1. Promoting and Protecting Competition
How does the government work to ensure that free markets are free and that consumers benefit from competition?

2. Government Regulation of Competition
Maintaining Economic Competition: Markets work the best when there are lots of buyers and lots of sellers. This fosters competition which is good for consumers.
Monopolies – market controlled by one business. Often
results in high prices and low quality products .
- Sherman Anti-trust Act (1890) – banned illegal business combinations and monopolies
- The government has used the Sherman Anti-trust Act several times to prevent a single business owner from controlling prices and products.
JP Morgan’s Northern Securities in 1904
John D. Rockefeller’s Standard Oil in 1911
AT&T in 1974
Microsoft in 2004

3. Government Regulation of Competition
Natural monopolies – LEGAL: Local utilities like water, electricity, natural gas, cable, etc. – Competition isn’t efficient, so businesses are allowed to be monopolies but are heavily regulated by the govt. to ensure proper market practices.
Oligopolies – market control by a few – LEGAL
- Car manufacturers, oil companies, etc.

4. Government Regulation of Competition
Mergers – combination of businesses – LEGAL as long as the merger does not create a monopoly. The govt. can prevent a merger that will cause one. (Food Lion in NC)
- Vertical- merge different levels/stages of production.
Ex: Hog farm & trucking company
- Horizontal – merger of “like” companies for efficiency.
Ex: BellSouth/Cingular/SBC/AT&T
- Conglomerates – merger of various businesses for profit
Ex: GE – electricity, insurance, real estate, NBC

5. International Trade
One way for the government to promote competition is ensure easy interstate and international trade.
When there are more available products and more businesses, consumers are usually better off.
Why do countries specialize?
Certain countries are very good at producing certain products and terrible with others.
The US can’t produce bananas. Most developing countries can’t produce airplanes and cars.

6. International Trade
Economic Interdependence: No person or nation is truly self-sufficient. We must rely on each other (people and nations) to produce all of the things we want and need.
Effects of Interdependence:
Environmental and Political problems in one country can cause economic problems in many other countries.
Governments must enact policies that allow their citizens access to products made in other countries.

7. International Trade Policies
Free Trade Agreements: Nations can legally agree that they will limit or prevent trade between the two nations.
NAFTA EU
Free Trade Issues: Companies can more easily move their factories to another country. Domestic businesses my be hindered by increased trade with foreign companies

8. International Trade Policies
Protectionist Trade Policies: Many nations limit imports to protect domestic producers of the same product.
Tariffs: Taxes on imports - Make prices for the imported goods more expensive
Quotas: Limits on the number of specific goods that can be imported. Ex: Japanese Cars

9. National, State, and Local Economy
Essential Questions: What are the major industries in the United States and the local economy? What steps can the government take to protect the local, state, and national economies?

10. United States’ Economy
World’s richest country the USA finished third in exporting last year. America shipped $1.48 trillion worth of goods around the globe, led by the top 10 items in the list below.
Major US Industries:

11. North Carolina Major Industries
Agriculture (Aquaculture)
Forestry
Industrial – manufacturing
Furniture
Textiles (cloth)
Government Sector – specifically defense industry

12. State Economy - Agriculture
North Carolina is considered to be a high producer of tobacco, cotton, corn, soybeans, peanuts, and wheat.
Our agricultural industry along with food, fiber and forestry contributes $70 billion annually to the state’s economy.
It is also responsible for employing 17% of residents and 18% of the overall state income

13. State Economy - Industrial
North Carolina over the past 20 years has become home to some thriving industries.
Information and software technology, defense, automotive, financial services, green and sustainable energy, aerospace and aviation, biotechnology and pharmaceuticals.
NC is now considered to be more of a global economy than our previous traditional economy
GDP is the 9th highest in the U.S. at $424.9 billion
There are more bank headquarters are located in Charlotte than all but 1 other U.S. city

14. Local Economy: Wake County
Out of all 100 counties, Wake county ranks 47 in overall agricultural sales.
Corn, tobacco, wheat, and soybeans are some of the largest industries in Wake County
Aside from agriculture, Wake County is also home to RTP
RTP is a major industrial hub including industries such as Biotechnology and Life Sciences, Clean and Green Energy, Banking, Gaming, Information Technologies, and Wireless Communications.

