How does the economic system of capitalism work?

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How does the economic system of capitalism work?


This assignment is to confirm by us to our respectable teacher Munmun Sobnom Bipasha that we analyze many kind of sector of Economics and described it here and present a fully economical situation of a country. Also we could find some extra topics that can successful to provide us much economical knowledge. This is not a reference book; it’s just a note book that consists of some important topics. It provide to others only some knowledge based on some topics.

Objective: Economics is a positive science, not a normative science; that is, economics is descriptive, not prescriptive. Economics can tell us what the effect of a minimum wage law is on employment, but economics cannot tell us whether that effect is good or bad. Good and bad are concepts of evaluation. They presuppose a standard and ultimately a system of morality. Economics is not ethics. Nevertheless, economics is not cut off from ethics. Ayn Rand defined ethics as “a code of values to guide men’s choices and actions” (1964, 2), and some such code, explicit or implicit, underlies everything men do. This includes the work of economists in analyzing an economic system.

Ayn Rand’s ethics of rational self-interest is an ethics of egoism, the view that selfishness is a virtue and the individual should be the beneficiary of his own actions. Her ethics is my ethics. By contrast, for the last hundred years, economists have presupposed the opposite ethics as the base for both generating and evaluating theories: that ethics is altruism, the morality of selflessness and self-sacrifice—the morality of the Judeo-Christian tradition—the morality that dominates our age and that has dominated Western civilization for two thousand years.

The clash between altruism and capitalism is irremediable. Capitalism is the economic system of self-interest. Capitalism depends on self-interest, it encourages self-interest, and it sanctions self-interest. At every level and in every detail, the motivation of self-interest is the motivation of capitalism. Consequently, the altruists have loathed capitalism from its beginning in the Industrial Revolution. This loathing is the fundamental cause of “the sweeping market reforms that economists have long advocated” (Mandler 1999, 151).

The primary purpose of economics is to identify, interpret, and explain how a capitalist economy works. Altruism assured economists that capitalism is evil in advance of that knowledge. The evil consequences of this belief permeate all of economics, damning capitalism in both theory and practice. In theory, capitalism never had a chance. Since an evil system cannot work, capitalism was convicted a priori. As for capitalism’s practice, economists’ commitment to the immorality of capitalism blinded them to the facts. Every datum, every event, every phenomenon, every result, every aspect of capitalism was twisted and distorted out of any resemblance to reality in order to make it conform to the altruist agenda. Ayn Rand’s refutation of altruism makes it possible for the first time in history to present the theory and practice of capitalism objectively, untouched by moral distortion. This is the first study of economics to take advantage of that fact, and in the end, an objective perspective is the primary value I have to offer.

1. What is Economics?

Economics is the study of how people choose to use resources.

Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services. Important choices involve how much time to devote to work, to school, and to leisure, how many dollars to spend and how many to save, how to combine resources to produce goods and services, and how to vote and shape the level of taxes and the role of government.

2. How does the economic system of capitalism work?

Some people provide other people with money to set up a business. The people who provided the money are called shareholders. The people who took the money are called management. The money is called capital. The managers use the capital to hire workers, rent space, and purchase machinery and office furniture. Then they start selling their product. Their product might be cars, hamburgers, computer programming, plumbing repair services, or any number of things. If there is money left over after the bills are paid, that is called profits. The company pays income tax. Then the company takes what is left and declares a dividend and gives the profits back to the shareholders.

3. What is economics agent?

In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory.

For example, buyers and sellers are two common types of agents in partial equilibrium models of a single market. Macroeconomic models, especially dynamic stochastic general equilibrium models that are explicitly based on micro foundations, often distinguish households, firms, and governments or central banks as the main types of agents in the economy. Each of these agents may play multiple roles in the economy; households, for example, might act as consumers, as workers, and as voters in the model. Some macroeconomic models distinguish even more types of agents, such as workers and shoppers or commercial banks.

