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Political Economy: GDP ====================== To judge whether economy is doing well or poor, you should look at the total income that everyone in the economy is earning. To fulfill this goal, politicians usually try to have a good balance in the following points: Main goals (of politicians) for a...

Political Economy: GDP ====================== To judge whether economy is doing well or poor, you should look at the total income that everyone in the economy is earning. To fulfill this goal, politicians usually try to have a good balance in the following points: Main goals (of politicians) for an economy: **[GDP (Gross Domestic Product)]** **GDP is the market value of all final goods and services produced within a country in a given period of time.** - It means all output of the country's economy valued at the market price, only including the final product, and done within in the borders of the country ([meaning that we only calculate with swiss companies earning their revenue in Switzerland and abroad, but not the revenue earned in Switzerland by a foreign company]) at a certain period, for example one year. There are many ways to calculate the GDP of a country "GDP-Calculation":  The [production approach] is quiet hard to calculate because the amount of output created is very hard to know as the government must know for sure how much output every company creates. When it comes to the [expenditure approach], it is more accurate as the government has the data needed to calculate the GDP The **total income must equal the expenditure** because: - Every transaction has a buyer and a seller - Every swiss frank of spending by some buyer is a swiss frank of income for some seller - The equality of income and expenditure can be illustrated with the **circular-flow diagram**. GDP Expenditure approach: - **Consumption (C):** The spending by households on goods and services, with the exception of purchase of new housing - **Investment (I):** The spending on capital equipment, inventories, and structures, including new housing. - **Government Purchase (G):** The spending on goods and services by local and central governments. Does [not] include transfer payments because they are not made in exchange for currently produced goods or services. - **Exports (X)** - **Imports (M)** **Y = C + I + G + X -M** **[GDP per capita]** GDP per capita is the **GDP divided by the population of a country** to give a measure of **national income per head.**  L is the size of the population of a country. **[NOMINAL AND REAL GDP]** **Nominal GDP:** value at current market prices. **Real GDP:** adjusts for inflation, uses constant prices uses prices that existed in the base year. **[Real GDP]** It is important to look at the **"real" GDP** and not the "nominal" GDP. But why? Let's say that a country makes exactly the purchases and the same savings but the price of goods and services have risen (inflation). The nominal GDP might be higher but it doesn't show the accurate data of how well the country is doing. Depending on the country the nominal GDP can be higher because they might have a different inflation rate. In the real GDP the inflation is already been taken in to account and it shows the accurate data of the country and how well they are doing. The nominal GDP shows the value at [current prices,] the real GDP on the other hand shows it at [constant prices]. **[How to calculate the inflation rate.]** 1. You take the shopping basket of a country. 2. Calculate the shopping basket with the prices of the current year, and the base year. 3. And compare it. The rate of change of the costs of the fixed shopping basket is the inflation rate. **[How to calculate the nominal and real GDP]** The real GDP is calculated as shown. We use the fixed price, in this case the price from 2015 base year, to calculate the real GDP. We calculate with the consistent / fixed price. **[GDP Deflator:]**  Measures **[the change in prices of all goods and services in the GDP]**. It shows how much of the change in GDP is due to price changes (inflation or deflation) and not due to the changes in production. If Deflator is 100, prices haven't changed If Deflator is bigger than 100, prices have risen (inflation) If Deflator is less than 100, prices have fallen (deflation) **[Consumer Price Index]** Measures the average change in prices over time for a specific "basket" of goods and services commonly purchased by households (like food, clothing, and housing). It's a way to track inflation as experienced by consumers. If the CPI rises, it means consumer prices are increasing (inflation). The typical family has to spend more money to maintain the same standard of living.  **[Why is GDP the best tool to measure the economic well-being of a society?]** - Best single and basic measurement of the economic well-being - The GDP data is available in many countries - GDP per capita tells the mean income and the distribution of the wealth in a country - Higher GDP per capita indicates higher standard of living - Calculation of GDP is standardized, therefore comparable among different countries But it has its limitations: It is not a measurement of welfare, happiness, quality of life Things that contribute to well-being but its not included in the GDP - Value of leisure - Value of a clean environment - Value of security - Value of, for example, how much time parents spend with their kids Other things, which is important when it comes to well-being: - Health, finances - Work-life-balance - Environment - Relationship - Where people live - Education and skills - Performance of the government GDP and GDP per capita are not easily comparable between countries. Cost of living are very different. Is not the same earning 6k/month in Spain than in Switzerland. **Solution for International Comparability: Purchasing Power Parity (PPP) and Real Exchange Rate.** **[Purchasing Power Parity (PPP)]** Ideally in efficient market, identical goods and services should have only one price. It also says that price differences between countries are not sustainable in the long run as market forces will equalize prices between countries and change exchange rates in doing so. Also its not sustainable because a company could benefit from the price difference -\> arbitrage profit. Law of one price: identical goods sold in different locations must sell for the same price when prices are expressed in a common currency. However, this is a theory and not really realistic as the price differences still exist and play a huge role in international business.  RER higher than 1 = your currency is overvalued RER lower than 1 = your currency is undervalued Political Economy: Growth ========================= **How Economic Growth is measured**  The Real GDP~1~ is the oldest one, further away. **Production and Growth** A country's standard of living depends on the ability of the country producing goods and services. A small change in percentage per year but if the increase/decrease keeps going, in years the change might look drastically different. Productivity is measured by the amount of goods and services **each hour of a worker's time**. Basically meaning: How productive is one worker per hour? How much output we are producing per input (hours of work). There is a huge difference between the GDP per capita and productivity: GDP per capita is the amount of the total goods and services produced by a country divided by the total population. Meaning you also count every baby, stay-at-home-mother, student and retired people; who are not producing goods or services In productivity you only count the **population who is working**. If you compare countries with different standard working hours by a week you'll see the difference. Productivity and growth are linked; countries very productive grow more. For example In Switzerland the average amount of working per week is 42, in France it is 35. So even tough France has a bigger population of workers, the Swiss workers work 7 hours more per week or one week more per month compare the French workers. That's one of the reasons why the GDP per capita is higher in Switzerland than in France. The ranking of countries by incoming per person changes time to time because countries with a already high GDP per capita have mostly a lower annual growth rate as their reaching the maximum of their potential. In the other hand countries with a lower GDP per capita have often a higher annual growth rate as they're usually just starting to use their potential of economic growth. Nevertheless, policy makers are always interested to keep a sustainable and good growth rate. They also invest in technology and education, so the growth keeps going fast but sustainable at the same time. But when it comes on sustainability, it is important to have a low but steady growth per year to avoid an inflation. **The Rule of 70** The Rule of 70 means a growth rate of 1% would see income per person doubling in 70 years compared to 23 years for a 3% growth (70 / 3) ---\> how long it takes until your GDP per capita doubles its