15. Impact of Outsourcing
Outsourcing – when companies move jobs to other countries (or states) where labor is cheaper in order to reduce production costs.
Negatives for NC industries – As more NC industries outsource their jobs to countries with lower labor costs, our citizens lose their jobs and incomes. As individuals lose their incomes, the government loses out on collecting income taxes, therefore the overall NC economy suffers.
Positives for NC – (very few) – some states with higher costs of living/production have outsourced their manufacturing jobs to the South, and states like NC, because they can pay their workers lower fees
NC is a Right to Work State – so we do not have Unions which often drive up the wages/salaries for employees

16. Business Cycle
Essential Questions: Which indicators should members of the government look at when making economic policies? Why? How do we know how the economy is doing?

17. Gross Domestic Product
Gross Domestic Product – the total amount of new/final goods and services produced by a nation in a given year (If GDP is increasing, it means the economy is good.)
GDP 2 3 1 4
TIME
Expansion - GDP is increasing;
a. Inflation - increase in prices of goods and services over time. (People have more $ to spend, therefore demand for all goods and services increases, which causes prices to rise as well.)
2. Peak - end of a period of expansion; the highest point of economic output

18. Business Cycle
Contraction - After a peak, business activity begins to slow or contract
a. If this becomes severe, it becomes a recession – businesses fail, people lose jobs, and profits fall
b. Recession – no growth in GDP for at least 6 months
c. Depression – an extended recession; very rare
d. Deflation - decrease in prices of goods and services over time. (People have less $ to spend, therefore demand for all goods and services decreases, which causes prices to drop.)
4. Trough - Lowest point in a the economic cycle
a. High unemployment; people can’t buy goods and services
b. Government intervention necessary
c. When GDP begins to grow again, we call it a recovery

19. How do we know how our economy is doing?
Economic Indicators
How do we know how our economy is doing?
Economic Indicator
Description
Gross Domestic Product (GDP)
If GDP is increasing, economy is doing well; If GDP is decreasing, economy is not doing well.
Consumer Price Index
A measure of the average change over time in prices paid by consumers for goods and services (measures inflation – if prices are going up – the economy is doing well.)
Producer Price Index
A measure in the average change over time in the prices that producers earn when selling their goods and services (if PPI is going up, producers are making more profits, the economy is doing well.)
Unemployment Rate
A measure of people that cannot find work – if the unemployment rate is increasing, the economy is bad

20. Review Questions
For each of the following scenarios, indicate whether the situation is describing a time of economic expansion, contraction, depression, or recovery.

21. Economic Scenarios
Stock prices plummet and unemployment is wide spread.
Stores continue to place large orders to keep up with growing demand.
The number of banks loaning money to prospective homeowners reaches an all-time high.
Business surpluses accumulate because demand has decreased.
New high-tech businesses begin hiring many of the unemployed.
Lowered prices lead to an increase demand for certain goods and services.
Consumers begin to cut back on spending on luxuries such as entertainment.
There is a boom in vacation real estate investments.
A large number of major corporations go out of business.
Car dealers lower prices and offer rebates to attract customers.

22. Economic Scenarios Answers
Stock prices drop suddenly and unemployment is wide spread. Contraction
Stores continue to place large orders to keep up with growing demand. Expansion
The number of banks loaning money to prospective homeowners reaches an all-time high. Expansion
Business surpluses accumulate because demand has decreased. Contraction
New high-tech businesses begin hiring many of the unemployed. Recovery
Lowered prices lead to an increase demand for certain goods and services. Recovery
Consumers begin to cut back on spending on luxuries such as entertainment. Contraction
There is a boom in vacation real estate investments. Expansion
A large number of major corporations go out of business. Depression
Car dealers lower prices and offer rebates to attract customers. Contraction

23. Measuring the Economy and Economic Indicators
How can we determine how the economy is doing overall, and what does the government do to try to help when things are not going well?

