The above mentioned analytical tools for economic thinking
Market diagram
production possibility curve
national accounting
governmental sector accounting
consumer surplus, producer surplus, welfare gain
PPC represents alternative bundles of efficient output;
“An increase of output may result from employing un-utilized existing resources (i.e. less unemployment) or from introducing additional new resources (i.e. economic growth)".
Saving as a "difference" (not „reduction"!), as ex post identity, as positive net exports.
public saving; budget deficit; primary balance/surplus/deficit.
Meaning, difference and example for a flow and a stock figure
Economic transactions which differ acording to the measure of time;
Flow figure: Measures a specific quantity over a period of time.
Example for a flow figure: „income"
Stock figure: Measures a specific quantity at a specific point in time.
Example for a stock figure: „wealth";
Guidelines of political decision-making
2 strategies “piece-meal engineering" or "grand design";
2 philosophies: to determine the framework for or to interfere in private decisions (German „social market economy" or French „planification").
Analytical questions of analysis
Descriptive (what is ?), normative (how should..?), positive (why is ..?).
specify “balance" and „equilibrium" and the time perspective
ex post: identity; ex ante: match of the plans.
Five steps of economic policy analysis
status, objectives, analysis, measures, evaluation
SOAME
Two well- known “Truths” resulting from economic thinking
“There is no free lunch” (opportunity costs are never equal to zero)
“The whole is greater than the sum of the parts” (implicitly: “fallacy of compensation”)
There have been five attempts to install democracy in Germany; three have been successful.
Which are they?
March 1848 - failed;
November 9, 1918 - successful, but weak;
May 1949 - successful in West-Germany;
June 17, 1953 - failed in East-Germany;
November 9, 1989 - successful in East-Germany.
Enumerate at least three effects which promoted the reconstruction of West-Germany after World War Il
Currency reform, decontrol of prices, support of the USA, Korean War, wage bargaining based on consensus.
Enumerate at least three specific information which can be measured by the circular flow of an economy!
Donator of gross value added, distribution of net national income; disposition of disposal income, use of GDP (demand for goods).
Explain at least five features of the „Social Market Economy”
capitalistic free market economy with social policy, close to Ordoliberalism, competition policy, Institutional and Process policy, compulsory social insurance system
why has Inflation caused a trauma of the German people. Describe shortly!
hyperinflation of 1923: France and Belgium took the German industrial center, Reparation payments-money supply increased and continued wages to support economy; 1kg bread=150bn Reichsmark
Currency reform of 1948: price and wage controls since 1936, RM declared as invalid, introduction of DM
Explain the different requirements of the „Golden Rule" of 1969 and of the „Debt Brake" of 2009!
The „Golden Rule” limits the public deficit finance to the amount of public investment expenditures thus avoiding a negativ public saving;
In contrast: Since 2009 “Debt-break”
= beginning in 2015: for the federal government a deficit finance by no more than 0.35 % of GDP (;
= after 2019: for each single federated state (not municipalities!) no permit for any deficit finance.
Why is the Postwar European integration a historically exceptional feature?
The postwar European intervention was exceptional because for the first time in history nations banded together in a group in order to deal with issues like war, famine, and other problems that plague nations internationally.
political reasons of West Germany to promote European integration
Political reason:
World War I
Western Integration -> the First democratic election
cold war -> Western Allies were interested in a political and social stability
Western way of life: West german Society was fed up with german nationalism and national Pride
economic reasons of France and West-Germany to promote European integration
france was interested in gaining a permanent influence on the german coal and steel industry
West-Germany was interested in returning to the word Community and market as a Producer of industrial goods
explain the meaning of „deepening" and „widening"
Deeping is the process of Vertical Integration meaning to strenghten the institutional links between the member states
Widening is the process of horizontal Integration, meaning the enlargement by new member states
are there analytical arguments for the German economy to have a net export situation?
Geographical location in the center of the EU promotes foreign trade.
Demographic trend towards an older population requires increased private savings.
Germany's net export of goods is linked with financing the net export of capital.
Preference for saving domestically and investing abroad.
enumerate four (of 6) forms of economic integration with both the explanation and an example:
1. Free Trade area
-> free intra schema Trade, each member keeps its own external tariff Example:
(EFTA)
2.Economic Union
- Integration plus a Single policy example: (EU)
3. Political Union
->Integration plus one Single government (merge of East and West / East and West germany forming one State and Nation)
4.Common Market
- integration plus free factor mobility (Single Market of the EU)
EU: no „state", no „nation", but a „peculiar union" - verify the identifying three features:
state: constitutional and political status; three criteria: territory, people, authority are not met;
nation: single culture, birth, language is not applicable;
peculiar union: ceded national sovereignty is compensated by the EU with single market, fiscal federalism, supranational decision-making.
the four freedoms of the European single market and their meaning:
free movement of products: no national barriers tariffs, quantitative restrictions;
free movement of people: move and reside wherever, no discrimination;
free movement of services: supply and business anywhere;
free movement of financial capital: no segmentation of markets to hinder capital flows.
the subsidiarity principle of European fiscal federalism:
to assign a public task start with the lowest level;
= to assign a public task: start with the lowest level;
= assign a public task to that level that can best deal with it.
