1. Political Economy

2. What is Political Economy
Economy is one arena where the struggle for freedom and equality is a reality
Interactions between political and economic institutions in any country has an impact on the prosperity of citizens.
The study of how politics and economcs are related and how their relationship shapes the balance between freedom and equality is known as political economy.

3. Components of Political Economy
Markets and Property
Public Goods
Social Expenditures
Taxation
Money, Inflation, and Economic Growth
Regulation
Trade

4. Markets
Markets - interactions between the forces of supply and demand.
Resources are allocated through the process
This interaction enables values placed on goods and services.
Millions of individuals making decisions about what they buy and sell dictate value
Markets are communities of buyers and sellers interacting through the economic choices the make.

5. Property
Generally refers to the ownership of the goods and services exchanged through markets.
In terms of physical property, the state has the task of regulation.
State regulations may vary depending upon the role they play in constructing and enforcing property rights.

6. Public Goods
Defined as those goods, provided or secured by the state, that are available for society and indivisible.
For example - roads, defense, education and health care.

7. Social Expenditures
Social expenditures - public benefits such as education, health care, transportation.
Also known as welfare of the welfare state.
Set up for those who require greater care - elderly, poor, and the disabled.

8. Taxation Is used to pay for social expenditures
Taxes can consume a high percentage of a country's GDP (gross domestic product). GDP represents total market value of goods and services produced in one year.

9. Money, Inflation, and Economic Growth
States manage money via a central bank
Can set national interest rates
Lower rates - stimulate borrowing and spending
Higher rates - foster saving and allow people to take advantage of earning off of their saved income.
Inflation - an overal increase in prices
Hyperinflation - inflation which is 50% higher for more than two months in a row.
Deflation - reduction of the general level of prices in an economy.

10. Regulation
Regulations - rules or orders that set boundaries of a given procedure.
Can be economic - for example Solar industry
Can be social - licensing occupational and professional certification.

11. Trade Tariffs - taxes on imported goods
Quotas - limit the quantity of goods coming into a country
Nontariff regulatory barriers - rules enacted to protect citizens and make it difficult for foreign goods to be sold within the state.
Regulate
- Generate state revenue
- Foster local industry
- Protect local jobs
- Keep wealth in the country
Deregulate
- Promotes competition
- Keep costs of goods low
- Stimulate domestic innovation in areas of comparative advantage

12. Political-Economic Systems
Is used to describe the relationship between political and economic institutions in a particular country as well as its policies and outcomes.
Liberalism
Social Democracy
Communism
Mercantilism

13. Liberalism
Seeks to limit state power with an emphasis on individual politics and economic freedom
The best state is a weak one
Focus is on the public good of defense and education
Enjoys minimal taxation
Promotes light economic regulation
Favors trade stimulus to encourage competition and innovation
Believes in "laissez-faire" capitalism
The power of market trumps that of the state

14. Social Democracy
Capitalism is a "runaway" train and if left unchecked will foster income inequality.
State must be involved with the market and economy
State must regulate trade
Public goods should include healthcare, pensions and higher education
Believes in higher taxes to allow for equality.
Neocorporatism - guilds or associations work with the state to insure equity.
State can own firms within the economy
Common in Europe

15. Communism Eliminate individual freedom to reach equality
Economic competition creates exploitation and the development of social classes in which a small group of the wealthy dominate and benefit from the labor of the poor majority.
Private property is nationalized
Economic decisions are made by the state for the public good.
They have fixed prices and wages
All profits go to the state
Labor is allocated by the state
Have extensive social expenditures - all basic services are state run.
Trade is highly restricted
State controls the people's fate

16. Mercantilism
Closely resembles the British colonial system. Colonies would supply the mother country with imports and thus exclusively consume exports from the home country.
Active industrial policy via the state
State directs economy to take advantage of certain segments
State trade regulations in the form of tariffs are used to shield domestic industries.
Less emphasis on social expenditures
Pros: Ability to direct an economy to areas of industrial development
Good for developing countries
Countries such as Japan, S. Korea and Brazil have this type of economy.

17. Comparing Outcomes of Political-Economic Systems
GDP - average per capita income of one year
PPP - Purchasing-power parity: estimated buying power of income
Gini Index: 0=equality, 100=inequality (see table 4.1)
HDI - Human Development Index: Assess health, education and wealth of the population. (High income = high education = high life expectancy)