4. What is microeconomics?

Microeconomics, study of the economic behavior of individual consumers, firms, and industries and the distribution of total production and income among them. It considers individuals both as suppliers of labor and capital and as the ultimate consumers of the final product, and it analyzes firms both as suppliers of products and as consumers of labor and capital. Microeconomics seeks to analyze the market or other type of mechanism that establishes relative prices among goods and services and allocates society’s resources among their many alternative uses.

Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions “top down,” that is, using a simplified form of general-equilibrium theory. Such aggregates include national income and output, the unemployment rate, and price inflation and sub aggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy.

In order to proceed with this examination it is necessary to envisage the macroeconomics system or (social organization of the greater community or nation) in a form that can be easily understood and appreciated. This is done by means of a macroeconomics model, which is a general expression of the system that is useful for purposes of discussion. The model can take a number of different forms including block diagrams, algebraic equations, mechanical analogy, electronic analogy, Leontief Matrix, etc. A suitable model for use in representing the macroeconomic system is shown in the illustration for a closed macroeconomics system without including “The Rest of The World”. Money circulates around this model and goods, services, valuable legal documents etc. pass in return between the 6 entities or agents (also sometimes called sectors) that comprise the basic structure of the system. The system flows of money, goods etc., continuously try to self-adjust, in order to attain a condition of equilibrium. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.<href=”#cite_note-44″> This has addressed a long-standing concern about inconsistent developments of the same subject.

Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, <href=”#Economics” title=”Technological change”>technological change and labor force growth.

Fig: Micro Economics

5. What is heterodox economics?

The analysis and study of economic principles considered outside of mainstream or orthodox schools of economic thought. Schools of heterodox economics include socialism, Marxism, post-Keynesian and Austrian, and often combine the macroeconomic outlook found in Keynesian economics with approaches critical of neoclassical economics.

Investopedia Says:

Heterodox economics provides an alternative approach to mainstream economics that may help give explanation to economic phenomenon that don’t received widespread credence. In addition, heterodox economics seeks to embed social and historical factors into analysis, as well as evaluate the way in which the behavior of both individuals and societies alters the development of market equilibriums.

6. What is mainstream economics?

The analysis and study of economic principles considered outside of mainstream or orthodox schools of economic thought. Schools of heterodox economics include socialism, Marxism, post-Keynesian and Austrian, and often combine the macroeconomic outlook found in Keynesian economics with approaches critical of neoclassical economics.

Investopedia Says:

Heterodox economics provides an alternative approach to mainstream economics that may help give explanation to economic phenomenon that don’t received widespread credence. In addition, heterodox economics seeks to embed social and historical factors into analysis, as well as evaluate the way in which the behavior of both individuals and societies alters the development of market equilibriums.

7. What is Applied economics?

Applied economics is a term that refers to the application of economic theory and analysis. While not a field of economics, it is typically characterized by the application of economic theory and econometrics to address practical issues in a range of fields including labor economics, industrial organization, development economics, health economics, monetary economics, public economics and economic history. The process often involves a reduction in the level of abstraction of this core theory. There are a variety of approaches including not only empirical estimation using econometrics, input-output analysis or simulations but also case studies, historical analogy and so-called common sense or the “vernacular”. This range of approaches is indicative of what Roger Backhouse and Jeff Biddle argues is the ambiguous nature of the concept of applied economics. It is a concept with multiple meanings.

8. What is Business cycle in economics?

Periodic fluctuation in the rate of economic activity, as measured by levels of employment, prices, and production. Economists have long debated why periods of prosperity are eventually followed by economic crises (stock-market crashes, bankruptcies, unemployment, etc.). Some have identified recurring 8-to-10-year cycles in market economies; longer cycles have also been proposed, notably by Nikolay Kondratev. Apart from random shocks to the economy, such as wars and technological changes, the main influences on the level of economic activity are investment and consumption. An increase in investment, as when a factory is built, leads to consumption because the workers employed to build the factory have wages to spend. Conversely, increases in consumer demand cause new factories to be built to satisfy the demand. Eventually the economy reaches its full capacity, and, with little free capital and no new demand, the process reverses itself and contraction ensues. Natural fluctuations in agricultural markets, psychological factors such as a bandwagon mentality, and changes in the money supply have all been proposed as explanations for initial changes in investment and consumption. After World War II many governments used monetary policy to moderate the business cycle, aiming to prevent the extremes of inflation and depression by stimulating the national economy in slack times and restraining it during expansions.

