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					        Lecture No. 1:
BASIC CONCEPTS AND GLOBAL
         ECONOMY

1. BASIC INFORMATION REGARDING
            THE COURSE
    2. WHY STUDY ECONOMICS?
        3. BASIC CONCEPTS
   4. MODELS FOR DEVELOPMENT
       5. WORLD PROBLEMS
1. COURSE: AIMS, COURSE SYLLABUS,
 TEACHING METHODS, EXAMINATION

Teaching staff: prof. dr. Bogomir Kovač, as. prof.
Aleksandar Kešeljević
Consulation hours: Tuesday 12.30 (P302)
Exercise, lectures, debate competition
Final exam: (1) categories (2) economic policy
(3) questions (4) economic problem (5) an essey
Final grade: 80 % final exam, 10% midterm
exam (April the 6th), 10% debate
Samuelson, P., Nordhaus, W.: Economics.
McGraw Hill: 2010. 2. Report and publications of
different Slovenian institutions 3. Other
(Economist, BusinessWeek, FT,....)
2. WHY STUDY ECONOMICS?

Personal choice
Economics and problem of choice
Economics and efficiency
Economics and problem of scarcity
    3. BASIC CONCEPTS

Three economic problems → what,
how much, how, (and for whom)
Microeconomics/macroeconomics →
BEP in both cases the same
Production possibility frontier (P1)
Cirlular flow (households, producers,
state, abroad, intermediaries…) (P2)
P1: Production possibility frontier
P2: Circular flow
       Ten principles of economics
EVERYTHING HAS A COST.       There is no free lunch, but a trade-
off.
COST IS WHAT YOU GIVE UP TO GET SOMETHING. Oportunity
cost is cost of trade-off.
ONE MORE. Rational people make decision on the basis of the
cost for one unit.
NETWORK. People respond to incentives by working together.
OPEN FOR TRADE. Trade can make all parties better off.
MARKETS ROCK. Markets are the best way to allocate resources.
INTERVENTION IN FREE MARKET IS NEEDED. But, be carefull!
CONCENTRATE ON PRODUCTIVITY AND COMPETITION. A
country’s standard of living depends and growth depends on it.
SLOSHING IN MONEY LEADS TO HIGHER PRICES. Inflation is a
big market devil.
4. MODELS FOR DEVELOPMENT

Free market economy
Centraly planned economies
Modern mixed economy

Dilemmas: state/market,
industrialization/agriculture,
inward/outward orientation
      Market economy

Two key features (market, private
property)
Markets and circular flow (P3)
Markets (final products, production
factors, financial markets) (P3)
Market as junction of supply and
demand (P3)
  P3: How markets solve the
three economic problems? (P3)
INVISIBLE HAND OF THE MARKET

 Market   and   competition
 Market   and   informations
 Market   and   knowledge transfer
 Market   and   learning processes
 Market   and   alocative efficiency
 Market   and   distribution
 Market   and   selectivity
Laissez faire laissez passer
Different economic systems of
capitalism (taxonomies)
Market failures (P4)
P4: Market failures
Centraly planned economy
Central plan, state property
Still existing today? Where?
Government failures: Central plan and
BEP → economic inefficiency
Difference ExYU, SU?
Socialism: Road to serfdom or road to
equality?
Government failures versus market
failures (modern mixed economy)
Dilemma: market and/or the state
   5. WORLD PROBLEMS


5.1.   Population
5.2.   Inequality
5.3.   Growth and unemployment
5.4.   Crisis
             5.1. Population

Population (1950-2,5 bil, 2005–6.4 bil, 2050-9 bil) = +40%

Urban population (2005 - 65%, 2050 – 95%)

2004-2050: USA (305->392) Europe (729->632) Asia
(3680 –> 5222) Africa (796 – >1803) = developed -2% +
nondeveloped -129%

Countries in development : 2050 – 96% world population,
20% world GDP

1 billion people : 123 years (1804-1927), 12 years (1987 –
1999)

Developed countries 2050: 1/3 population over 60
             5.2. Inequality
among 6 billion people 2,8 billion people live with
less than 2$/day

average income of 20 the most developed
countries is 37 times bigger than income of 20
the most poor countires

hunger requires 25000 lifes per day, every 5
second dies a child

un millienium goals: ↓ hunger (160 mrd $)

subsidy in agriculture sector
    5.3. Economic growth and
          unemployment

         2009     2010    2011
EM       -3,9      0,4    1,6
EMU      -4,2      0,2    1,6
USA      -2,8      2,2     2,0
Slovenia -7,9      0,9     2,5

Time lag → unemployment
Crisis (origin, solutions,…) →
          5.4. CRISIS

Situation before the crisis
Origins
Consequences
Solutions and costs
Dilemmas
Implications for capitalism
Geopolitical implication
               INTRODUCTION
Crisis is like pretty woman: hard to define but recognizable
when encountered (R. Goldsmith)

Dimension: Financial, economic, social, moral, ecological.

Dimension: Local, national, regional, global.

Dimension:Cyclical/structural → the rapidity with which the
growth is slowing seems to indicate that crisis is not the
usual cycle

The longer the crisis the bigger the change will be.

Every family is happy in the same way, but unhappy in its
own (Tolstoj)
  SITUATION BEFORE THE CRISIS
Globalization, transition and reforms
Liberalization of financial markets and capital flow
USA: the main provider of dollars currency reserves,
international medium of exchange
International trade: American subsidies to farmers ($350 billions
annually), problem of juan, standards etc.
Large current accounts deficit (USA)
USA: fiscal deficit (13% GDP; war, crisis)
Large current account surpluses (Asian countries, OPEC)
Asian financial crisis forced many Asian countries to accumulate
dollars, Euros, yen and pounds in record amounts. China alone 2
trillion, Japan 1 trillion and Russia more than 500 billion.
Asian countries the biggest holders of US Treasury securities →
accumulation of dollar through foreign savings
Asian countries: export oriented, state guidance, focus on real
economy, education, high savings rate and high foreign reserves
USA is exporting treasury bills and not modern technology →
demand for dollars exceeds demand for american goods (result:
current account deficit)
                 ORIGINS
Internal/external
Easy monetary policy
Liberalization of financial markets and innovative
financial instruments
Housing and stock market bubble and its
financing
Bad corporate governance
Financial institution have losses from subprime
mortgage debt. The originator of mortgages
passed them on to the provider of funds who then
securitized them and sold the collateral debt
obligation to investors around the world
International trade as a reason for crisis
Economic comunity → no prediction of crisis
             CONSEQUENCES
2007: China, Japan, Germany, Russia are not prepared to
buy bonds FNM (Fannie) in FRE (Freddie), GB resqued
Northern Rock Bank (107 billion), USA rescued Bear Stearns.
2008 collapse: IndyMacBank, FNM, FRE, Bank of America
bought Merrill Leanch, AIG received help FED
14.9. one of the biggest bankrupty in USA history (LB)
EU: Barclay take over Lehman bank, German problems with
Hypo Real Estate, Belgium (Fortis)
Confidence dropped, credit flows frozen
Decreasing prices on the housing and stock market (bad
loans)
Liquidity problems (guarantees, government bonds)
Sharp contraction of credit and global capital outflows mainly
influenced emerging market. Raising demand for foreign
currency → interest rates rose (Icelandic krona, Hungarian
forint)
Brazil, India, Russia drew down their reserves by more than
80 billion dollars to protect their currencies
    SOLUTIONS AND COSTS
Screenplay for the movie Apokalipsa 2008
Restoring the confidence and trust among
population and banks (government guarantees of
bank deposits, recapitalization of banks)
Coordinated action of CB (↓ interest rates;
liquidity trap)
Fiscal policy stimulus
Fiscal measures: government debt guarantees,
injection of capital, purchases of assets, take-
overs by the government (state ownership),
other for EU, USA, Canada, Switzerland, Australia
Funding from IMF, WB
Fiscal deficits: GB (-14% GDP), Ireland (-12,2%),
Špain (-12%), France (-8%), Grece (-7%) -
>6,9% (EU)
EMU: public debt 84% GDP (2011 – 91% GDP)
Rules of the game 2013: 3% GDP
deficit, 60% GDP public debt
Not every country in the same
position (crisis on crisis, free rider)
In EU not enough manoeuvring
space for economic policy, EU is not
a federal state as USA, EU27 more
modest (3% GDP) than USA (dispute
in London, different ES)
Coordination on the global level (G7,
G8, G20, Breton Woods II
               Dilemmas
Dilemma 1: to much from taxpayers
viewpoint and to little to solve the problem

Dilemma 2: moral solution and deep
recession or vice versa

Dilemma 3: relying on others

Dilemma 4: market and/or the state (Polany)

Dilema 5: clasical socialist instruments
(Žižek)
  Implications for the Capitalism?
Is capitalism dead, Laisser capitalism is over
(Sarkozy), Unsustainable system (Wen Jiabao)
Enormous creation of well being until today by
capitalism (1980-2008 world GDP grew 145%,
3,4% annually)
Socialism is not alternative! (not hamper the
markets, not all regulation will be wise, political
instead of business judgments)
Capitalism will not be the same afterwards →
today market the only game and enemy in town
Regulation: Institutional reforms, corporate
responsibility, business ethics, corporate
governance, living within the personal limits
WALL STREET-MAIN STREET
      Geopolitical implications
West is today even more disliked by the rest,
however we have knowledge to manage the
sophisticated system
USA in decline, prestige has been damaged,
however the new president has certainly helped
External (current account deficit; 6% GDP) and
internal imbalance (fiscal deficit; 13% GDP)
Many countries have non-dollar foreign reserves,
China has gone from 100% in dollars to 75%
reserves in dollars
If Chinese will go out, dollar will depreciate, it will
mean that interest rates on dollar will have to go
up, Chinese which have dollar assets will loose
Russia and China sugest new currency instead of
$ (SDR)
New players like China, India, Russia, Brazil,…. (G-20
instead of G-7, G-8 meetings, global governance, new
world currency, relations China-USA). New economic
geography → with today growth rate China, USA, India,
Russia, Brasil (Top 5 in 2050). Reversing to south and
east where it came two centuries ago.

G20 summits (common approach for global governance,
strengthening international regulatory standards and
coordination, developing capacity to address financial
crisis, IMF help, reforms that promote anti-powerty and
avoid climate change, global imballances)

Danger of increased protectionism

Mutual interests and interconnection → economic
globalization needs regulation on the global level
(supranational regulation body, Bretton Woods II)
Expectations in 2011, 2012…..-
  Investments in GDP (in %)
Business expectations
Annualised world trade growth,
         in per cent
           Better days


It is not as bad, as it sounds… (M.
Twain)

				
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posted:9/22/2012
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