Apex Investment Services "Why The Markets Reflect The Economy Part Two"

Apex Investment Services "Why The Markets Reflect The Economy Part Two"

Why The Markets Reflect The Economy Part Two

As we continue our in depth looks into the Ten Principles of Economics, we recall in Part 1 of the series that the first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. In Part 2 of the series we will discuss the next three principles which examine with how people interact with one another.

Principle 5: Trade Can Make Everyone Better Off

It is easy to be misled when thinking about competition among countries. Trade between the United States and Japan is not like a sports contest in which one side wins and the other side loses. In fact, the opposite is true: Trade between two countries can make each country better off.

By trading with others, people can buy a greater variety of goods and services at lower cost.

Countries benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our competitors.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

At first glance, the success of market economies is puzzling. After all, in a market economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity in a way that promotes overall economic well-being.

Principle 7: Governments Can Sometimes Improve Market Outcomes

If the invisible hand of the market is so great, why do we need government?

One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a healthy economy. Most important, markets work only if property rights are enforced. A farmer won't grow food if he expects his crop to be stolen; a restaurant won't serve meals unless it is assured that customers will pay before they leave; and a music company won't produce CDs if too many potential customers avoid paying by making illegal copies. We all rely on government provided police and courts to enforce our rights over the things we produce - and the invisible hand counts on our ability to enforce our rights.

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