Different Types of Cycles:

Scholars in the early post–World War II period often distinguished “growth cycles,” in which contractions were defined as a decline in the rate of GDP growth, from the less frequent business cycles, in which contractions were defined as decreases in GDP. Some held out hope that the business cycle could be replaced with less severe growth cycles.

Table: The fact that growth rates are higher in some periods than others poses difficulties for the empirical evaluation of business cycles. Ascertaining the severity of the business cycle requires knowing the growth rate around which cyclical fluctuations occur. But observation of a change in GDP from one year to the next conflates the effect of the trend growth rate and the effect of the cycle. Thus, analysts use complex and controversial statistical techniques to distinguish trends from cycles. This task would increase in complexity if economists accepted the existence of more than one type of cycle.

U.S. Business Cycle Expansions and Contractions
*30 cycles
**15 cycles
SOURCE: National Bureau of Economic Research Website (
Reference Dates Duration in Months
Trough Peak Contraction Expansion Cycle
Trough from Trough Trough from Peak from
Previous Peak to Peak Previous Trough Previous Peak
December 1854 June 1857 30
December 1858 October 1860 18 22 48 40
June 1861 April 1865 8 46 30 54
December 1867 June 1869 32 18 78 50
December 1870 October 1873 18 34 36 52
March 1879 March 1882 65 36 99 101
May 1885 March 1887 38 22 74 60
April 1888 July 1890 13 27 35 40
May 1891 January 1893 10 20 37 30
June 1894 December 1895 17 18 37 35
June 1897 June 1899 18 24 36 42
December 1900 September 1902 18 21 42 39
August 1904 May 1907 23 33 44 56
June 1908 January 1910 13 19 46 32
January 1912 January 1913 24 12 43 36
December 1914 August 1918 23 44 35 67
March 1919 January 1920 7 10 51 17
July 1921 May 1923 18 22 28 40
July 1924 October 1926 14 27 36 41
November 1927 August 1929 13 21 40 34
March 1933 May 1937 43 50 64 93
June 1938 February 1945 13 80 63 93
October 1945 November 1948 8 37 88 45
October 1949 July 1953 11 45 48 56
May 1954 August 1957 10 39 55 49
April 1958 April 1960 8 24 47 32
February 1961 December 1969 10 106 34 116
November 1970 November 1973 11 36 117 47
March 1975 January 1980 16 58 52 74
July 1980 July 1981 6 12 64 18
November 1982 July 1990 16 92 28 108
March 1991 March 2001 8 120 100 128
1854–1991 (31 cycles) 18 35 53 53*
1854–1919 (16 cycles) 22 27 48 49**
1919–1945 (6 cycles) 18 35 53 53
1945–1991 (9 cycles) 11 50 61 61

The existence of natural seasonal fluctuations in economic activity, associated with climatic changes and the bunching of purchases around holidays such as Christmas, adds another complication. Economists prefer to look at “seasonally adjusted” figures when evaluating economic performance. Has the change from month to month been greater or less than is usually observed between those two months? But as the economy evolves, so does the desirable seasonal adjustment.

9. Gale Encyclopedia of Small Business:

Business Cycles

A business cycle is a sequence of economic activity in a nation’s economy that is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging about six years in length. In addition, some business analysts have appropriated the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. But the term “business cycle” is still primarily associated with larger (regional, national, or industry wide) business trends.

Stages of a Business Cycle:

RECESSION: A recession—also sometimes referred to as a trough—is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression.

RECOVERY: Also known as an upturn, the recovery stage of the business cycle is the point at which the economy “troughs” out and starts working its way up to better financial footing.

GROWTH: Economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, growth periods are also generally accompanied by inflationary pressures.

DECLINE: Also referred to as a contraction or downturn, a decline basically marks the end of the period of growth in the business cycle. Declines are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced production by businesses.

