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6. Markets are usually a good way to organize economic activity

5. Trade can make everyone better off

7.Governments can sometimes improve market outcomes

  • stock and bond markets are organized.However in China, insiders' profits are transferred leaving growth at risk.
  • The airplane example: this is an entire market. Depending on where the money is put (what country) a country could go through an employment increase/decrease. These economic factors drive those involved with the market into different standpoints.
  • Policy shopping sprees divert resources from markets.
  • ex: like airplane example, money is being spent elsewhere.
  • Trade changes and deficits effect other economies in the opposite way.
  • Trade intervention changes what each country can specialize in by replacing the need for trade. This could help domestically, but not abroad.
  • American's have benefited from China's production and trade. Prices are generally cheaper. (used in book to say how global economy was affected)
  • savings rates reflect imbalances globally
  • Imbalances are especially seen in Europe with the euro

4. People respond to incentives

  • policies are what mainly affect the global economy.
  • trade intervention forces the savings rate up by "transferring income consumers to the tradable goods sector" (pg.8). This encourages investment.
  • sets tariffs
  • sometimes policies are unintentional
  • ex. environmental policies: not having to dump chemicals into water costs more for proper disposal. Pollution can also cause economic shifts due to health care.
  • financial repression= markets under control of political authorities
  • trade intervention=higher costs, "increases domestic employment by appropriating foreign demand." This will naturally raise the savings rate. More employment responding to more jobs. Savings responding to more employment.
  • When a currency is devalued, capital and goods are either worth more or less, causing a change in economic habits.
  • In China, the household income was taxed in order to generate growth. This caused workers to move to more developed areas, so income could grow.
  • When capital stock is low an increase will raise worker productivity.
  • Worker productivity and wages are much lower in China then in more economically developed countries.

8. A country's standard of living depends on its ability to produce goods and services

  • growth in wages should match growth in productivity
  • In China, when there's heavy migration to industrial centers, wages don't catch up to productivity. (China is considered a poor country, there is a correlation with this gap).
  • Although goods and services are being produced, wages are not rising with production in China.

3. Rational people think at the margin

  • Chinese households actually consume more when interest rates rise. By keeping in mind this pattern, causing interest rates to rise could benefit if consumption rates rise.
  • Brazil's "economic miracle"- used high income taxes to confiscate household wealth and use proceeds not to improve social benefits but to subsidize growth.

10 Principles of Economics

9. Prices rise when the government prints too much money

Audrey Trebelhorn

period 6

2.The cost of something is what you give up to get it

  • "helps borrowers and hurts lenders", this transfers money to the government or corporations (the borrowers)
  • too much money is being spent of what governments don't have.
  • in some ways will help the global economy depending on the opposite impact elsewhere
  • ex. In China, lower deposit rates allow for more income savings, but consumption is reduced. This is a form of trade intervention. Obvious cost: more savings and less consumption; implicit cost: trade intervention. This policy in China will have a global affect.
  • China revalued the remnibi (to rise). This caused interest rates and credit to lower.
  • the undervalued exchange mechanism is used to increase the gap between what a country produces and what it consumes.

10. Society Faces a short-run tradeoff between inflation and unemployment

1. People Face Tradeoffs

The Great Rebalancing

Michael Pettis

  • by reducing household wealth, inflation forces down consumption
  • inflation (less of it) that lowers savings rates (mostly in countries like Germany and China with high savings rates) comes with unemployment
  • if inflation cause a rise in unemployment, productivity will drop which results in a lower savings rate which worsens global trade balances.
  • if a country tries to change its gap between domestic savings and investments, trade is affected (gives up global stability for domestic)
  • ex. if Japan forces up its total savings, the investment rates rise in other economies
  • ex. changes in currency value affect trade balance by shifting incomes from one group to another
  • China is unbalanced because of reliance on exports and investments for growth. Growth is positive except consumption hasn't been stressed, which will cause great stability.
  • In China, employers were subsidized at the expense of workers, however it boosted business competition.
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