value. For example A country with a growth rate of 10% will double its income per person in 7 years (70 divided by 10). This means within 7 years there will be a population that got twice as rich and this might cause the economy or government problems because they can't keep up with the change. **The Solow Theory** Economists have identified other factors that may influence economic growth. How open to trade a country is. How easy it is to do business and how and the extent to which corruption is minimized. The extent to which violence, war and conflict exist in a country, Regional characteristics such as whether the country is part of Europe, North America, Asia or sub-Saharan Africa. Geographical factors such as physical resource endowments and climate. **The production function** Y = AKL Y = The output (goods / services) A = Technology K = Capital L = Labour (Manpower / or time of work like hour, day or year) Y/L = AK Y/L is the productivity: output divided by the hours worked. Productivity increases with capital and technology. In the Solow model of growth we assume that there is a closed economy, meaning the output is either consumed or saved (Y = C + S). There is no foreign investment for example. **Diminishing return to scale** means that when you increase the amount of capital in a business (buying another oven) the output will increase but probably not double as the labour (the chef) is not able to work with both capitals at the same time (one chef but two ovens). You also need to increase the labour. Sooner or later the savings will be invested into capital. But at the same time investments, for example a machine, can depreciate. For example a machine will get less and less usable with time. Four equations in the Solow model  Example    There are two ways to keep the growth 1. Increase Savings: If you keep saving more and more the point your growth will touch the capital line divide more and more. But this means that when saving is increasing, the consumption ins declining. Meaning you will reach a point where you can't save anymore. 2. Technology: With technology you can produce more and more so it becomes more likely that you will not touch the capital line. So technology is the best way to keep the growth going. Because of this the policy makers should invest in an environment where technology can be improved or new technologies can be invented, for example investing in universities and student so they learn skills and might invent a new technology to keep the growth going. So let's come back to the function: Y/L =AK If you invest more and more in technology (A) or capital (C), the output produced by one workers time is getting higher and higher, meaning a worker will be able to produce more goods and services in that same time. 1. The standard of living in an economy depends on the economy's ability to produce goods and services. 2. Productivity depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers. 3. The Solow model notes that the accumulation of capital is subject to diminishing returns. 4. The Solow model implies that countries with low capital stocks will initially grow faster. **Intuition of the Solow Model** The Solow model explains how an economy grows over time by focusing on capital accumulation, labor, and technology. It shows that: Growth comes from investment in capital (like machines and infrastructure). Over time, growth slows due to diminishing returns to capital. Long-term growth depends on technological progress, not just capital or labor. **Connection Between Savings, Capital, and Growth** Savings: Higher savings mean more resources are available for investment in capital. Capital: More capital boosts production (output), leading to economic growth. Growth: Initially, growth is fast as capital increases, but diminishing returns slow it down. Sustained growth requires improvements in technology. Political Economy: Income Distribution, Inequality and Poverty ============================================================== **MEASURES OF INEQUALITY; Lorenz curve, GINI, and income ratios** **Lorenz curve** Graphically shows the income distribution. Relationship between the cumulative percentage of households and the cumulative percentage of income. If income were equally distributed, would be represented by a 45-degree line. **The Gini Coefficient** To compare inequality of two wealth distributions is hard just by looking at two Lorenz curves. The Gini coefficient measures the degree of inequality. The Lorenz curve is basically a visual measurement and the Gini curve is the nominal measurement. The Gini coefficient is a number between 0 and 1, or 0 and 100. The more the number is towards 0, the more equal is the wealth distribution. You get the number by dividing a figure A by A + B. The higher the Gini coefficient the greater the income inequality.  Figure C is the most equal. **Percentile Measurement**  Different measures might lead to different rankings 80/20 ratio of distribution C \> distribution A Gini of distribution C \< distribution A Data on income distribution and the poverty rate give an incomplete picture of inequality in living standards because of the following: 1\. The economic life cycle. 2\. Transitory versus permanent income. 3\. Economic mobility. **Economic Life Cycle** One more problem which makes hard to accurately measure the wealth / income distribution of a population is, that the population earns a different amount of income or has different amount of income as his life goes on. For example Let's go through your life cycle At age 14: You're going to school -\> you're earning nothing At age 21: You're attending university and working part-time in a bar -\>you're earning a little bit At age 25: You've completed your studies and started working full-time -\> you're earning good At age 50: You're a CFO of a company -\> you're earning a lot At age 85: You're retired -\> your retirement pension is monthly the same amount you started to earn at age 25. So during your life, you're going through different income/wealth population groups. So while the people in Japan are mostly older and could be associated to the poor group, the population in East Europe are in their prime and more in the middle class. Also it depends on the economy and acts of nature: it can be that you lose your job due to a pandemic even though you had a job with a very good income where you would have been associated to the rich people group. So you should always calculate the permanent income of the population. What you really want to measure is the economic mobility. So the ability to move from economic group (e.g poor) to another group (e.g rich) through hard work. But the opposite is also possible if you don't work, have more leisure time or simply bad luck (pandemic like COVID-19). Normally, the associated income / wealth group is passed over from generation to generation but in the economic mobility, it allows individuals to move up and down from the groups. **Political Philosophy on Economy** As the problems are known, we as a society came up with different ideas on how it should be fought against inequality and how much inequality we can accept. Economic analysis can not give a perfect approach or solution. The question we're facing is normative, which means we as individuals have to decide on how much we can accept and which approach we should chose. Because of this we have four political philosophies when confronted with the topic: 1\. Utilitarianism 2\. Rawlsian Liberalism 3\. Libertarianism 4\. Libertarian Paternalism **Utilitarianism** The government should choose policies to maximize the utility of everyone in society. Redistribution of income will end in problems in the economy: for example taxes are a redistribution tool but often people avoid paying taxes, which will slow down the economy in the long run. Even though it has many good factors it shouldn't be implemented completely. So if taxes are used to redistribute income they should do it in a convenient way so the richer people won't avoid taxes. **Rawlsian Liberalism** The government should choose policies deemed to be just, as evaluated by an impartial observed behind a "veil of ignorance". A public policy should seek to maximize the utility or well-being of the poorest person in the society. In that world it is about only improving the situation of the most poor people instead of all people in a society. **Libertarianism** The government should get not too involved in the distribution of wealth and income. They should only act like a police force and provide an environment where any business can be done by anyone. It is more important that everyone as equal possibilities than equal income. Every person is responsible for their own well-being. If you have bad luck, you have bad luck and be poor **Libertarian Paternalism** So the government acknowledges that people can choose freely but the government has the right to influence the behaviour of people to make their lives better. So you have endless possibilities but the government is "nudging" you to the right direction. For example the