Freak!-onomics

            Economics is the study of how people strive and work to meet their basic wants and needs. In order to get to this, people rely on a field called the economy which influences much of their position in society. Yet, the economy is not just what people see on TV or hear in the news. There is much more to it when the doors of the media close, and it remains silent. Freaknomics is the study of all the economic secrets.

            This book reveals all of the history and background that has led to some economic aspets of society now a days. It also reveals some secrets of professions such as drugdealing or cheating school teachers. Education is one of the most important bases of an efficient economy, yet corruption lives all throughout it. Freakonomics not only talks about the economy itself, but also speaks of certain social aspects and traditions that still create a division between social classes and races. For example, there is still an established naming system for girls and boys in America where social class, wealth, and race define the name you are getting when born. However, many of the author's justifications are based on opinions, assumptions, stereotypes, and unknown studies. This can be seen when the author speaks of crime rates decreasing  drastically in America not for new crime control but for the legalization of abortion. He claims all new bastard babies given for adoption are future criminals and abortion has inhibited their criminal development. Freakonomics is a very interesting book with fascination points, yet one's own judgment is essential to analyze what the author says and justifies.

Why Nations Trade

          Trading relationships between countries can benefit them whether they have abundant resources or few resources. The answer to this involves two related concepts: absolute and comparative advantage.

          A country has an absolute advantage over another when it can produce more of a given product using a given amount of resources. Suppose two people, Steve and Snookie, want to make some money and they decide to produce pies and pinatas. Steve can make 6 pies and 2 pinatas in one hour. Snookie, however, can only make 1 pie and 1 pinata in an hour. Thus, Steve has an absolute advantage over Snookie.

          When a nation has a lower opportunity cost in producing a certain good, it has a comparative advantage in producing that good. Comparative advantages consist in the ability to produce a product most efficiently given all the other products that could be produced. Steve can produce 6 pies and 2 pinatas in one hour, while Snookie can produce 1 pie and 1 pinata in an hour. The opportunity cost for Steve in producing each pie is 1/3 of a pinata. To produce 1 pinata, it costs 3 pies to Steve. Nevertheless, Snookie's opportunity cost for producing 1 pinata is 1 pie and viceversa. Thus, Snookie has a comparative advantage over Steve.

The law of comparative advantage states that a nation is bette off when it produces goods and services for which it has a comparative advantage. Each country can then use the money it earns selling those goods to buy other goods that it cannot produce as efficiently.

International Trade

           Whenever a good or service is produced in one country and sold in another, International trade takes place. If foreigners or tourists want to purchase a good or service in the country they are in, they must first exchange their currency into the local currency.

           The value of a foreign nation's currency in relation to your own currency is called the foreign exchange rate. Exchange rates are listed on the internet and in many major newspapers. These rates signify what 1 US dollar is worth on that particular day. However, rates change daily.

           To determine the rate of exchange, you need to divide the amount need to be paid in local currency over how much of the local currency is one unit of your own currency. For example, if you are in Mexico and need to pay a 500 pesos hotel room. 1 dollar is equal to 10 pesos. Therefore, you will divide 500/10pesos per dollar= $50.

          There are two types of exchange rates called fixed exchange rates and flexible exchange rates. Fixed exchange rates consist in a currency system in which governments try to keep the values of their currencies constant against one another. Flexible exchange rates consist in a currency system that allows the exchange rate to be determined by supply and demand.

Graph below shows the ups and downs the US dollar has had in exchange rate against Canadian dollars.

Monetary Policies (demand-side and supply-side)

            Monetary policies and fiscal policies both work hard to reach economic balance.  Monetary policies regulate the amount of money in circulation. The FED play the major role and the chairman nowadays is Ben Bernanke. The FED is in charge of printing money. They also regulate the reserve requirement, securities, and discount rates.

           
            However, fiscal policies have slightly different purposes. In fiscal policies, Congress plays the major role approving budgets and the president writes the budgets. All of the money for budgets is provided by taxes voted on by Congress

             
            To maintain economic balance, Congress has come up with two types of spending, discretionary and nondiscretionary. discretionary spending changes yearly by votes. Nondiscretionary spending is always the same and the laws always state the amounts, it only changes if the laws are new or change too.

Background

            There have been a number of policies in the past in order to maintain fiscal and monetary stability.  During the 1930s and the Great Depression, there was no economic activity and growth. There was too little spending. Demand-side policies consisted in cutting taxes for people for a certain amount of time. Yet, if there are no taxes, the government receives no income and there is maintenance for public services and social projects. This must be a short-term concept or else there is no growth. If it were to be long term, the dollar value would rise and lead to inflation. To fix the GD problem, Keneysian economics state to stimulate demand

            During the 1950s and 1960s, supply side policies for production came up. Supply side policies consist in cutting taxes on big corporations and rich people and allow them more money for spending, thus the economy grows. This is known as the "trickle-down" theory by Ronald Reagan.

            In 2000, the idea came up that fiscal policies are a problem for both sides of supply and demand and they are bipartisan. To work with this, theory states to cut corporate taxes to allow more production and subsidize corporations to create jobs. However, risks do exist with these theories. Some say it only benefits few groups of people mostly big corporations and very wealthy people. Very few corporations act on public interest. If corporations and government become too close, people lose control.

Economic Systems

       In order for societies to produce and distribute goods efficiently they have to follow certain methods or economic systems. The economic systems of different nations allow different levels of economic fulfillment. 


      However, economic limitations remain among people all over the world. All of these systems work under three key questions:

What goods and services should be produced?

How should these goals and services be produced?

Who consumes these goods and services?

There have been four main economic systems developed to answer these questions. Each system has a different set of goals and reflections towards the values of their societies.

Traditional economy bases its methods on habits and customs therefore leaving little room for progress and development. It is based on family practices, boys take on the roll of their fathers as do girls of their mothers and so the cycle continues and it all remains traditional.

Market economies consist of people making their own economic decisions based on trade and exchange. The decisions each individual makes determine what is produced and how and who will purchase the goods and services. Market economies can also be called free markets, or capitalism. Capitalism consists in a privately owned economy where people make their own economic decisions.

Command economies or centrally planned economies consist of the government making all economic decisions and setting all economic limitations. Command economies tend to exist frequently in communism. Communism consists of a command economy with all economic and political power in the hands of the government.

Mixed economies are the most modern type of economic systems. they consist in market-based economic systems and the government only plays a limited role. This type of system works better in socialism, a political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.