10. Economics growth:

Process by which a nation’s wealth increases over time. The most widely used measure of economic growth is the real rate of growth in a country’s total output of goods and services (gauged by the gross domestic product adjusted for inflation, or “real GDP”). Other measures (e.g., national income per capita, consumption per capita) are also used. The rate of economic growth is influenced by natural resources, human resources, capital resources, and technological development in the economy along with institutional structure and stability. Other factors include the level of world economic activity and the terms of trade. See also economic development.

Growth economics studies factors that explain economic growth – the increase in output per capita of a country over a long period of time. The same factors are used to explain differences in the level of output per capita between countries, in particular why some countries grow faster than others, and whether countries converge at the same rates of growth.

Much-studied factors include the rate of <href=”#In_economics_or_macroeconomics” title=”Investment”>investment, population growth, and <href=”#Economics” title=”Technological change”>technological change. These are represented in theoretical and empirical forms (as in the neoclassical and endogenous growth models) and in growth accounting.

11. What are the Economic sectors of Bangladesh?

1. Agriculture:

Most Bangladeshis earn their living from agriculture. Although rice and jute are the primary crops, maize and vegetables are assuming greater importance. Due to the expansion of irrigation networks, some wheat producers have switched to cultivation of maize which is used mostly as poultry feed.<href=”#cite_note-bn-3″> Tea is grown in the northeast. Because of Bangladesh’s fertile soil and normally ample water supply, rice can be grown and harvested three times a year in many areas. Due to a number of factors, Bangladesh’s labor-intensive agriculture has achieved steady increases in food grain production despite the often unfavorable weather conditions. These include better flood control and irrigation, a generally more efficient use of fertilizers, and the establishment of better distribution and rural credit networks. With 28.8 million metric tons produced in 2005-2006 (July–June), rice is Bangladesh’s principal crop. By comparison, wheat output in 2005-2006 was 9 million metric tons. Population pressure continues to place a severe burden on productive capacity, creating a food deficit, especially of wheat. Foreign assistance and commercial imports fill the gap, but seasonal hunger (“monga“) remains a problem. Underemployment remains a serious problem, and a growing concern for Bangladesh’s agricultural sector will be its ability to absorb additional manpower. Finding alternative sources of employment will continue to be a daunting problem for future governments, particularly with the increasing numbers of landless peasants who already account for about half the rural labor force. Due to farmers’ vulnerability to various risks, Bangladesh’s poorest face numerous potential limitations on their ability to enhance agriculture production and their livelihoods. These include an actual and perceived risk to investing in new agricultural technologies and activities (despite their potential to increase income), a vulnerability to shocks and stresses and a limited ability to mitigate or cope with these and limited access to market information.

2. Manufacturing & Industry

Many new jobs – mostly for women – have been created by the country’s dynamic private ready-made garment industry, which grew at double-digit rates through most of the 1990s. By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector as well as Leather products specially Footwear (Shoe manufacturing unit). During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh’s total exports. Bangladesh has overtaken India in apparel exports in 2009, its exports stood at 2.66 billion US dollar, ahead of India’s 2.27 billion US dollar.

Eastern Bengal was known for its fine muslin and silk fabric before the British period. The dyes, yarn, and cloth were the envy of much of the pre-modern world. Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe. The introduction of machine-made textiles from England in the late eighteenth century spelled doom for the costly and time-consuming hand loom process. Cotton growing died out in East Bengal, and the textile industry became dependent on imported yarn. Those who had earned their living in the textile industry were forced to rely more completely on farming. Only the smallest vestiges of a once-thriving cottage industry survived.

Other industries which have shown very strong growth include the chemical industry, steel industry, mining industry and the paper and pulp industry.

3. Textile sector

Bangladesh’s textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation’s number one export earner, accounting for 80% of Bangladesh’s exports of $15.56 billion in 2009. Bangladesh is 3rd in world textile exports behind Turkey, another low volume exporter, and China which exported $120.1 billion worth of textiles in 2009. The industry employs nearly 3.5 million workers. Current exports have doubled since 2004. Wages in Bangladesh’s textile industry were the lowest in the world as of 2010. The country was considered the most formidable rival to China where wages were rapidly rising and currency was appreciating.