government allows you to smoke but it puts taxes on cigarettes making them more expensive so you don't smoke. The standard economic idea of welfare is based on utilitarianism. **The rate of poverty** In Europe the poverty line is when your earnings are 60% less than the median income. For example the median income is EUR 20,000. If you earn less than EUR 12,000 you're living in poverty. Absolute poverty is the level of poverty where people have no access to basic life -- housing Relative poverty is a situation where and individual which can't access what we consider acceptable standard of living -- for example sharing a two-room-flat with 8 people. Economic growth is the easiest solution of elevating people out of extreme poverty. This can be seen if we compare the globally poverty rate with the global GDP rate. The problem of measuring poverty is also that it shouldn't be based only on income but also on assets of an individual / family. There are four policies to fight against poverty: **Minimum wage law** This policy is for the working poor. People who work full-time, maybe even working multiple jobs, but still are poor. But if you rise the minimum wage of labour, companies will start investing more in technologies and machines so they don't have to pay for manpower, for example the machines in Coop and Migros replacing the cashiers. Or they will outsource it to a country who has lower wages or employ a worker from a neighbouring country who is willing to work for less than its Swiss colleagues, for example cleaning women from Italy crossing the border of Tessin to work in Swiss companies. **Social Security** For example if you get unemployed, you'll get unemployment money. This security is ensured by taxes. **Negative Income Tax** If you earn below a certain line the government will actually pay an assistance amount to you. On the other side, the richer families will pay more based on their income. **In-kind transfer** Donate goods and services to poor people instead of cash. But the problem is that you tell the poor people what they need and what you're willing to donate, even though if the poor person wants or needs something else. **Price elasticity:**  Economic Development ==================== **Economic Development Theory** =============================== - 3 levels: advanced, developing, least developed. - Criteria: (1) Per capita income PPP, (2) Diversified export base, (3) Global financial integration. - Labor: How much input vs. Output. How much time is investing in creating the output. - Country's ability to improve its standard of living over time depends on its ability to raise its output per worker. - The **Three-Sector Hypothesis:** 1. Farming, forestry, fishing, mining 2. Manufacturing, construction 3. Service Social Frameworks ================= Happiness level, quality of life level, human development level: many things that make you happy don't have economic impact (in GNI, GDP...). There is a diminishing marginal utility: more money doesn't make you necessarily more happy. If you have 10k and I give you +1chf, you're not happier. **Demographics** Growth rate continues to fall. Absolute numbers keep growing but growth rate keeps falling. 8 countries with biggest population: - India - China -- Population is already falling - US - Indonesia - Pakistan - Nigeria - Brazil - Japan Fertility rates falling, Life expectancy at birth growing. **Urbanization** ================ Mega-Trends: 1. Urban majority: since 2008, majority of the world's population lives in cities. 2. Larger urbanisation trends in the developing world: most of urban growth will happen in the developing world.  6. **Public Economics Part 1** **[Welfare Economics]** Is the study which shows how the allocation of resources affect the economic well-being (the happiness and satisfaction with life reported by individuals). - Subjective well-being refers to how an individual evaluates his own happiness. - Objective well-being refers of measuring the quality of life by using indicators developed by researchers. Allocative efficiency is where the value output of the seller matches the value output of the buyer. Basically the equilibrium in the market. The point where the buyer and seller have the lowest costs and the most benefits and using the full potential of this fact. **[Willingness to pay]** The maximum amount somebody is willing to pay for a good or service Consumer surplus is the buyer's willingness to pay for a good minus the amount the buyer actually pays for it. For example: You go to a store and you're really hungry and willing to pay CHF 5 for a sandwich. Now in the store you realize that the sandwich only costs CHF 3. So the consumer surplus is CHF 2 because even though you pay only CHF 5, you would have paid up to CHF 5 if the sandwich would have costed that much. In your mind, you saved CHF 2. **[Quantity demand]** The amount of people are willing to pay for a good or service at a certain price.  You can use the demand curve to calculate the consumer surplus   **[Consumer surplus:]** amount that buyers are willing to pay for a good minus the amount they actually pay for it. **[Bargaining process]** Happens when two parties bargain for a transaction of a good. Agreed outcome between two interested and competing economic agents. **[Is consumer surplus good?]** Depends, a heroin addict is always willing to pay more for his addiction than he actually would pay. But in general, the consumer surplus usually shows the well-being of an economy. **[Producer surplus]** Is the amount a the seller has left after subtracting the costs. Non-economists call it **profit**.     **[Market Efficiency]** In the free market theory, the market is aligning to the behaviour of the sellers and buyers. In that case the market equilibrium will also move. For example if the gasoline prices increase, more and more oil companies will enter the market to produce gasoline, but the buyers will change their behaviour and will reduce their dependency on oil by using it less. So the sellers will also align to that and the producer surplus will diminish. **[Economic Efficiency and waste]**  **[Total surplus]** Can be calculated as following  **[Pareto efficiency]** When you reach the equilibrium, the Pareto efficiency occurs. At that point, if the resources would be reallocated, either the buyer or the seller would be worse off, meaning they would have higher costs or less profit or benefit. So if you reach that point, everything is in balance and no party has a disadvantage. **[Pareto improvement]** Is an action which makes at least on economic agent better off without harming the other economic agent. They still benefit, but more equally than before. **[Efficiency and Equity]** The market it efficient when the equilibrium is met at a point where the resources are allocated in manner, where the market outcome is the best for the sellers and buyers (as described above). It that case the policy makers can leave the market as it is. But efficiency means not fair. It can be that the well-being between the various buyers or sellers are distributed unequally. It can be that a seller benefits more than another buyer so his well-being is higher. In that case the policy makers have to interact with social welfare functions. **[Government policies]** In a free market goods and services are transferred at an equilibrium. Depending on the market the equilibrium might move. Even though there is an equilibrium, it doesn't mean the market is fair. **[Price ceiling and floor]** If policy makers think that the prices in the market are unfair to buyers and sellers, they will interfere and set following price borders: - Price ceiling (maximum price) - Price floor (minimum price) If the price ceiling is above the equilibrium, nothing will change because it will not affect the market. If it's below, it will affect the market and therefore is [binding]. This measures make sense for housing or insurances for example.  If you have a price ceiling, the willing of supply will decrease so a building company might decide not to build new houses and apartments. So the ques for new housing will rise because there is a supply shortage in the market. A price floor must be above the equilibrium to be [binding]. Below of it would have no effect on the market.  This price floor might make sense for example if the price of a good is falling so drastically that some sellers (for example domestic milk producers) have less and less profit. **[Introduction of Taxes]** The government can rise taxes for public projects, but it will discourage market activity (like in the tabaco market) Buyers and sellers share the tax burden because taxes decrease the market activity and number of market participants.