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Macroeconomics 1002 1/31/17 Current Events : ▪ Economically Trump became president because of 1) big corporations overseas. Taxes are more expensive here. 2) Certain groups get most advantages ((comparative advantages in reality) ▪ Trade, people at factories lost their jobs in Middle America. All coporations in east and west have done well. He won because people were angry this would continue. ▪ Average family income has no moved, went down. ▪ Comparative advantage- big thrust (TPP, NAFTA) Elasticity of Demand- how much demand is affected by changing the price. Price decreases, Demand increases To make a product as inelastic as possible monopoly. (to price at what you want)
- Advertising – differentiate product, more inelastic e.g.) Apple iPhone is inelastic.
- Inelastic – better product Sunk cost- cost that cannot be recovered e.g.) You buy $400 tickets to see singer. Your friend comes to see you from London at the same time. $400 is already spent, it is not a significant variable to your choice. Allocation/distribution of scarce resources – how to distribute resources in society.
- Factors of product
- Externalities -negative externalities (e.g. factory dumped waster near river) -positive externalities -full benefit is not received by the person paying for it. Efficient Productivity- output labor Inflation- general increase in prices from one period to another Deflation- prices go down Federal Reserve fears deflation – it can lead to recession. We like a little deflation. Problem with inflation (prices go up)—if prices double, you buy less. Labor- inflation goes up, interests rate goes up. 2/7/17 Current Events : ▪ Unemployment rate went up 4.7% to 4.8%. ▪ Unemployed means not working and looking for job ▪ Participation grade- working or unemployed and looking for a job. Percent of adults 16+ that are working or unemployed looking for a job. ▪ Participation grade went up since 70’s because women started working. ▪ Less people participate, unemployment rate goes up. ▪ Earned income tax credit- people who need money are helped in least costly way. Supply and Demand
If you demand something, then you 1) want it. 2) can afford it. 3) made plan to buy it. Six factors that change demand are:
- Prices of related goods
- Expected future prices
- Income
- Expected future income/credit
- Population
- Preferences Price of related goods Substitute- good can be used in place of another Complement- good used in conjunction with another good More substitute there is, more elasticity Less substitute, more inelastic Price of substitute ↑, Demand ↑ Price of complements ↓, Demand ↑ Normal good- income ↑, demand ↑ Inferior good- income ↓, demand ↑ Supply Cost of production- labor, taxes If prices go up, supply goes up Market power- business/industry can control price e.g.) McDonalds has lost some market power. Oil has greatest market power. Law of demand- the lower the price of a good, the larger the quantity demanded. Why? – Substitution and income effect. Six main factors that change supply:
- The prices of factors of production
- The prices of related goods produced
- Expected future prices
- Number of suppliers
- Technology
- State of nature 2/14/17 Current Events: The Great recession/depression All major banks predicted Immediate decline in stock market after trump Great depression in 30’s, invisible hand- economy generates itself – equilibrium GDP- gross domestic product Macro is equivalent to accountant- summize who area into one number What was produced? How did it happen?
2/16/17 Current Events Federal reserve- Stock market has been going up in leaps – historic highs, 10-15% in last 5-10 weeks. Important in economics because everyone’s wealth goes up, worth more 90% of economy went up by over trillions of dollars- Total assets went up significantly in short period of time. Reasons why people spend money- income and wealth, assets of tension funds Stock market—leading economic indicator, tends to tell you what may happen in the future (not past). Market does not care about “noise” (things that happen randomly, what’s important is that you get to that point; random events with no significance) – taxes are reduced, people spend more money, they make more money GDP= C + I + G + N-X -keep unemployment as low as possible -increase GDP by increasing consumer spending because it is about 70% of whole GDP by
- increasing income
- increasing wealth (tend to spend more)
- expectations (pushes stock market) Fiscal policy- when government and Congress agree to help by reducing taxes Lowering taxes one year vs. lowering taxes permanently—the way people spend it. Permanently- people spend more (like a free gift from govt.) Good fiscal policy is to lower taxes permanently, ended after 2010 GDP went down in real terms 2 years in a row—big recession. Federal Reserve saved – our central bank. They could increase/decrease interest rates. They buy treasury (govt.) bonds with a check. Quantitative Easy- buy bonds on the open market. Lower interest rates and increase money supply. (monetary policy) If anyone buys anything it is an exchange of money, product, service. Supply of money did not change. Different with govt. bonds. Federal reserve buy from Buffet, Buffet gets $100M, and govt has the 100M bonds. Govt money supply goes up by $100M. QE- Federal reserve bought bonds to increase wealth (stock market), increase price of real estate. They couldn’t directly increase GDP. Federal reserve surplus is given back to Federal government. Federal reserve buys bonds and federal govt benefits. Investments- investors try to use fiscal policies on investments. (e.g. new cars, new machine, computer help the business) More investments make more modern Major reason why we have recession *inventory- what you have on hand to sell. (e.g. retail store). Every company has investments in inventory, planned inventory- decrease or increase inventory. Inventory is part of investments. Inventory goes up, investments go up.
