals (or countries). An individual (or country) possesses a comparative advantage in the production of a good if the individual (or country) can produce the good at the lowest opportunity cost.
Economic Interdependence
Let's examine an example illustrating the difference between these two concepts. Suppose that the U.S. and Japan only produced two goods: CD players and wheat. The diagram below represents production possibilities curves for these two countries. (These numbers are obviously hypothetical).
The opportunity cost of one unit of CD players in the U.S. is 2 units of wheat. In Japan, the opportunity cost of one unit of CD players is 4/3 of a unit of wheat. Thus, Japan possesses a comparative advantage in CD player production.
The U.S. however, has a comparative advantage in wheat production since the opportunity cost of a unit of wheat is 1/2 of a unit of CD players in the U.S., but is 3/4 of a unit of CD players in Japan.
If each country specializes in producing the good in which it possesses a comparative advantage, it can acquire the other good through trade at a cost that is less than the opportunity cost of production in the domestic economy. For example, suppose that the U.S. and Japan agree to trade one unit of CD players for 1.6 units of wheat. The U.S. gains from this trade because it can acquire a unit of CD players for 1.6 units of wheat, which is less than the opportunity cost of producing CD players domestically. Japan gains from this trade since it's able to trade one CD player for 1.6 units of wheat while it only cost Japan 4/3 of a unit of wheat to produce a unit of CD players.
If each country produces only those goods in which it possesses a comparative advantage, each good is produced in the global economy at the lowest opportunity cost. This results in an increase in the level of total output.
Reading Check
Analyzing
What role does specialization play in the productivity of an economy?
Profiles in Economics, p. 18
Adam Smith (1723-1790)
French thinkers known as physiocrats focused on economic reforms. Like the philosophes, physiocrats based their thinking on natural laws. The physiocrats claimed that their rational economic system was based on the natural laws of economics.
Physiocrats rejected mercantilism, which required government regulation of the economy to achieve a favorable balance of trade. Instead, they urged a policy of laissez faire (les ay fehr), allowing business to operate with little or no government interference. Physiocrats also supported free trade and opposed tariffs.
Scottish economist Adam Smith greatly admired the physiocrats. In his influential work The Wealth of Nations, he argued that the free market should be allowed to regulate business activity. Smith tried to show how manufacturing, trade, wages, profits, and economic growth were all linked to the market forces of supply and demand. Wherever there was a demand for goods or services, he said, suppliers would seek to meet that demand in order to gain profits. Smith was a strong supporter of laissez faire. However, he felt that government had a duty to protect society, administer justice, and provide public works. Adam Smith’s ideas would help to shape productive economies in the 1800s and 1900s.
Division of Labor
Smith, a Scottish economist, argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests.
One person may decide to be a baker, another a merchant. One person may choose to sell his land, another to farm it. But all of these private decisions, made by rational, self-interested individuals, Smith argued, combine to produce a healthy, growing economy.
Invisible Hand
The great threat to economic growth, Smith argued, was government intervention—the government telling people what to do would only muddy the waters. Government intervention distorted the natural and rational exercise of free, prudent choice. When left to their own natural operation, the private decisions made by thousands of rational economic players were tied into prosperous harmony by the “invisible hand” of the market.
Wealth of Nations
If you haven't read his famous book, it's absolutely worth checking out, whether or not you consider yourself a disciple of the free market. The Wealth of Nations is, without a doubt, one of the most important books of all time. And the ideas it contained played a powerful role in shaping the development of American economic thought. The book is relevant it matters today what he wrote.
Adam Smith's metaphor of the invisible hand remains one of the most important and influential ideas in economics, even today. As Americans have recently grappled with questions about how government should and should not intervene in the economy, many have turned to Smith for guidance.
What would Adam Smith think about the stimulus bill? About universal government-organized health insurance? About bailouts for companies judged "too big to fail"?
Cf. Adam Smith, http://www.shmoop.com/economic-systems/botw/resources?d=http://www.econlib.org/library/Enc/bios/Smith.html
Talking Heads - "Once In A Lifetime," 3:43
Talking Heads
Once in a Lifetime (1984)
Once In A Lifetime
And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful
wife
And you may ask yourself-Well...How did I get here?
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/after the money's gone
Once in a lifetime/water flowing underground.
And you may ask yourself
How do I work this?
And you may ask yourself
Where is that large automobile?
And you may tell yourself
This is not my beautiful house!
And you may tell yourself
This is not my beautiful wife!
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/after the money's gone
Once in a lifetime/water flowing underground.
Same as it ever was...Same as it ever was...Same as it ever was...
Same as it ever was...Same as it ever was...Same as it ever was...
Same as it ever was...Same as it ever was...
Water dissolving...and water removing
There is water at the bottom of the ocean
Carry the water at the bottom of the ocean
Remove the water at the bottom of the ocean!
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/in the silent water
Under the rocks and stones/there is water underground.
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/after the money's gone
Once in a lifetime/water flowing underground.
And you may ask yourself
What is that beautiful house?
And you may ask yourself
Where does that highway go?
And you may ask yourself
Am I right?...Am I wrong?
And you may tell yourself
MY GOD!...WHAT HAVE I DONE?
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/in the silent water
Under the rocks and stones/there is water underground.
Letting the days go by/let the water hold me down
Letting the days go by/water flowing underground
Into the blue again/after the money's gone
Once in a lifetime/water flowing underground.
Same as it ever was...Same as it ever was...Same as it ever was...
Same as it ever was...Same as it ever was...Same as it ever was...
Same as it ever was...Same as it ever was...
Lyrics are reproduced for educational purposes only; copyright remains in the hands of the lawful owners.
HW
Email me at gmsmith@shanahan.org, or in a hard copy hand in.
1. Ch. 1 Sec. 1 Scarcity and the Science of Economics, review the material because there is a Quiz (hint, hint, wink, wink, nudge, nudge) on Friday.
Refer to your Quiz Prep page at:
http://shanawiki.wikispaces.com/Honors+Business+Economics+Chapter+1+Section+1
Wednesday HW, define the next five "Content Vocabulary," p. 12, words.
k) factor market
l) product market
m) economic growth
n) productivity
o) human capital
Thursday HW, define the next five "Content and Academic Vocabulary," p. 12, words.
p) division of labor
q) specialization
r) economic interdependence
Academic Vocabulary
s) transferable
t) accumulation
u) mechanism
