C.23

1. C.23 The role of the government in the economy Measuring the economy The Stock Market

2. The Role of Government • Providing Private Goods • Private goods are goods, that when consumed by one individual, cannot be consumed by another. • Private goods are subject to an exclusion principle, which means that a person is excluded from using that good or service unless he or she pays for it. • Private goods are clothes, shoes, insurance, and telephone services

3. The Role of the Government • The Gov’t provides public goods • Public goods are goods that can be consumed by one person without preventing the consumption of the good by another. • Consumption of public goods is subject to the nonexclusion principle, which means that no one is excluded from consuming the benefits of a public good whether or not he or she pays. • Examples are public parks, public libraries, museums, highways, and street lighting • The gov’t usually provides public goods b/c it is difficult to charge for their use. • The gov’t raises the funds for public goods through taxes.

4. Maintaining Competition • A monopoly is when there is a sole provider of a good or service • Consumers may suffer b/c a monopoly has no competition and can charge any price it wants to. • Antitrust laws are laws that control monopoly power and preserve and promote competition.

5. Sherman Antitrust Act • The Sherman Antitrust Act was passed in 1890 and banned monopolies and other business combinations that prevented competition.

6. Mergers • A merger is a combination of two or more companies to form a single business. • This can threaten competition and the gov’t will at times try to break up mergers. • For example, when OfficeMax and Staples tried to merge the federal gov’t put a stop to it because they felt it would lessen the competition and result in higher prices for consumers.

7. Regulating Market Activities • Natural monopolies occur sometimes b/c it makes sense to have one company to produce a product. It wouldn’t make sense to have 3 or 4 telephone companies b/c of the increase in telephone poles. • The gov’t will allow for natural monopolies and in return the company will allow the gov’t to regulate it. • This is why so many public services such as gas, electricity, and water are delivered by a single producer.

8. Advertising and Product labels • The Federal Trade Commission deals with problems with false advertising and product claims. • The Food and Drug Administration makes sure that all of our drugs, and good are pure, effective, and safe.

9. Public Safety • The Consumer Product Safety Commission makes sure that all of our products are safe and if they are not they will issue a recall, which is when a company pulls a product or agrees to make changes to the product to make it safe.

10. Measuring growth • How do economists decide which period the economy is in? • The Gross Domestic Product (GDP) is a measure of the economy’s output. • This would be all the dollars spent on cars, apples, CDs, haircuts, and many other final products. • Even if a country spends the same amount of money each year their GDP could go up because the prices for goods can go up.

11. Measuring growth • economists use Real GDP, which shows a country’s GDP after the increases in price are removed.

12. Business Fluctuations • An economy does not grow at a constant rate but rather has highs and lows. • the growths and declines are apart of a business cycle. • When the line on a business cycle moves upward the real GDP is growing and when the line moves downward the real GDP is declining.

13. Expansions • when the real GDP goes the economy is expanding, eventually the real GDP will peak, which is its highest point and then start to decline. • Expansions tend to last longer than recessions; the longest one lasted from March of 1991 to March of 2001.

14. Recessions • A recession takes place after the real GDP has gone down for 6 months. • They may not last long but they are painful b/c of loss of jobs.

15. The unemployment rate • this is the percentage of people in the civilian labor that is not working but are looking for jobs. • The changes in the unemployment rate are very important to the economy. • A 1- percent rise in the unemployment rate equals a 2 percent drop in total income in the economy.

16. Fiscal Policy • this is when the government changes its policies regarding taxing and spending. • the government may cut taxes so that the consumers will have more money to spend so to stimulate the economy • this will also convince businesses to hire more workers which will reduce the unemployment rate

17. Price Stability • Inflation • Inflation is the general increase of prices. • It hurts the economy b/c it reduces the purchasing power of money and may alter the decisions people make.

18. CPI(Consumer Price Index) • the gov’t measures inflation by sampling about 400 products commonly used by consumers every month. • This tracking of the goods will determine the rate of inflation

19. The Stock Market • You invest to make money • Profits from stock come in two ways: • dividends- are a share of the corporations profit that are distributed to the stockholders • capital gains-occurs when stock can be sold for more than it originally cost to buy

20. Stock Market Indexes • Stock Market Indexes are statistical measures that track stock prices over time. • Dow-Jones’s Industrial Average (DIJA) and the Standard and Poor’s (S&P) are the two most popular indexes. • The DIJA tracks 30 representative stocks and the S&P tracks 500 stocks

21. Stock Exchanges • Stocks in publicly trades companies are bought and sold at a stock market, or a stock exchange, which is a specific location where shares of stock are bought and sold. • You don’t have to travel to the stock exchange but can have a stockbroker, who can buy or sell the stocks for you. • Most stocks in the U.S. are trades on the New York Stock Exchange (NYSE), he American Stock Exchange, or an electronic stock market like NASDAQ.

22. The Stock Market and the Economy • the DIJA and the S&P 500 reveal investors’ expectations about the future. • If investors think there is going to be rapid expansion, the market is referred to as a bull market. If investors think there is going to be a slow down in the economy then the market is referred to as a bear market.