**[Specific Tax]** - Specific tax: for example CHF 0.50 tax per unit - Ad valorem tax: 10% tac per unit - Tax incidence: when sellers and buyers share the tax burden  In this case the tax burden is split equally between the buyer and the seller. But that doesn't always have to be the case as. It is possible that one of the both parties has a bigger burden. **[Ad valorem Tax]** Like the specific tax, the buyer and seller share the burden of the tax. The supply curve shift up but not by a parallel amount. The specific tax had a fixed amount per unit, but the ad valorem tax has a fixed percentage. For example the VAT tax Let's say it is at 20% , which means the a product which costs \$ 20 has a VAT of \$4 included. This VAT has to be paid by the seller to the government, but the seller will charge the buyer to get it back. At the lower prices, the amount to be paid for VAT is relatively low. But at higher prices, the amount to be paid gets also higher. That's why the supply curve is not parallel. **[Tax Incidence and Elasticity]** Tax Incidence: Taxes always discourage market activity because the buyer pays more and the seller receives less. Both parties share the burden, no matter on whom the taxes are levied on. The way a burden is divided depends on the price elasticity of the demand and the supply. The burden is more heavy on the party, where is less price elasticity For example: If the taxes of cigarettes are increased, both parties will share the burden but the burden is heavier on the buyer because he really wants the good and has no alternatives to consume than cigarettes -\> so there is a low price elasticity on the demand side. If oil prices change, the oil producers like Shell have no other choice to accept this change and have to keep producing for a lower margin because they have no other alternative than producing oil -\> so there is a low price elasticity on the supply side.  Both parties still share the burden but the buyer (demand side) has to pay a bigger half of the tax because he has no other choice than consuming the product. So no matter how the price changes, the demand stays the same. Even if the shift to the left is small and has a low change in quantity (demand stays the same) the price difference is huge, especially for the consumer. In this situation, the seller could also additionally increase the price and the demand change would be almost the same. In this example, it is exactly the same with the exception that the supplier has now a lower price elasticity and the tax burden is heavier on him. **[Subsidies:]** Is exactly the opposite of taxes. It is a payment from the government to the buyer or the seller to supplement income or lower the cost. The recipient of this payment is now encouraged to take part in the market more as he's provided an advantage or has now an equal position to trade. For example railways: When the company received subsidies from the government, it's cost decrease and so the supply curve shifts downwards. This lowers the price and generates more ticket purchases. So both the seller and buyer benefit from the subsidies.  The supply curve doesn't shift left or right but more down than up. The supply demand stays the same but the equilibrium goes down because the railway is now ready to offer a lower price without making a loss and the buyer is happy that the price for the same (or even better) quality has gone down. Subsidies still have to be paid by somebody. The government finances this through taxes. **[Taxes and efficiency ]** There are two main objectives when it comes to designing a tax system: - Efficiency - Equity Efficiency: When one tax systems raises the same amount of revenue with less cost than another tax system. They have a small deadweight loss and low administrative burdens. A deadweight loss is the fall on total surplus that results from a market distortion, such as a tax. **[Tax revenue]**   C + E is the deadweight loss. This is the amount which is not consumed anymore, because of the implementation of the tax. It would have been consumed without the tax but now it can be considered as a loss. -\> There is less quantity consumed.  The greater the price elasticity the bigger is the deadweight loss. At the same time, the amount of deadweight loss is increased much more than the tax revenue when the taxes are increased more and more, see below:  But there is a point also like a "break-even-point" where the tax revenue is as big as the deadweight loss. Below this point the revenue is bigger than the deadweight loss, but above that the deadweight loss is bigger than the tax revenue and so has more a negative impact on the economy than a better one. At the peak of the tax rate, there is the perfect point where the tax revenue is perfect. **[Administrative tax burden]** The second type of cost comes from administration. The time/money/effort spent to documenting, computing and filling the tax forms is also a cost.  **[Average tax rate and marginal tax rate]** - Average tax rate is the total of tax payments divided by total of taxable income - Marginal tax rate is the extra tax paid for every addition Swiss frank of income. The marginal tax rate discourages working because here you have to think if it is worth marking or earning more if you have then to pay even more taxes. For example: Let's say the taxation rate of income between a yearly income of \$ 30,000 and \$ 40,000 is 20% and from \$ 40,000 and \$ 50,000 is 35%. Now you currently earn \$ 39,000 a year and thus pay \$ 7,800 of taxes yearly. You could earn \$ 2,000 more, making your yearly income \$ 41,000, but then you would pay 35% taxes which would be \$ 14,350 a year. So, you have more money in your pocket when you earn \$ 39,000 a year than \$ 41,000. **[Lump-sum tax]** The same amount every person has to pay, regardless of earnings. There the marginal tax rate is practically zero and is the most efficient as it sends the same invoice to all people but it might not be the most "fair" taxation.    **[Public goods]** Usually every good and service is allocated to a market. But if a good or service is free of charge, the market forces are absent and the government takes charge. There are two characteristics of goods: - Excludability - Rivalry **[Excludability]** Excludability means somebody can be excluded from using it. **[Rivalry]** If a person uses a good, then another person can use it less. **Type of goods** 1. Private Goods - Are both excludable and rival. 2. Public Goods - Are neither excludable nor rival. (street light, clean air) 3. Common Resources - Are rival but not excludable. 4. Club goods - Are excludable but not rival. (cable television)  Important public goods are for example national defense, basic research, justice system Free-riders are those who benefit from a good/service but don't pay for it, they are not excludable. Example: Somebody being protected by the national army but not paying it's taxes. The problem is preventing private markets supplying public goods. One way to solve this is funding public goods with taxes or provide the benefits if they exceed the costs. Cost benefit analysis is where the benefit and the cost of public costs are compared. To do this the total benefit of those using this good must be compared to the costs of providing and maintaining the goods. With this the government can decide whether to provide this good or not. But this is hard to do since there are no prices of public goods, only cost are known. We don't know for how much we value this good. So the government should continue to provide public goods until the marginal benefit of providing one more unit of public good is equal of the marginal cost generated by providing one more unit. MSB = MC **[Common Resources]** Common resources, like public goods, are not excludable. They are freely available to anyone who wishes to use them. Common resources are rival goods, because one person's use of the common resource reduces other people's use. Tragedy of the commons is a phrase that should illustrate the excessive use of the common resources because no one is in charge of it's usage and defines who can use how much. For example clean water or other natural resources. **[Merit goods]** Consumers may have imperfect information of the benefits of a good, so the goods are used below their potential and are thus undervalued. Often they are under-consumed if the market provides them. The problem is that the consumers are not informed well enough. Merit have two main key benefits: - Private benefits of education include career prospects. - It is hard to calculate the benefits of private education. - Social benefits include better stock of human capital - Individuals don't take account of social benefits when making decisions about their education, so left to the private market education would be under consumed. Other goods are for example Healthcare, insurance and pensions. De-merit goods are goods overused if they are left to the free market, like alcohol. Alcohol has a private and social cost. -\> bad health and antisocial behaviour. That's why the government takes taxes for alcohol. **[Market Failure]**  **[Externalities and the Market Inefficiency]**  - Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. **[Negative externalities]** For example the aluminium market: It is good for the society because it generates new producers and buyer and generates economic growth, but it also create a lot of pollution (negative externality). The cost of aluminium production is larger to the society than to the producer it self because of the pollution, which is bad for the environment and the human population. So the total cost is the private cost (the costs of the producer) and the society cost (the bystanders like the environment).  