After massive labor unrest in 2006 the government formed a Minimum Wage Board including business and worker representatives which in 2006 set a minimum wage equivalent to 1,662.50 taka, $24 a month, up from Tk950. In 2010, following widespread labor protests involving 100,000 workers in June, 2010, a controversial proposal was being considered by the Board which would raise the monthly minimum to the equivalent of $50 a month, still far below worker demands of 5,000 taka, $72, for entry level wages, but unacceptably high according to textile manufacturers who are asking for a wage below $30.On July 28, 2010 it was announced that the minimum entry level wage would be increased to 3,000 taka, about $43.

The government also seems to believe some change is necessary. On September 21, 2006 then ex-Prime Minister Khaleda Zia called on textile firms to ensure the safety of workers by complying with international labor law at a speech inaugurating the Bangladesh Apparel & Textile Exposition (BATEXPO).

4. Investment

The stock market capitalization of the Dhaka Stock Exchange in Bangladesh crossed $10 billion in November 2007 and the $30 billion dollar mark in 2009, and USD 50 billion in August 2010. Bangladesh had one of the best performing stock markets in the world during the recent global recession, due to relatively low correlations with developed country stock markets.

Major investment in real estate by domestic and foreign-resident Bangladeshis has led to a massive building boom in Dhaka and Chittagong.

Recent (2011) trends for investing in Bangladesh as Saudi Arabia trying to secure public and private investment in oil and gas, power and transportation projects, United Arab Emirates (UAE) is keen to invest in growing shipbuilding industry in Bangladesh encouraged by comparative cost advantage, Tata, an India-based leading industrial multinational to invest Taka 1500 crore to set up an automobile industry in Bangladesh, World Bank to invest in rural roads improving quality of live, the Rwandan entrepreneurs are keen to invest in Bangladesh’s pharmaceuticals sector considering its potentiality in international market, Samsung sought to lease 500 industrial plots from the export zones authority to set up an electronics hub in Bangladesh with an investment of US$1.25 billion, National Board of Revenue (NBR) is set to withdraw tax rebate facilities on investment in the capital market by individual taxpayers from the fiscal 2011-12.

External trade:

Bangladeshi exports in 2006

The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) has predicted textile exports will rise from US$7.90 billion earned in 2005-06 to US$15 billion by 2011. In part this optimism stems from how well the sector has fared since the end of textile and clothing quotas, under the Multifibre Agreement, in early 2005.

According to a United Nations Development Programmed report “Sewing Thoughts: How to Realize Human Development Gains in the Post-Quota World” Bangladesh has been able to offset a decline in European sales by cultivating new markets in the United States.<href=”#cite_note-15″>[16]

“[In 2005] we had tremendous growth. The quota-free textile regime has proved to be a big boost for our factories,” said BGMEA president S.M. Fazlul Hoque told reporters, after the sector’s 24 per cent growth rate was revealed.

Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) president Md Fazlul Hoque has also struck an optimistic tone. In an interview with United News Bangladesh he lauded the blistering growth rate, saying “The quality of our products and its competitiveness in terms of prices helped the sector achieve such… tremendous success.”

Knitwear posted the strongest growth of all textile products in 2005-06, surging 35.38 per cent to US$2.82 billion. On the downside however, the sector’s strong growth came amid sharp falls in prices for textile products on the world market, with growth subsequently dependent upon large increases in volume.

Bangladesh’s quest to boost the quantity of textile trade was also helped by US and EU caps on Chinese textiles. The US cap restricts growth in imports of Chinese textiles to 12.5 per cent next year and between 15 and 16 per cent in 2008. The EU deal similarly manages import growth until 2008.

Bangladesh may continue to benefit from these restrictions over the next two years, however a climate of falling global textile prices forces wage rates the centre of the nation’s efforts to increase market share.