24. The Business Cycle
Phases of the business cycle: The economy goes through regular fluctuations where sometimes things are very good, and sometimes they are very bad.
Peak: highest phase - prosperity and low unemployment. Economy “expands”more goods and services produced
Trough: lowest phase - high unemployment / decreased business activity. Economy “Recedes/shrinks” fewer goods and services produced

25. Business Cycle continued…
Recession: Downward phase; declining GDP for at least 6 months/ 2 quarters.
Depression: prolonged (several years) period of no growth or decline. No specific definition.
Causes of business cycles
Political and social upheavals (war, election, etc.)
Increase or decrease in consumer confidence

26. Economic Indicators Forecasting business cycles:
Gross domestic product: the total value of all goods and services sold in a nation in a year. Does not measure changes in quality
US GDP: $14.62 Trillion
- China: $5.75 Trillion, Japan: $5.39 Trillion,, Germany: $3.3 Trillion, India $1.43 Trillion
- Per Capita GDP: GDP per person good indicator of Standard of Living. US: $47,100, China: $4,300
- Real GDP: adjusted for inflation (more on this later)
Housing starts/ Consumer spending: more new houses means things are good. Less consumer spending means things are bad
Unemployment rates
Inflation
Stock Market

27. Unemployment Measures of Employment - employed: actively working
- unemployed: those who do not have a job and ARE seeking work.
- not in labor force: persons without jobs NOT seeking work
- Civilian Labor Force: All people 16 or older in a nation who are working or looking for work.
Unemployment Rate: Percentage of people in CLF who are not working
- The unemployment rate tends to rise quickly in recessions and fall slowly in expansions.

28. Inflation/Deflation
Measuring inflation - Consumer Price Index survey of the change in price of 400 commonly bought products in the country.
If the price of items has gone up on average, we are experiencing inflation - A general rise in prices, meaning value of the dollar decreases

29. Effects of Inflation
creditors - paid back in devalued dollars (BAD for creditors)
Wage/salary increases – must match inflation
cost of living increases
People on a fixed income, such as those retired or on Social Security, are hurt the most by inflation

30. Stock Market
Individuals buy pieces of ownership in corporations called stocks
- Stockholders make money two ways
1) Receive a portion of the company’s profits based on their percentage of ownership Dividends
2) Sell stocks at a higher price than they were bought for capital gains
Stocks go up or down in price because people are willing to pay more or less money for them. This decision is based on assumptions about how well the business will do in the future.
Stock Indexes: look at general trends of many stocks Ex: Dow Jones Industrial Average; S&P 500
- Stock Indexes tend to be good indicators of how confident people are in the economy.

31. The Government’s Role in the Economy
Providing Public Goods: the government provides many goods and services to consumers that are not provided by private businesses.
Private goods – consumed by only 1 person, only bought by one person. You must directly pay for it to use it.
- Pizza, t-shirts, lamps
Public goods – consumed by many. You can use it without paying for it each time. Govt. provides these because they are seen as necessary but it is difficult to get people to pay for them.
- Libraries, parks, street lights, roads

32. More Government Involvement
Government Safety Net
- Externalities – unexpected side effects of economic activity
- Govt. provides public goods for positive externalities. They also unintentionally cause a positive externality - Govt. also works to prevent negative externalities, especially pollution caused by businesses
Protecting consumers/environment
Advertising/product safety: ensures that companies are truthful (Federal Trade Commission) and are producing safe products (FDA)
- Recall – removing/changing a dangerous product

33. Fiscal and Monetary Policy
What actions can be taken by the government to affect the economy?

34. Fiscal Policy Fiscal policy is how we collect and spend money.
In theory, the best thing to do in a recession is to both cut taxes and increase govt. spending. (Keynesian Economics)
Why cut taxes? This gives people more income to spend, which will hopefully stimulate the economy due to increased demand
Why increase govt. spending? Provide more jobs to unemployed people, so they have more money to spend.