The difference between the optimum and equilibrium is the production which is produced and used in the market but is bad for the society. Here the government should impose taxes so the equilibrium reaches the optimum. **[Positive externalities]** For example education: More better-educated people lead to improved productivity and economic growth. The "production" of educated people leads to economic growth, which is the positive externality. The marginal social benefit is the private plus external benefit to the society. Here the government should subsidies education so the equilibrium reaches more the optimum. **[How to solve negative externalities and subsidy positive externalities.]** The government does not always have to intervene to do that. There are other private ways: - Social norms and moral behaviour - Charities and foundations - Self-interest (win-win-situations) - Social contracts **[Coase Theorem]** The Coase Theorem says that every negative externality can be solved without the government when the property rights are clearly allocated and bargaining has no costs. For example: If you're in a train and you are preparing yourself for an exam and need quietness and there is another traveller who listens to his music without any headphones, you ask him to either listen to the music with headphones or not to listen to it at all. In this case the music is a negative externality for you. But you can bargain and offer him CHF 10 for him to listen to his music with headphones so you can continue preparing yourself for the exam. Now, this is not really fair because you should not have to pay somebody so you can rightfully do what want, but the other guy listening to his music has a better position than you and can charge money to change his behaviour. But there are also other problems to it: - Transaction cost: If costs occur while you're bargaining. - Bargaining problem: If an agreement can't be met. - Difficulties to coordinate the interested parties. - Asymmetric information and irrational behaviour. **[Other solutions:]** - Regulations (certain behaviours are required or forbidden) - Pigovian taxes - Firms which can reduce their pollution to the point where they don't have to pay taxes anymore will try to do so. Other who cannot reduce pollution will (have to) pay the taxes. - But there will be firms which will trade their pollution permits to other firms who don't have this permits.   International Trade Part 1 **[Government Failure]** Government failure a situation where political power and incentives distort decision making so that decisions are made which conflict with economic efficiency.  **International Trade** All economies, regardless of their size, depend on other economies. Usually they benefit each other but they also can be negative. - When a buyer and a seller engage in a voluntary transaction, both can be made better off. - German consumers import oranges that they would have a hard time producing. - The producer of the oranges receives income that it can use to buy other things that it desires. - Adam Smith's invisible hand: *Nobody is forced to trade. You cannot be worse off if you have more options.* **[Production Possibilities Frontier]**  Imagine you have a factory and with the limited resources you have, you can only produce motorcycles and cars. Let's the vertical line is the *car line* and the horizontal *motorcycle line*. If you use all of your resources, you can produce 1 million cars or 3 million motorcycles. Let's say you want to produce both at the same time. You cannot produce both products at the same amounts at the same time. But you can produce 2 million motorcycles and 750,000 cars at the same time with the same amount of resources. At this point (A), the production is most efficient. It also means that you cannot produce one more unit of one of the products without produce less of the other product (frontier line). And if you only produce only 800,000 motorcycles and 300,000 cars, your production is inefficient (B). Let's say you produce 900,000 cars and motorcycles each (D). If you decide to produce 2 million motorcycles, you have to accept that you'll only be able to produce 650,000 at the same time with the resources you have. This decrease in car production is the opportunity cost.  The frontier line can shift outwards and inwards. It shifts outwards when there is a change in the quality of resources (instead of uneducated people working you hire highly educated people) or change of technology (instead of man power you can use robots). It can also shift outwards because of trade (you get the resources for smaller costs). It can shift inwards if the resources are reduced (no oil anymore for petrol production). If the resources are not use, the frontier line doesn't shift, you would rather see a point within the frontier line (when there is great unemployment -- there is man power, but it's not used) Depending on the change of quality or technology, one product may benefit more than the other, for example if you have better computers, you can produce more and better software. You can use better computers also to calculate how many potatoes you can sell if you have a certain price and cost, but the computers will benefit the software production more than the potato production. **[International Trade]** Let's say in the world there are only two products: potatoes and meat. And there are only two marketers: gardeners and farmers. Now, obviously the farmer is producing meat and the gardener is producing potatoes. Each marketer could try to produce the other product as well but they wouldn't do it as efficiently as the other.  So both should rather produce their own product and trade those products instead of trying to produce both products at the same time. -\> Self sufficiency  Both, the farmer and gardener, can do both but they are better of if they specialize and produce what they are best at and trade with each other.  Both benefit from trade. Gardener gets meat for his potatoes and the farmer gets potatoes for his meat. With trade, it allowed them to consume more and produce more. Every party has gained from the trade.  Both the gardener and the farmer are now able to consume more than their production possibility. With trade, they can consume more than they would if they didn't trade. **[The Principle of Comparative Advantage]** The producer, who needs less input to produce the same or better output, has an advantage to their competitors.  **[\ ]** **[Comparative advantage]** **International Trade Part 2** **[Winners and loser from trade]** International trade can make some individuals of a land worse off, even if it makes the nation as a whole better off. This gain from trade can be redistributed to the disadvantaged people to make everyone better off. Let's have an example of a imaginary country called Isoland, which is isolated from the rest of the world. In Isoland, olive oil is produced and it is only consumed within the country. Import and export of olive oil is forbidden.  Now, Isoland decides to enter international trade. Will Isoland become an exporter or importer of olive oil? If the domestic price of the olive oil is below the *world price* (the price of a good that prevails in the world), then Isoland has a comparative advantage. The demand for olive oil from Isoland his high, because it is cheaper than the global market price. -\> Isoland becomes an exporter. So the domestic producers are better off (because they can sell more), but the domestic buyers are worse off (because they have no cheaper alternative). If the domestic price is above the world price, then Isoland will import olive oil from other countries, because their own olive oil is too expensive. -\> Isoland becomes an importer. So the domestic producers are worse off (because they sell less) and the domestic buyers are better off (because they can buy olive oil much cheaper from other countries). **[When domestic price is below world price]**  **[When domestic price is above world price]**   **[Other benefits of trade]** - Increased variety of goods - Lower costs through economies of scale - Increased competition - Enhanced flow of ideas - Generates economic growth. **[Restrictions on trade]** There are tree form of trade restrictions: - Tariffs - Quotas - Non-tariff barriers Tariffs are taxes on goods produced internationally and consumed domestically. Tariffs increase the price of a good above the world price.    