Company has excess, make sales, and still has excess. Next season they would produce less and buy less from manufacturer. – less production, less staff. If it happens in 2 major industries – Recession because unemployment goes up and GDP go down. e.g.) housing- excess houses, prices started to drop. Auto industry- reducing prices, had to spend money to hold the car. GM was going bankrupt. Major banks were failing, major industries failing, insurance companies going out of business. Current Events 2/21/ IPO- initial public offering is part of GDP. Potential GDP- if you are in full employment, and you use resources … Occurs at or near full employment Higher unemployment rate- the bigger the potential GDP Lucas Wedge developed the difference between actual GDP and potential GDP Business cycle- expanding, then you hit the peak, and after the peak the recession starts. GDP tends to go down, and increase at a negative rate. Unemployment tends to go up. At the bottom- trough. When there is no hope—when people want to sell everything, it is the best time to buy. 2007, the stock market hit a peak. It went down 58%, GDP went down. People should’ve sold at the peak. Peak to peak, trough to trough is called the business cycle. When the economy goes to a certain point, and goes down. At that certain point, things are so bad that it cannot get much worse, so it is now worth the risk. Excess inventory, get more cocky, then all the sudden there is a recession. (a typical business cycle) increase GDP GDP- its value and limitation Value- gives you a synapsis of how the country is doing e.g.) if we hire another janitor it would be better because it would GDP does not necessarily say that the economy is good, or running well. It just means all goods and services produced in one year (we assume it is beneficial) ak pe trough
Chapter 5 CPI- consumer price index Basket of good and services that is surveyed every month to see how prices are doing. Inflation- price goes up Deflation- price goes down **Core Inflation- refers to the inflation rate that excludes/takes out energy prices and food prices. (the inflation rate that Federal reserve looks at) It is volatile, and federal reserve has very little control over the prices. Energy prices do not go up and down very much. Unemployment rate- 4.7/. Includes discouraged workers (not actively looking for a job) and other workers who work 6hrs/ week. Not really making enough to make a living—9.4% (more significant). Employed: people who work Unemployed: not employed, want to work or looking for a job Not in labor force: not employed, not unemployed Consumer- housing, food/beverage, transportation Inflation: Producer price index- (similar to CPI) for producers. Index for people supplying goods and services. CPI goes up less than PPI. **PPI goes up faster than CPI, does not really match in recent years because of increase foreign competition (or substitutes). They lack market power/pricing power because of competition, imports, international trade. Converting GDP: GDP in 2010: 15 trillion dollars, CPI: 218 How much did it go up in real terms (in today’s dollars) 2015: CPI: 237 CPI 2015/CPI 2010 = 237/ 237/218 x 15 trillion dollars= 16.3 trillion dollars (GDP of 2010 in today’s dollars) Thus prices went up, inflation. The number of goods and services produced are the same!! – you are just turning into today’s dollars. Labor- factors of production, human services. Unemployment- if unemployment included everyone who wasn’t working then the rate would be much higher than 4% Unemployed someone who is not working and wants to work// has been looking for work at least once in last 4 weeks.