Prior to the Wage Board’s announcement of its recommended minimum wage of $24, Tk1,604, in 2006, the rate had remained unchanged at Tk950, about $15, for more than 12 years. Although the government may allow up to three years for the new wage to be implemented, and inevitably there will be compliance issues as manufacturers drag their feet, it seemed politically untenable for wages to remain at those levels given the unprecedented industrial unrest.

In response to the Wage Board’s initial draft recommendation of a minimum wage of Tk1, 604 to be increased to Tk1, 800 after eight months, the BGMEA declared over 50 per cent of factories would be ruined within three months. While this claim is no doubt an exaggeration, the capacity of Bangladesh’s textile industry to absorb a significant wage hike as margins become tighter is a key question which hangs over the future of the industry. Bangladesh’s textile sector is concentrated in export processing zones in Dhaka and Chittagong. These zones, which are administered by the Bangladesh Export Processing Zone Authority, aim to offer “a congenial investment climate, free from cumbersome procedures’ according to Bangladesh Export Promotion Bureau’s website.

They offer a range of incentives to potential investors including 10 year tax holidays, duty free import of capital goods, raw materials and building materials, exemptions on income tax on salaries paid to foreign nationals for three years and dividend tax exemptions for the period of the tax holiday.

All goods produced in the zones are able to be exported duty free, in addition to which Bangladesh benefits from the Generalized System of Preferences in US, European and Japanese markets and is also endowed with Most Favored Nation status from the United States.

Furthermore, Bangladesh imposes no ceiling on investment in the EPZs and allows full repatriation of profits. The formation of labor unions within the EPZs is prohibited as are strikes.Bangladesh’s exports to the U.S. surpassed $1.9 billion in 1999. Bangladesh also exports significant amounts of garments and knitwear to the EU market. Bangladesh also has significant jute, leather, shrimp, pharmaceutical, and ceramics industries. Bangladesh has been a world leader in its efforts to end the use of child labor in garment factories. On July 4, 1995, the Bangladesh Garment Manufacturers Export Association, International Labor Organization, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this pioneering agreement began in fall 1995, and by the end of 1999, child labor in the garment trade virtually had been eliminated. The labor-intensive process of ship breaking for scrap has developed to the point where it now meets most of Bangladesh’s domestic steel needs. Other industries include sugar, tea, leather goods, newsprint, pharmaceutical, and fertilizer production.

The Bangladesh government continues to court foreign investment, something it has done fairly successfully in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a Board of Investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. The government created the Bangladesh Export Processing Zone Authority to manage the various export processing zones. The agency currently manages EPZs in Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara. An EPZ has also been proposed for Sylhet. The government has given the private sector permission to build and operate competing EPZs-initial construction on a Korean EPZ started in 1999. In June 1999, theAFL-CIO petitioned the U.S. Government to deny Bangladesh access to U.S. markets under the Generalized System of Preferences (GSP), citing the country’s failure to meet promises made in 1992 to allow freedom of association in EPZs.

Sylhet is fast becoming a major center of retailing in Bangladesh, with many shopping centers being built by expatriates to serve fellow expatriates visiting Sylhet and the emerging middle class. Many of these developments hark back to Britain.

Overview of Economics:

Fiscal Year Total Export Total Import Foreign Remittance Earnings
2007–2008 $14.11b $25.205b $ 8.9b
2008–2009 $15.56b $22.00b+ $9.68b
2009-2010 $16.7b ~ $24b $10.87b
2010-2011 $22.93b $32b $11.65b

Bangladesh has made significant strides in its economic sector performance since independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups.

The especially severe floods of 1998 increased the flow of international aid. So far the global financial crisis has not had a major impact on the economy. The World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate.

12. The summery between Rich and poor (In growth theory):

From growth theory, we have learned that for an entire country, the following factors are important in determining the level of well-being.