Tariffs reduce the quantity of imported goods and moves the domestic market closer to its equilibrium without trade. It also generates deadweight loss because the activity in the whole market decreases due to the tariffs. There are some arguments for tariffs: - Jobs argument (factories moving to china) - National Security argument (outsourcing supply chains and making us depending on foreign countries or foreign countries could sell goods which can be used to harm us as a nation) - Infant Industry argument - Unfair Competition argument (US trade war with China) - Protection as a Bargaining Chip (US trade war with China) **[Other trade theories]** **[Mercantilism:]** - Prosperity of a nation dependent on capital supply - Global volume of international trade unchangeable (in short term!) - Maximize exports (e.g. through subsidies) - Minimize imports (through tariffs and quotas) - This was supposed to raise domestic capital supply **[Factor Proportions Theory]** Heckscher's observation - If a country has a lot of steal, it exports many steal products - Factor endowments (resources) are important for export and import patterns Ohlin pushed it even further - Only the relative endowment matters - If two countries differ by their relative endowment of machines and labour, the country that has relatively more machines will export goods that use machine as input. The other country will export goods that mainly use labour as input **8.Technology** **Monetary Systems and Exchange Rates** **Bartering** The exchange of one good for another. For this a coincidence is required where both parties want the good of the other and are willing to exchange them, for example a car for a pig. This can be a problem. Due to this problem, money was invented because even if you guys don't want the other offered good, you can still exchange your good for money. **Money** has three function: - Medium of exchange - Unit of account - Store of value **Commodity money (Primitivgeld)** is a form of commodity with intrinsic value, like gold, silver or cigarettes. **Gold standard** Is a system in which the currency is based on the value of gold and where the currency can be converted to gold. Good during times of financial crises or war. **Fiat money** is used as money because of government decree. It does not have intrinsic value, for example coins, currency, current account deposits. These are things which is accepted by the government **Liquidity** The ease with which an asset can be converted into the economy's medium of exchange. Money is the most liquid asset available. Other assets are for example stocks or real estates When it comes to gathering wealth, it should be balanced between liquid assets and other mediums with less liquid value. **Central Bank** In a economy with fiat money like currency or coins, a central government agency is needed to oversee the banking system and regulate the quantity of such money in the economy. The central bank has three functions: 1. Macroeconomic stability in maintaining stable growth and prices. 2. Ensuring the maintenance of stability in the financial system. 3. Printing money and supplying them to commercial banks. It can also step in as the lender of the last resort, which means if two parties want to do a transaction, they can provide the money to both parties (usually two large banks) and ensure the transaction. **Money Supply** Is the quantity of money available in the economy. Monetary policy is the best action to affect the money supply. **Commercial Banks** They core business is to accept deposits and making loans. The difference between the interest you as debtor make pay the bank and the interest the bank pays its creditor is called **spread**, this is the profit of the bank. Their assets are include reserves of cash, securities and loans. Their liabilities are demand deposits, savings deposits (our money that we actually give the bank to save) and borrowing from other banks. Their assets must always equal their liabilities plus equity. The bank must keep reserves which are deposits that banks received but have not loaned out in order to cover possible withdrawal (for example when we take out our money from the bank). At the same time the bank lends money, the assets increase and the liabilities too as they lend out money that is originally from their customers and not their own. So their balance sheet keeps expanding. Central banks main tools 1. Open-market operations 2. Changing the refinancing rate and reserve requirements rate 3. Quantitative easing **Open-market operations** The money supplier of the banks is the central bank. If they get money by buying bonds from the central bank. The central bank can increase the money supply by buying bonds from the public. It also can reduce the money supply by selling bonds to the public. When the central bank buys government bonds or sells government bonds to the public, it conduct *open-market operations.* **Refinancing rates** This is the interest rate that the European Central Bank in Frankfurt (ECB) lends on a short-term basis to the euro area banking sector. At every night, when the bank is closing the day, the reserves have to be full and the assets have to equal the liabilities plus equity. If the bank doesn't have that balance, it can borrow over night from the ECB and pay it back the next day. Increasing the refinancing rate decreases the money supply, decreasing the money rate increases the money supply. All over the world, this rate is known by another rate: US calls it discount rate and the UK calls it the repo rate. **Quantitative Easing** The practice is when the central bank is directly lending money to companies. Now companies can sell their assets directly to the central bank, which buys them in the stock market. In this case the central bank avoids the commercial banks as middlemen an gives the money/loan directly to the company. This is especially good in times of financial crises. **Inflation and value of money** When there the quantity of a currency in the market rises, the value of the money decreases as the government is printing too much money and the prices are rising. In this case people have to pay more money for goods and services. This is measured by the consumer price index (CPI). If the average basket of this year has an index of 100 and next year it is 103, then there was an inflation rate of 3%. **Money Demand** The amount of how much money people want to hold depends on the prices of goods and services. For example if you go out tonight and you know that everything has the price of a few francs, you go out with a 10 francs bill. But if you know that everything costs 100 francs, then you go to the bank and ask for 100 francs so you can go out and enjoy yourself. So the demand rises and falls based on the prices.  **Quantity of Money** The quantity of money in the economy determines the prices and it's value. So if the central bank decides to increase the quantity of money in the economy, the prices will rise and the value of the money will decrease. Like in the example below: **Exchange rates** The most important international prices are the nominal exchange rate and the real exchange rate. **Nominal Exchange Rate** This is the rate you usually see at the airports. This is the rate at which a person can trade one currency of a country to another currency of the other country. And this rate can be shown in two ways. For example, if the exchange rate of Japanese yen and the euro is 80 yen for one euro, you can show this as following: One euro trades for 80 yen. One yen trades for 0.0125 euro (1/80). **Appreciation** Is the amount of foreign currency the domestics currency can buy. For example if one Swiss franc can buy one US dollar, then the rate is one-to-one. If now one Swiss franc can buy 2.30 US dollars, the Swiss franc appreciated. **Depreciation** Is the opposite of appreciation. **Real exchange rate** Is the rate at which a person can trade the goods and services of one country for the goods and services of another country with the same currency. So you compare the prices of domestic goods and foreign goods in the domestic economy. For example If a kilo of British sugar sells in the UK for £1 and a kilo of US sugar sells in the US for \$3 and the nominal exchange rate is \$2 per £1, then the price of British sugar in dollar is \$2. So the real exchange rate is 0.66 kilo of US sugar per 1 kilo of British sugar. To calculate the real exchange rate, you always need the nominal exchange rate. The real exchange rate determines of much a country exports or imports.  This real exchange has following impact on the British money value and import/export rate **Purchasing Power Parity Theory** In this theory the currency should be able to buy a good in every location for the same price and all goods should be able to be sold at the same price in all locations. As this theory is not possible in the real world, the exchange rates are the tools to move the world economy more to a PPP economy. **PPP implications** The nominal exchange rate between two currencies should also show the price level of the countries. As the nominal exchange rate depends on the price level, it must also depend on the money supply and demand of that country. If the central bank prints too much money and supplies this into the economy, the prices rises and the value of the currency declines. So it also loses value compared to the other countries because for example a bakery would need to buy more Swiss francs to buy the same amount of sugar he needs, which he could buy somewhere cheaper domestically or in another country.  