Labor force those who are working + those who are unemployed (looking for work but not working) Population population of adults working who are 16 and older Labor force / adult population = Participation rate All working + all unemployed / all those who could work (16+) = participation rate Participation rates were low in 60s/70s. Starting in 2000’s it went up. (66%) It went up about 66% in last ten years – when women entered the participation rate went up. When less people are in the labor force (which means they are not working// not looking for work). Participation rate has gone down by 3 million since 10 yrs. **If participation rates go down (nothing else changes), then unemployment rate goes down because those who were looking for work are now not looking for work – no longer unemployed/ not in statistics. People from 45-55 (prime working age) dropped out. Why are people unemployment? -Frictional unemployment -Cyclical- has to do with business cycle. Recession happens and unemployment goes up. Due to recession, not change in demand. -Structural- if industry is wiped out or broke. (unemployment due to a great surplus) e.g. Shoe maker in US, most shoes are made in another country – structurally unemployed unemployment insurance—you lose your job and you get insurance if you lost your jobs for right reason. To help people who are laid off. Full employment- non accelerating inflation rate of unemployment- NAIRU Rate of unemployment where it’s low enough but that that low that it causes inflation Lower unemployment, inflation tends to go up. Higher unemployment, inflation tends to go low. Since participation rate has gone down by 3 million people Many people have dropped out of labor force – federal reserve is unsure of the rate. They are waiting to see inflation rate go up. They want us to assume risk that rates can go up. In 80s -- Inflation rate was 18% -- it was high so interest rates were high to adjust for inflation. Federal deserve made interest rates so high (20%) so that people would stop spending on goods and services. This led to recession. It reduced inflation rate by a lot – it worked. Since then, economy is very careful about inflation rates – 2% is good. Interest rates increased our savings— decreased spending, thus inflation rates went down. (e.g. if you want to buy a car, but you find out inflation will go up next year you would want to buy it now.) Deflation is worse because we do not know how to deal with it.
Elasticity of demand, supply- sensitivity of demand relative to price Price goes up, demand does not change – inelastic Goods with least amount of substitutes are usually inelastic Goods with most substitutes are usually elastic Inelastic- more differentiation. sunk cost – cannot take money back, cannot recover, cannot be taken into consideration to make decision off that. (make decision off satisfaction) Opportunity cost- the thing you give up e.g.) give up free time for studying marginal cost- incremental/additional babe ruth, converting CPI $ 10 years later, $ how much percent did it go up? 50% $150, 5 years later $ GDP= C+I+G + (N-X) Consumer spending Investments Govt spending Exports – imports (U.S imports are greater than exports, we import more than we export) Exports are small portion of our country. Business cycle- participation rate= labor force/ adult population labor force= those who are working (employed) + those who aren’t working but looked for a job in last 4 weeks(unemployed) participation rate (62.8) today is much lower than 35 years ago. # of people in work/ labor force is not as high as it could’ve been. People dropped out. Unemployment rates low, inflation goes up Federal reserve PPF- give up consumer goods to put money in capital goods so in future it produces more Tradeoff – opportunity cost—of 2 goods
shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. GDP deflator—CPI but for GDP. Take all goods and services in GDP and measures inflation GDP-goods/services produced by ANYONE in the country GNP- all goods and services produced by Americans anywhere in the world. Real GDP- GDP taken from year converted to current Nominal GDP- GDP of that year Monetary policy – federal reserve has to increase/dec interest rates or money supply. Fiscal policy- executive branch in congress, inc/dec in taxes, govt spending. Recitation Review CH 1: Tradeoff- Rational choice- Benefit Preferences Opp. Cost = the value of second best option – the value of first best option (chosen) e.g.) you earn $200 if you choose to work you spend $2.75 , $5 if you decide to go to school value of choice 1: + value of choice 2 is -2.75 + (-5) opportunity cost= +200 – (-2.75+ -5) = 207. Marginal benefit Marginal cost CH Production possibilities frontier- combination of goods that can be produced Line is frontier—used everything you have to produce good 1 and good 2 (most quantity you can produce) Comparative advantage Pizza Cola 1 30 20 2 15 20 2/3 cola 3/2 pizza 4/3 cola ¾ pizza lowest opportunity cost CH
CPI= cost of CPI basket at current price / cost of CPI basket at base period x 100 Quantities don’t change! Inflation rate= CPI this year- CPI last year/ CPI last year x 100 Positive inflation Negative deflation To find Real GDP: multiply this year’s quantity with base year’s price, then sum up expenditures for Real GDP -- (april 4 th^ next midterm – 6,7,8,9) CHAPTER 6 3/7/17 Current Events Federal reserve bank meets 8 times a year. Federal law committee meets and set policies for the economy. In this years meeting (next week), not much will happen. They want people to know that something will happen. They send out surrogates (substitute, proxy) that they will raise interest rates. They will probably 1) reduce taxes, 2) reduce number of immigration They want to increase growth of economy. Growth of economy 3%, slowly. To increase number of jobs. -Increase trade, GDP GDP per capita (per person) Increase well being of people who live in the country Increase wages, profits, employment Expand total GDP Economic growth: The standard of living depends on real GDP per person. Real GDP per person is real GDP divided by population. Real GDP per person grows only if real GDP grows faster than the population grows. Real GDP can increase for two distinct reasons:
- The economy might be returning full employment in an expansion phase of the business cycle.