35. Fiscal Policy
Cutting taxes AND increasing spending is impossible without putting the nation into serious debt.
This issue is one major difference between Democrats and Republicans.
- Democrats prefer to increase govt. spending hoping to employ more people and encourage them to spend their income. (FDR’s New Deal)
- Republicans prefer to cut taxes hoping to stimulate investment in the economy from the top which will result in more jobs being created. (Reaganomics)

36. Problems with Fiscal Policy
Because Fiscal policies are set by the Congress, it often takes a long time for them to take effect.
The Congress often has trouble making quick decisions because of the different perspectives/interests of members.
Both possible actions also assume that people will spend the extra income that they receive. If they choose to save their money instead, the economy will not be stimulated.

37. The Federal Reserve and Monetary Policy
The Federal Reserve (Fed) serves as the nation’s central bank.
It is designed to oversee the banking system.
It regulates the quantity of money in the economy.

38. The Federal Reserve and Monetary Policy
Monetary policy affects the money itself
The money supply refers to the quantity of money available in the economy.
Monetary policy is the setting of the money supply by policymakers in the central bank.
The Fed works to affect the economy by changing the supply of money.
More money tends to stimulate the economy
Less money tends to slow the economy

39. The Fed’s 3 Tools of Monetary Control
1. Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed.
To increase money supply, Fed buys govt bonds, paying with new dollars.
…which are deposited in banks, increasing reserves
…which banks use to make loans, causing the money supply to expand.
To reduce money supply, Fed sells govt bonds, taking dollars out of circulation, and the process works in reverse.

40. The Fed’s 3 Tools of Monetary Control
2. Reserve Requirements (RR). Affect how much money banks can create by making loans. The RR is how much of your money the bank is required to keep on hand and not loan out
To increase money supply, Fed reduces RR.
Banks make more loans from each dollar of reserves, which increases money multiplier and money supply.
To reduce money supply, Fed raises RR, and the process works in reverse.
Fed rarely uses reserve requirements to control money supply: Frequent changes would disrupt banking.
Reserve requirements were introduced & defined on the slide titled “Bank Reserves,” immediately following “The Structure of the Fed.”
Reserve requirements are not a good tool for monetary policy:
To make the money supply grow over time, the Fed would have to continually reduce reserve requirements. This is neither possible – they cannot be reduced below 0 – nor desirable – if reserves are too low, then banks will have liquidity problems, and bank runs (discussed later in the chapter) might become fashionable again.
To reduce the money supply using reserve requirements, banks wouldn’t be able to make as many loans, which would make the banking industry less profitable, and could cause it to contract.

41. The Fed’s 3 Tools of Monetary Control
3. The Discount Rate: the interest rate on loans the Fed makes to banks
When banks are running low on reserves, they may borrow reserves from the Fed.
To increase money supply, Fed can lower discount rate, which encourages banks to borrow more reserves from Fed.
Banks can then make more loans, which increases the money supply.
To reduce money supply, Fed can raise discount rate.
Why might banks run low on reserves? On any given day, it might turn out that depositors make higher-than-expected withdrawals, or the bank makes more loans than expected.

42. Effects of Monetary Policy
The Fed most commonly uses Open Market Operations (buying and selling bonds) to affect the supply of money.
If the economy is doing poorly, the Fed uses Monetary policies to attempt to stimulate the economy.
If the economy is doing really well, the Fed uses Monetary policies to slow things down. This prevents inflation and hopefully prevents a massive over-correction like we saw in 2008.

43. Effects of Monetary Policy
Monetary Policy is often more effective then Fiscal Policy in the short-term because the Fed can enact policies immediately.
The Fed is also independent of the Congress, so they can make decisions that are more unpopular with voters, because they cannot be voted out of office.
This is potentially good for the economy, but not so good for a democracy.