1. The savings rate, which determines the country’s ability to accumulate capital

2. The growth rate of the efficiency of labor, which in turn depends on

o Education

o Cumulative Knowledge

o Adaptive Social Institutions

For individuals, these same factors affect relative well-being. For example, young people generally tend to be better off than preceding generations, because as society accumulates knowledge, this adds to wealth. Historically, it took hundreds of years for this accumulation of knowledge to have a noticeable effect. Now, you can see the effect within a generation. Even if your parents are in the top half of the wealth distribution and you wind up in the bottom half, you are almost sure to enjoy better health care, better technology products, and a higher standard of living in general.

For over 100 years, from the time of Karl Marx until the latter part of the 20th century, economists looked at capital accumulation as the main factor in economic growth and individual wealth. In Marxist economics, it is capitalists who save and accumulate the economy’s capital. They become wealthier and wealthier, while workers stay miserable until they finally get fed up and launch the Communist revolution.

The view that saving leads to wealth is not wrong. However, saving is not the only road to wealth, for a nation or for an individual. In fact, one irony is the fact that most people living under Communist dictatorships are worse off than ordinary workers under capitalism, because Communist dictatorships do not do well at adapting to advances in knowledge.

Marx’s jargon of “class struggle” continues to permeate political dialogue. Marx saw the struggle as taking place between the capitalist class of savers and the working class getting by on subsistence wages. Today, people talk about a number of supposed victim classes: women, gays, and ethnic minorities are spoken of using the “class struggle” jargon, even though the original economic basis for Marxist classes–savers vs. workers–does not apply to these victim classes.

In the twentieth century, particularly in the United States, poverty has been receding. Fewer and fewer people face the squalor that was typical 150 years ago, and that is still typical in some regions of the world. Most Americans live well above subsistence levels. In fact, researchers have found that saving takes place among Americans of all income groups (there are also people at all income levels who try to live beyond their means).

Differences in well-being reflect more than just differences in capital accumulation. Two hundred years ago, when the efficiency of labor was growing slowly, inherited wealth and the lack thereof played an important role in determining people’s station. With the acceleration in the rate of technological change, your inherited financial capital matters relatively less and your personal earnings power and saving rate matter relatively more.

The growth rate of your personal “efficiency of labor” will be a big factor in determining your place in the distribution of well-being. If you make good use of your education and you adapt to readily take advantage of the technologies that emerge over the next 30 years, you will be rich. If you fail to do so, then you will gradually slip to a lower place in the wealth distribution.

Income, Consumption, Wealth, and Poverty

Statisticians collect three measures of economic well-being.

  1. Income is the amount of money that an individual or a household earns in a year. Income is a flow.
  2. Consumption is the value of goods and services that an individual or a household consumes in a year. Consumption is a flow.
  3. Wealth is the value of the assets of an individual or a household at a point in time. Wealth is a stock.

Economists have issues with using income as a measure of well-being.

  • Income has a transitory component. Some years, people earn windfalls, due to unusually large bonuses or high profits from personal businesses. In other years, people earn less than usual, because they might be laid off part of the year or they may own a business that does
  • poorly that year.
  • Income also has a “life-cycle” component, meaning that it depends on where you are in the life cycle. A graduate student may have a low income, but once she completes her degree her income likely will take a leap. A retired person may have a low income, but he has sufficient wealth to sustain a lavish lifestyle.

Wealth also has some shortcomings as a measure of well-being. Statistical measures of wealth count only financial assets, without taking an individual’s earning power into account. A new graduate of medical school may have no wealth (in fact, she could be carrying a large debt on a student loan), but her prospects for future earnings may be bright. In general, younger people have less wealth than what they will be able to accumulate later in their lives.

People seem to make consumption decisions more on the basis of long-term income and wealth than on the basis of current income and wealth. Therefore, it makes sense to focus on consumption as an indicator of how people view their economic circumstances. Using consumption as a measure, economists tend to find that poverty in the United States is shrinking.

For example, W. Michael Cox and Richard Alm, in Myths of Rich & Poor, present information on the ownership of durable goods in 1994 by households whose income was below the official poverty line of around $13,000 per year. On page 15, table 1.2; they compare this to the ownership of those same types of durable goods by all households in 1971.