- Potential GDP might be increasing. The return to full employment in an expansion phase of the business cycle isn’t economic growth. The expansion of potential GDP is economic growth -increase potential GDP by increasing labor supply (# of able bodied workers) and increasing productivity ** Productivity- output per worker per hour Historically productivity has been going up, about 1% last 10 years.
Because our productivity is not as high as it used to be, and adult population is getting older, labor force not growing so fast If you could increase productivity, you can increase GDP per capita The growth rate of potential GDP measures the pace of expansion of production possibilities and smoothes out the business cycle fluctuations in the growth rate of real GDP. Potential GDP goes down, tend to think that productivity is going down. Satisfiers for productivity – complimenting them, promotion Increase productivity with technology Productivity means production of whatever you are producing increases per hour. A return to full employment in an expansion is a movement from inside the PPF to a point on the PPF. OUTWARD SHIFT. Regulations cost money and time, “official regulations” and unofficial regulations Go to easiest and least costing—you want labor. Reducing regulations The rule of 70- number of years it takes for a level of a variable to double is approx. 70 divided by annual percent growth rate of variable. e.g.) variable that grows at 7 percent a year with double in 10 years. Real GDP relative to US, central south America. In 60’s central south America was 28% of US real GDP. It went down to 23% Shows how economy is growing by real GDP. Increase productivity, increase real GDP –> increase employment, increase wages Growth increase demand for labor—increase competition and salary Recitation: Rule of 70- concept of compounding- getting interest out of principle Interest gets interest, year after year Approximates how many years it takes to double the amount based on growth rate 3/9/ Financial markets, banks, financial institutions, money, central bank, federal reserve Recession will be caused by excess inventory, economy but not by banks. Banks, insurance companies went bankrupt. Major banks went bankrupt—govt lent billions dollars to banks, so that it didn’t go bankrupt. Federal Reserve (our central bank) prints money, not govt. Money is backed by nothing. Money goes out of circulation if no one accepts it Finance- central banks – called the Federal Reserve in US The whole financial system is based on everyone except the currency.
