recently suggested that, in an increasingly integrated world economy, the global output gap can affect domestic inflation. In other words, all else equal, a booming world economy may increase the potential for inflation pressure within a country. For example, stronger global demand for computers raises the price U.S. producers can charge their foreign customers. But because all computer producers are facing a stronger global market, U.S. producers can charge more for their output at home as well. This is known as the “global outputgaphypothesis” and calls for central
inflation. In other words, all else equal, a booming world economy may increase the potential for inflation pressure within a country. For example, stronger global demand for computers raises the price US producers can charge their foreign customers. But because all computer producers are facing a stronger global market, US producers can charge more for their output at home as well. This is known as the “global outputgaphypothesis” and calls for central bankers to pay close attention to developments in the growth potential of the rest of the world, not just domestic
This paper discusses about capitalism that is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society. The essential feature of capitalism is the motive to make a profit. In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses. Although some form of capitalism is the basis for nearly all economies today, for much of the past century it was but one of two major approaches to economic organization. In the other, socialism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.
IN RECENT YEARS, many central banks, the makers of monetary policy, have adopted a technique called inflation targeting to control the general rise in the price level. In this framework, a central bank estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward that target, using such tools as interest rate changes. Because interest rates and inflation rates tend to move in opposite directions, the likely actions a central bank will take to raise or lower interest rates become more transparent under an inflation targeting policy. Advocates of inflation targeting think this leads to increased economic stability.
THE MODERN ECONOMY is a complex machine. Its job is to allocate limited resources and distribute the resulting output among a large number of agents—mainly individuals, firms, and governments—allowing for the possibility that each agent’s action can directly (or indirectly) affect other agents’ actions.
ECONOMISTS DEVELOP ECONOMIC MODELS to explain consistently recurring relationships. Their models link one or more economic variables to other economic variables (see “Economic Models,” p. 8). For example, economists connect the amount individuals spend on consumer goods to disposable income and wealth, and expect consumption to increase as disposable income or wealth increases (that is, the relationship is positive).