=the way it is performed may contribute to the democratic design.
identify the sovereign of the EU:
the member states, not the people are the masters of the Lisbon Treaty.
Four basic mechanisms of decicion-making
prices
bargaining (at labor markets)
command (within bureaucratic administrations)
voting
enumerate and define five majority rules of voting
relativ majority rule, most votes
simple majority rule, more than 50% of attendant
absolute majority rule, more than 50% of eligible
qualified majority rule, majority of prescribed (vorgeschriebene) number of eligible voters
unanimity rule, approval of all eligible voters
two methods of supranational decicion making in the EU
intergovernmental method, represent the (national) member state
community method, represent the union as a whole
enumerate the five governmental institutions of the EU and specify the constitutional role and the method of supranational decision making of each
The Council of the EU
constitutional role (representation of the national member states)
European Council
decision by consensus (not by voting), if not possible: qualified majority rule or unanimity rule
The European Parlament
simple majority rule
The European Commision
The Court of Justice of the European Union
two deficits of democratic requirements of the European Parliament
dregressive proportionality: "The ratio of seats to votes decreases for larger subdivisions."
no “right of initiative” to introduce a law
the measure for “efficiency” of a (public) good
Is efficient if willingness to pay is not less than the cost of production
Willingness ist größer/gleich cost of production
The measure for “effieciency” and the measure for “Pareto improvement” of voting rule
efficiency:
does not reject efficient goods nor accept inefficient goods
pareto criterion:
“improving", if outcome improves utility of at least one, not even worsening the deciding person
four objectives of governmental functions
to improve the allocation of markets
to influence the distribution of income and goods
to influence the stability
->leads to no deficit of the balance of payments of current account, more economic growth
Three measures of governmental activities
by markets
by legislation
by the budget
the conclusions on the EU revenue items
EU has minorfiscal sovereignty
EU revenues as %-share of EU GDP
the budgetary impact of the CAP
CAP = Common Agricultural Policy
Budgetary impact of the change from a net importing to a net exporting area of agricultural products->harming less developed countries
in case of net imports: EU revenues are increasing
in case of net exports: EU expenditures are increasing
the meaning of the net payer position of a member state
The net payer position of a member state refers to the situation where the country contributes more to the EU budget than it receives back in funding and subsidies.
the reason and the special feature of the Reconstruction Fund “NextGenerationEU”
In the course of Covid a new long-term EU budget as an emergancy temporary recovery instrument was installed.
Goal: repair economic and social damage.
Special feature: 750 billion EUR (2018) for reconstruction, climate change, asylum and migration, medical care, digital actions, and public security
two normative philosophies in regard to the sequence of European monetary and political integration
economists position (coronation theory)
favored by germany netherlands and italy: the establishment of a political union at first before a monetary union will crown the integration
monetarists position (foundation theory/locomotive theory)
favored by france and belgium: the establishment of a monetary union at first which then will give rise to a political union
three reasons because of which Germany gave up the reluctance (Abneigung) against EMU
through german reunification france was in force to urge germany to accept european influence on the german monetary policy
German export industry (easier trade within EMU)
German interests were also respected by the EUM which were: independent ECB, ECB located in FFM, public debt needs to be limited by StGP
the meaning of the spread of interest rates for the emu
its a market mechanism
it pictures the markets evaluation of the fiscal discipline of a government
in case of a spread the member state will be forced to improve its budgetary discipline
hence you dont need a united fiscal policy due the EMU
definition of the two fiscal sustainability rules of the SGP
Sustainability and Growth Pact
public deficit ratio = governmental budget-deficit/GDP
public debt ratio = governmental debt / GDP
economic and political advantages of a european monetary union
economic:
common unit of account
no costs of exhange/rate flucatations
common medium of exchange
lower transaction costs between goods; capital
a common store of value
spreading risk by diversification
political:
identifying symbol as one EU (deeper integration)
enumarate the regulations, necessary for any monetary union
control the banks
support the banks
lender of the last resort
determine the money supply for the economy
government cant lend money from ECB directly
why should a monetary authority not act as the “bank of government”
to secure independent decision making
fix the interest rate not as monetary target by itself, but as a mean to reach economic targets
why was it permitted for the ecb to buy government bonds
The ECB was permitted to buy government bonds to support the eurozone's monetary policy, stabilize financial markets, and promote economic recovery during times of crisis.
what is the glut of money
the result of the ECBs monthly purchases
explain the asymmetric effectivness of the instruments of economic policies
Monetary: powerful to curb economic boom, but not stimulating
Fiscal: able to boost due depression, but political reluctant
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