Real GDP (^) Potential GDP They look at how much sales go up per share. Recitation 3/16/ CH 6- Only need to know p. 131- Economic Growth is the expansion of production possibilities Calculate the growth rate: Real GDP growth rate = Real GDP in current year – Real GDP in previous year / Real GDP in previous year x 100 *real GDP takes our inflation GDP per capita Compound Interests- rule of 70, understand how things compound Add .com in name, stocks go up. (dot.com growth of 1990s) Recession in 2008. **Long term trends of economic growth—Great depression Peak at WWII—increase in production, sold a lot of weapons, golden period Rapid growth in 1960s Growth slowdown Dot.com growth of 1990s 2008-9 recession Economic growth around the world (Real GDP per capita/person) Third world countries: central south America, eastern Europe, Africa – hard to catch up to U.S. Potential GDP: What determines potential GDP? – labor, capital, land, and entrepreneurship produce real GDP and the productivity of the factors of production determines the quantity of real GDP that can be produced. The quantity of land is fixed and on any given day, the quantities of entrepreneurial ability and capital are also fixed and their productivities are given. The quantity of labor employed is the only variable factor of production. Potential GDP is the level of real GDP when quantity of labor employed is the full employment quantity. --land, entrepreneurship, and capital are fixed. Labor changes. Real GDP determines labor/employment
when calculating potential GDP, we use REAL terms, not nominal To determine GDP- we use model with 2 components: -An aggregate production function (PPF) Y= f(L) Potential GDP = f(labor) Labor—unit of hours per year. -input more labor, produce more -increase labor hours, increase in real GDP slope decreases as labor increases – that means the productivity decreases with more labor. (when you input more labor, productivity decreases) -an aggregate labor market Amount of labor supplied and demanded depends on real wage rate. Potential GDP growth- what makes it grow Growth of supply labor, and labor productivity. *--labor market and potential GDP at equilibrium of labor market = potential GDP and labor (quantity) should be the same. Study figures 6.6,6.7,6.8 **Labor market Horizontal axis—labor (billions of hrs/year) Vertical axis- real GDP (billions of dollars) Potential GDP Horizontal—labor (billions of hrs/year) Vertical—real wage rate (dollars/ hr) CH7: finance, saving, and investment Finance- describe the activity of providing the funds that finance expenditures on capital. (how households and firms obtain and use financial resources and how hey cope wit h risks) Money
*** Fractional banking system - all bank accounts today do not have to hold 100% of your account. No bank has to hold 100%, LESS than 100%. e.g.) give bank 10000, they may only have 80% of it. They use your money to reinvest. Since they only hold a fraction of it, they give you interest and use it to make more money. Most important thing with bank- confidence Barter- hard to do business, but is always a possibility if you find someone who wants what you have. 3/21/ Money supply- what makes money, who decides what makes money? Fiot? decree by the government Most money today is fiot money. 1907- Panic of 1907 (financial panic, similar to 2008), bank had problems, no one to lend them the money. 1907- JP Morgan (wealthy banker)- lent banks money 1913- they sent up Federal reserve (lender of last resort during financial problems, if banks needed money) Gold standard- gold coins circulating, eventually they stop circulating, and switched to paper that says gold certificate (now says federal reserve note). Can take the dollars to the government and get gold. How to increase money supply? – increase amount of gold, but the problem of the gold standard was that it was limited. 1970- Nixon decided no more gold standard. In early 80’s price of gold went up, $250-500 for gold. Gold sets limits—no limits today. Federal Reserve decides on money supply—they are the ones who print it. *Open market operations- the way the federal reserve increases/decreases money supply. They don’t have to print or burn money to increase or decrease. Money supply- cash and checking accounts Keynesian- John Keynes (important economist of 20 th^ century) *if economy not doing well/ in recession, what should we do? A) if you want to increase economic activity (GDP), reduce interest rates. (people would borrow more, more economic activity) B) if you increase liquidity, more money available in banks to lend it out at lower rates. Fed reserve can reduce interest rates and control money supply. FOMC – federal over market committee
Federal GOVERNMENT issues bonds. Fed reserve found out if they buy bonds, it would affect interest rates and money supply.
- Increase money supply. e.g.) Buy 100mill worth of bonds from Buffet, Buffet gets $100 mill check, and puts it in his checking acc. This goes to his bank and all banks have acc with fed reserve. Now there is $100mill in acc with federal reserve. The money supply increases by $100 mill. Every transaction that is not involved with the federal reserve is just a transaction – no increase or decrease in money supply! Just a trade of cash, no increase/decrease. Buy and sell US govt. bond (biggest market in the world). Increase money supply- buying bonds through FOMC. When interest rates go up, bond prices go down. *What is the maximum? ONE over reserve requirement 1/reserve requirement, reserve requirement/rate will be given (%) money multiplier= 1/reserve requirement e.g.) reserve requirement= 20% 1/0. e.g.) $100 mill, reserve requirement= 20% of $100 mill. more than what is required= excess reserve multiplier= multiple expansion of money supply When the federal reserve is involved, they are buying for nothing. There would be no reciprocal (no one is gaining, one is losing). Money supply can go up or down. Overnight, banks have to meet reserve requirement. If they don’t have enough, they borrow from another bank (federal fund rate) or from federal reserve (discount rate). Recitation 3/23/ Financial capital markets -Loan markets (bank loans, credit cards, mortgage) -bond markets (federal government, state govt, municipal govt, corporations)
- