1. The Political Economy

2. “The Economy”
It is not a monolithic institution – it is a collection of billions of individual choices based on people’s incentives
The Political Economy – how politics and economics interact, and how they balance freedom and equality (conflicting values)

3. Components of Political Economy
Every regime’s ideology determines the relationship the state will play in regulating the economy
Markets – interaction between supply and demand that functions to allocate resources
Freely allow individuals to buy, sell, and trade what they produce for what they will consume
Sets values, or “prices” for these goods and services
Markets arise spontaneously, and are difficult for the state to control

4. Components of Political Economy
Property – ownership of goods and services
State can choose to play a role in protecting property rights – the right to sell property freely, or to not have it taken away
In LDCs, frequently property exists without a fundamental protection of property rights, due to the state’s inability to monitor instances of fraud

5. Components of Political Economy
Public Goods – goods provided and/or secured by the state
Examples (universal): Roads, lighthouses, the military
Examples (in some cases)
Health care in Britain, Canada
Oil in Nigeria and Saudi Arabia
Most businesses in Cuba

6. Components of Political Economy
Social Expenditures
Commonly called “The Welfare State” – redistribution of wealth through government taxing some, and paying others
Typically provided to the elderly, the unemployed, the poor, and the disabled
Often a subject of political battle, due to the question of who benefits from expenditures

7. Components of Political Economy
Taxation
Means to provide for public goods and social expenditures
Subject of political battles, determined partially by ideology toward the role of the state

8. Tax Rates as % of GDP (2008) Sweden: 54.2 % Denmark: 48.8 %
Finland: 46.9 %  
Belgium: 45.6 %
France: 45.3 %  
Austria: 43.7 %  
Italy: 42 %  
Netherlands: 41.4 %
Norway: 40.3 %  
Germany: 37.9 %
United Kingdom: 37.4 %
Russia: 36.9 %
Canada: 35.8 %
Switzerland: 35.7 %
New Zealand: 35.1 %
Australia: 31.5 %
Ireland: 31.1 %  
United States: 29.6 %
Japan: 27.1 %  
China: 17%
Mexico: 9.7%
Iran: 7.3%
Nigeria: 6.1%

9. Components of Political Economy
Money, Inflation, and Unemployment
States create and manage the money supply through a central bank
Money is created by the rate at which banks make loans
Low interest rates encourage more creation
High interest rates discourage creation
Creation of too much money in effort to stimulate the economy and reduce unemployment can cause inflation
Slowing the growth of money to control inflation can slow economic growth and cause unemployment to rise

10. Components of Political Economy
Regulation – rules or orders to set the boundaries of given procedures
States can ban production or sale of goods, set safety requirements, outlaw monopoly control, etc.
Trade – access to goods and services from foreign states
States can allow open trade, or restrict it through tariffs, quotas, and other non-tariff barriers

11. Arguments for and Against Trade
Why Regulate Trade?
Generate state revenue
Foster local industry
Protect local jobs
Keep wealth within the country
Why Not?
Promote competition
Keep the cost of goods and services low
Stimulate domestic innovation in areas of comparative advantage

12. Political-Economic Systems
Liberalism – rooted in capitalist ideology of private ownership, minimal state regulation and intervention beyond protection of property rights
Emphasizes individual freedom
Examples: U.S., Great Britain
Laissez-Faire – philosophy claiming the economy should be left to do what it wishes

13. Political-Economic Systems
Social Democracy – eliminate extremes of too much freedom, too much equality
Accepts a role for both private property and public ownership, freedom and regulation
Examples: Most European countries

14. Political-Economic Systems
Communism – believes freedom only comes from total economic equality, uses the state to achieve that goal
Rejects private ownership of property
Nationalization – bringing private industries under state control
Examples: China (though there is a massive transition ongoing), former Soviet Union

15. Political-Economic Systems
Mercantilism – emphasizes needs of the state to grow wealthy and powerful above the needs of society
Emphasizes neither freedom nor equality
Parastatals – industries nationalized based on some perceived need for international competitiveness
Examples: Japan, India, South Korea

16. Measurements of Economic Performance
GDP – Gross Domestic Product
Total dollar value of all goods and services
GDP per capita shows standard of living of the average person
PPP – Purchasing Power Parity
Adjusts GDP for relative buying power in each country, since cost of living differs from place to place

17. Measurements of Economic Performance
Gini Index
Formula to measure economic inequality in society
High Gini coefficient = more inequality, lower Gini coefficient = less inequality
HDI – Human Development Index
Attempts to measure well-being, in addition to wealth

18. GDP for the 6 Countries U.S. - $14.26 Trillion China - $4.4 Trillion
United Kingdom - $2.67 Trillion
Russia - $1.68 Trillion
Mexico - $1.09 Trillion
Iran - $0.34 Trillion
Nigeria - $0.21 Trillion

19. GDP per capita (PPP) for the 6 Countries
U.S. - $46,859
China - $5,693
United Kingdom - $36,523
Russia - $15,922
Mexico - $14,560
Iran - $11,250
Nigeria - $2,134

20. Gini Coefficient for the 6 Countries
U.S. – 40.8
China – 44.7
United Kingdom – 36.0
Russia – 31.0
Mexico – 54.6
Iran – 43.0
Nigeria – 50.6

21. HDI Ranking for the 6 Countries
U.S. – #8
China – #94
United Kingdom – #12
Russia – #57
Mexico – #53
Iran – #101
Nigeria – #151

22. Global Trends in Political Economy
2 MAJOR movements
Globalization – world is increasingly interconnected due to technology and trade
Liberalization – free markets are more prevalent than ever before in history, and developing nations often see liberalization as the key to growing wealth