Percent of Households with: Poor Households, 1994 All Households, 1971
Washing Machine 71.7 71.3
Clothes Dryer 50.2 44.5
Refrigerator 97.9 83.3
Stove 97.7 87.0
Color Television 92.5 43.3
Telephone 76.7 93.0
Air-conditioner 49.6 31.8
One or more cars 71.8 79.5

Looking at the table, it seems reasonable to say that a “poor” household in 1994 was at least as well off as an average household in 1971. This is without taking into account the fact that a majority of poor households have microwave ovens, VCR’s, and cable television hookups, none of which were available to the average household in 1971.

Cox and Alm examine a large study of income dynamics undertaken by the University of Michigan. It tracked income of specific households from 1975 through 1991. As Cox and Alm report (p. 73),

Those who started in the bottom 20 percent in 1975 had an inflation-adjusted gain of $27,745 in average income by 1991. Among workers who began in the top fifth, the increase was just $4,354. The rich may have gotten a little richer, but the poor have gotten much richer.

The University of Michigan data suggest that low income is largely a transitory experience for those willing to work…Nearly a quarter of those in the bottom tier in 1975 moved up the next year and never again returned. By contrast, long-term hardship turned out to be rare: Less than 1 percent of the sample remained in the bottom fifth every year from 1975 to 1991.

Cox and Alm argue that if one counts as poor only households that remain below the poverty line for at least two years, then the poverty rate is 4 percent, rather than the 13 percent that was reported at the time. It may be that true poverty among the able-bodied and able-minded (meaning people who are not substance abusers or otherwise incapacitated by mental illness) has been essentially eradicated in this country.

Resenting the Rich

If you compare people at a single point in time in terms of either income or wealth, then disparities stand out. Today, the top-to-bottom ratio of income or wealth is larger than ever. Some economists would downplay this fact, and instead focus on absolute levels of well-being.

However, people seem to care about relative economic standing as well as their absolute standing. For example, Reason‘s Ronald Bailey cites a fascinating experiment conducted by British economists Daniel John Rizzo and Andrew Oswald. First, the researchers placed subjects in a gambling game. Then at the conclusion of the gambling sessions, each player was given the chance to spend his own money to anonymously “burn” some of the cash won by his fellow participants. It was made clear that there was no prospect that burning his fellow player’s winnings would in any way make him richer. In fact, if he chose to burn another player’s money, he had to pay between 2 cents and 25 cents for each dollar subtracted from the other player’s take.

Zizzo and Oswald found that nearly two-thirds of players happily paid for the privilege of impoverishing their fellow participants.

Income Status mean real income, 1966 mean real income, 1999
Top 20 percent $123.7 $254.8
Second 20 percent 80.5 147.8
Middle 20 percent 47.2 72.2
Next 20 percent 35.3 48.9
Bottom 20 percent 24.7 31.0

This suggests that a political platform of “soak the rich” will have support. In fact, one consequence of the increased dispersion in incomes is that in the United States the income tax

is focused on the upper end of the income distribution.

Since the 1960’s, the share of income accounted for by the top fifth of households is up somewhat. More important has been the increase in all levels of income. The average real income of people in the second fifth of households today exceeds the average real income of people in the top twenty percent in the 1960’s. See the following table, which comes from the census report on income distribution, in dollars of constant purchasing power.

The combination of a large rise in overall income and a slight increase in the share at the top means that households earning over $100,000 now account for something close to three-fourths of all income. If we think of “rich” in absolute terms ($100,000 per year in household income, adjusted for inflation) rather than in relative terms (the top 20 percent), the “rich” now earn enough income to fund both baseline government functions plus programs to help the poor.

We do not need the middle class to pay taxes any more. In fact, with income taxes, the middle-class taxpayer is on the road to extinction. Data from the U.S. Treasury compiled by Daniel Mitchell for the Heritage Foundation show that the bottom 50 percent of the income distribution accounts for only 4.2 percent of tax revenues, as shown in the following table:

Income Status Share of Total Income Tax Revenues
Top one percent 34.8 %
Rest of top ten percent 30.2
Rest of top 25 percent 17.6


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