Chapter 5
Economic Policy
Economy, People & Government
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1.
2.
People’s concerns:
Prosperity & Economic Growth (how well is
economy doing)
Distribution of Economic benefits (how wealth
spread)
Economy & the State
 For everything the state wants to accomplish
(education, defense, etc), it must have a strong
economy
 Political economy: How the state and economy
interact
Economic Growth
 Economic growth: Single thing by
which governments are most
judged
 Varies greatly from state to state
Economic growth decisions require
agility
Economic Growth: Rents




Often governments will leave economy to free
markets
Often people in government use rents
Rents: transfer of money that do not relate to
production (different than apt. rent)
Example: Tax money to build a road
Economic Growth:
Import-Substitution Industrialization
 1950s-1970s, many less affluent states used importsubstitution industrialization
 That is, to transform economies into advanced
industrial economies, states encouraged
establishment of factories
 Set high tariffs (taxes) to discuss imports
 Often failed—factory owners took advantage with
extremely high prices
Economic Performance:
Inflation


1.
2.
3.
Inflation: a time in which most prices are rising at the
same time & the value of the dollar is thereby declining
too
Can be caused/influenced by:
Deficit spending
Shortage of goods
Monopolies
Economic Performance:
Unemployment
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

Unemployment: Not enough jobs are available to those
who want them
Hurts morale and is inefficient
Key to government control is to maintain a balance
Distribution & Equality within Economy

1.
2.
If government wants to create greater equality:
Create special subsidies and programs for poor
Create system of progressive taxation (greater
taxes for wealthier)
Central Banks
 Central bank: a bank set up by a government to help
handle its transactions; to coordinate policies of other
banks and to control interest rates
 Every modern state has one
 Example: Federal Reserve Bank in United States
Influences on Economy
 Degree of corruption in a government can directly
influence the success of an economy (Example:
Saddam Hussein took money for his family from Iraq)
 Globalization of business has meant businesses can
exist in many different countries which can directly
influence policy
Political Economy
 Subfield of political science that focuses solely on
study on relationship between politics and economy
 Rational Choice Model