If the US dollar is overvalued, the American tourists around the world will be happy because where ever they travel, everything will be cheap for them and they will be able to buy a lot of things. On the other hand, US factories will not be happy as their prices will be too expensive for the rest of the globe and their sales will thus decline. **Market Demand**  With more individuals, the more kinks and the more curved is the line **Market Sumply** The quantity you are willing to supply rises when the prices rise because you hope for more benefit.  **Market equilibrium** At the green point the amount you're willing to produce is the same amount the market is willing to buy. For example you are willing to produce two cups of coffee, if you get 4 Swiss francs for both cups. The customer in your shop exactly wants two cups of coffee and is willing to pay 4 Swiss francs. So you have two linear equations -- which you can solve mathematically! **[\ ]** Economic Systems and Governance =============================== **[Economic systems]** **Market economy**: Market (demand and supply) that controls or organizes the economy, without the government interfering. - Switzerland is not fully a market economy because there are some markets subsidised, strong laws and regulations and the WEKO (Wettbewerbskomission), which ensures a fair competition between market participants. - Switzerland also has welfare system, we have to pay for our health insurance and have to support the SRF for example. - Switzerland has a large public economy. **Command economy**: Institution or a person fixes the price, demand, supply and the market. Commonly seen in former communist countries like China, Poland, Soviet Union etc. Mixed economy and state capitalism won over the command economy because it is more endurable and flexible. **Mixed economy**: These are countries with a large public system and mandatory expenditures like health insurance, school fees. For example Switzerland. **State capitalism**: A system in which is private capitalism is modified by a varying degree of government ownership and control. The governments, whether democratic or autocratic, has a large influence in the economy. They control the marketing by providing and capital to the people they choose. Central planning (government closely working with business) and political motives (maximizing state power) are tools of such a economy. These governments are very autocratic and are emerging economies. This is now seen in China or Russia, and formerly in South Korea. **[State capitalism example: South Korea]** 50 year ago, after the war, it was one of the poorest countries and now its one of the richest countries with the 10^th^ largest economy in the world. The service sector has 60% of the economy. It also transitioned from sweat shops in the cities to more offices, parks and almost no factories. It is now known for many companies like Samsung, Hyundai and cultural exports like food, K-Pop and Korean soap operas. It has the most robots as workers and the best download speed with almost the whole country covered with internet connection. But the rise of economy was not democratic. Generals ruled the country, leading them to strong economy by investing in factories and fighting the poorness. Manufacturing is the best solution for a poor country as the domestic economy is poor, you have to focus on the export. But as skills and human s can't be exported due to the lack of the population, closed borders for cheap workers, the country has to focus on working domestically and sell it abroad. **Value chain**: - Productivity increases the 1^st^ sector - Workers shift from 1^st^ to 2^nd^ sector - Export-driven strategy (backed by the government with subsidies) - Shift from bottom up (from labour to capital-intensive, from low to high-tech) - Shift from labour force from the 2^nd^ to 3^rd^ sector. The former South Korean model of state capitalism (such as in Taiwan, Japan and now in China) picked and support the winners of the economic growth but also weeded out the losers. It was also highly corrupt because the government officials often chose their friends and supported them. But as soon as their friends didn't deliver the expected performance, the officials chose other "friends". Of course the government took a fair share of the revenue of the export sales and invested them in the infrastructure. But at the beginning the system was very improvised, there was no proper tax system and the government told the companies individually how much they had to pay the government for the revenue they accomplished. **[Political Systems]** Collectivsm vs individualism - Democracy - Citizens involved in political decisions - Representative democracy - Direct democracy - Principle of political participation, politicians are accountable, freedom (of expression, of gathering, etc) - Authoritarianism - One person or one political party has the sole political, economical and social power - Very efficient - Communist Authoritarianism - Theocratic Authoritarianism - Tribal Authoritarianism - Right-wing Authoritarianism - Military Authoritarianism - Totalitarianism - *Beyond* monopolization of power - Control of every aspect of social life and even private life. - Examples are like Nazi-Germany, Fascist Italy, Stalinist Soviet Russia. **[Governance]** How to measure the quality of governance VERY IMPORTANT  Governance main goal should be to ensure a good environment for economic growth and development. It should be sustainable and inclusive. It should fight against poverty, pollution, inequality, unemployment and the fight against global warming. **[Governance Example: Mexico]** - Voice and Accountability: Some local elections in Mexico were fraud and the local population like in Chiapas was demonstrating against the central government, even blockading the main roads if the region which connect the region with the rest of Mexico. - Government Effectiveness: The financial capital is misused by the government and there is no proper taxation in the country. Weak local and municipal government. - Rule of Law: The abduction and mass killing of the 43 male students is a perfect example. The local government often do not obey to the law and act in their own right. Or the escape of El Chapo Guzman. Even if the government gets criminals into prison, they are not able to keep them in and they escape, often due to corruption. - Corruption: As the population is poor and the government official don't get paid much, they are more willing to accept money from drug cartels. This happens from the little local police officer to the highest positions in the national government. **Excerpts from the post-lesson reading assignments** [The Economy: Unit 1 The capitalist revolution (core-econ.org)](https://www.core-econ.org/the-economy/book/text/01.html#110-varieties-of-capitalism-institutions-government-and-the-economy) Capitalism is the first economic system in human history in which membership of the elite often depends on a high level of economic performance. As a firm owner, if you fail, you are no longer part of the club. Nobody kicks you out, because that is not necessary: you simply go bankrupt. An important feature of the discipline of the market---produce good products profitably or fail---is that where it works well it is automatic, because having a friend in power is no guarantee that you could remain in business. The same discipline applies to firms and to individuals in firms: losers lose. Market competition provides a mechanism for weeding out those who underperform. For innovators to take the risk of introducing a new product or production process, their ownership of the resulting profits must be protected from theft by a well-functioning legal system. Governments also adjudicate disputes over ownership and enforce the property rights necessary for markets to work. As Adam Smith warned, by creating or allowing monopolies such as the East India Company, governments may also take the teeth out of competition. If a large firm is able to establish a monopoly by excluding all competitors, or a group of firms is able to collude to keep the price high, the incentives for innovation and the discipline of prospective failure will be dulled. The same is true in modern economies when some banks or other firms are considered to be too big to fail and instead are bailed out by governments when they might otherwise have failed. In addition to supporting the institutions of the capitalist economic system, the government provides essential goods and services such as physical infrastructure, education and national defence. In subsequent units we investigate why government policies in such areas as sustaining competition, taxing and subsidizing to protect the environment, influencing the distribution of income, the creation of wealth, and the level of employment and inflation may also make good economic sense. In a nutshell, capitalism can be a dynamic economic system when it combines: Private incentives for cost-reducing innovation: These are derived from market competition and secure private property. Firms led by those with proven ability to produce goods at low cost. Public policy supporting these conditions: Public policy also supplies essential goods and services that would not be provided by private firms. A stable society, biophysical environment and resource base: As in Figures 1.5 and 1.12. Legal Systems and Their Impact on International Business ======================================================== **[Globalization and Westernization]** Often "globalization" is a euphemism for "westernization". The say when we talk about "modern" civilization. The reason because of that is that the globalization is often defined and pushed by western countries like the US, UK and Germany. By declaring globalization and progress as western ideology, it is often implied that other countries in the east for example are less progressed. In the past, a question was asked why Christians and other Westerners were so successful to build huge empires and become more rich than the Asians like the Chinese, Ottomans and Indians. It was because they had rules, laws and institutions with a good reason. Following factors pushed that: 1. Competition (which didn't exist in Asia) 2. The scientific revolution (which gave enhanced weaponry, didn0t exist in the Ottoman Empire 3. Property rights (where in south America it is owned by very few people) 4. Modern Medicine (didn't exist in Africa) 5. Consumer society (where for example in India where Gandhi proposed to make poorness a normal thing) 6. Work ethic (The Asians are keeping up here, there now working more than Westerners The west was more advanced but Asian nations are achieving that more faster. Soon they will exceed us. The west may fall because complex empire operate in the edge of destruction. **Great divergence, and why it happened?** - Imperialism - Geography - National character /culture - Laws (made by reason) and Institutions Political Economy and Its Impact on Development: The Case of the MENA Region ============================================================================ Developement traps 1. Conflict trap: instability and wars for example 2. Natural resources: can be dangerous because if a nation relies to much on natural resources, it will fall in this trap sooner or later. For example Saudi Arabia where now has to start developing new industries to become independent as their oil resources will sooner or later be used completely 3. Landlocked with bad neighbours trap: An economic growth needs an export driven industry. If a country is landlocked is surrounded by bad neighbours who would let you to pass will have a bad effect on a country. Or if refugees from bad countries come to your country for safety. 4. Bad governance / corruption trap: Bad governance and corruption doesn't allow a nation to use it's complete potential for growth as with bad governance the population can be stopped from trading or corruption will consume a large amount of a countries wealth. People in China or Pakistan call the middle easter "south-west-asia". During or after the World War II the region's growth exploded and peaked during the 1970s (because of the oil crisis) and declined a bit in the 1990s (the second Gulf war) and is now rising again with a couple hiccups due to the Arabian revolution beginning in the 2010s. Saudi Arabia may seem stable from outside but from the inside it is pretty unstable with multiple demonstrations. This is also applicable to other Arabian countries. Almost all middle eastern oil is for export as they use less than they produce so they sell it to western countries such as in Europe. Nearly 49% of the global oil reserves are in the middle east. As the overall production and consumption amount in the western world is higher than in the middle east, the need for oil there is also higher. Algerian civil war started due to election of a Islamic party in Algeria, which the autocratic elite government didn't accept. Arab spring started with Mohammed Bouazizi, a vegetable seller at a local market. The police at the market controlling the paper of the sellers. The sellers without the license, like Bouazizi, was not allowed to sell his vegetables. From that day on he had to pay the police until it escalated on the Dec. 17^th^ 2010, where Bouazizi got into a confrontation with the police, he went to the police station and burned himself. This event was uploaded to social media and sparked the Arab Spring. There is currently the so called "Arab Spring 2.0" going on with youth demonstrations in Libya, Lebanon, Iran and Iraq since 2019.  Even tough normally in war crisis in the middle east the oil prices went up in the past, the become more stable in the recent years due to Saudi Arabia. By keeping the oil price low Saudi Arabia because they supplied more oil because. By keeping the oil prices low the also made it less expensive for other western powers like US to interfere in the war. Troops, tanks, jets and ships need oil as fuel and by keeping the price low and supplying more oil to those powers, they made it easier for the US to join the Kuwait war.  When a large part of the GDP is based on natural resource revenues, it can be dangerous for a countries economy as a small decline of the oil revenue can cause a national crisis.  A change to economic diversification is difficult because if a country has one industry that generates the most revenue, which motivates the most skilled and intelligent people to work in that industry and also foreign investors put their money only in this industry because they can expect more interest revenue. And also if a country puts the revenue gained from this industry to other domestic industries, it makes their currency stronger and thus more expensive for foreign countries to buy for example Arabian oil. A normal government is financed by it's citizens thus making them depending on them. But countries with secure cash flow through oil are less dependent on their people and their well-being. So they act more autocratic, without getting in a financial crises.  Because of their importance, countries with large natural resources are on the radar of many powerful nations. They may invade them to secure supply of those resources for a low price. For example Iran and DRC (Congo).  **IEBUS Formulas and other Stuff to learn by heart** **ABC Formula:** **Price elasticity:** **"Standard" Eliasticity Formula:** **Change in Quantity / Change in Price** E\>1 elastic E\ 1.20 CHF/EUR 1 CHF = 0.83 EUR -\> 0.83 EUR/CHF Ein Bild, das Text enthält. Automatisch generierte Beschreibung **Poverty** Relative Poverty in UK and Europe: less than 60% of the median income (cant afford the normal standing of living in this country) Absolute Poverty: Can't afford basic needs like food, shelter, clean water, education, health care  **Consumer and Producer Surplus**  Ein Bild, das Text enthält. Automatisch generierte Beschreibung Ein Bild, das Tisch enthält. Automatisch generierte Beschreibung Ein Bild, das Text enthält. Automatisch generierte Beschreibung  Ein Bild, das Text enthält. Automatisch generierte Beschreibung CS = Willingness to pay, Value -- Cost = (7000-4000) + (6000-4000) + (5000-4000) + (4000-4000) = 6000 PS= Revenue for Painting -- Cost of Painting = (4000-1000) + (4000-2000) + (4000-3000) + (4000-4000) = 6000 Total Surplus: CS +PS = 12000 **\ ** **Types of Goods:** Type of good Income Increase Income Decrease --------------- ----------------- ----------------- Normal Good Demand ↑ Demand↓ Inferior Good Demand ↓ Demand ↑ Public Good = non rivalry, non-excludable Common resources = rivalry, non-excludable Club Good / natural Monopoly = non-rivalry, excludable Privat Good = rivalry, excludable Merit Good= good for the society (demand normally smaller than Optimum, e.g. health insurance, government subventions it) De-Merit Good= bad for the society (demand normally bigger than Optimum, e.g. smoking, government tries to prevent that behavior with pigovian tax or (tradeable pollution permits) **GDP** Main **GOALS** for an economy:  - **GDP is the market value of all final goods and services produced within a country in a given period of time.** Ein Bild, das Tisch enthält. Automatisch generierte Beschreibung Take the prices of the base year for the Real GDP! Ein Bild, das Text enthält. Automatisch generierte Beschreibung **Production Factors** - Labor - Human Capital - Technological Knowledge - Capital - Natural Resources Capital has an diminishing effect on the growth of the GDP: when you have small capital an increase in capital gives you a big growth in GDP, but if you have already a large capital an increase in capital only increases your GDP slightly! Technological knowledge is the only production factor who doesn't fade out (E.g. Human Capital -\> people die) **Flächenberechnungen** Ein Bild, das Text enthält. Automatisch generierte Beschreibung Ein Bild, das Text enthält. Automatisch generierte Beschreibung **Trade Theories**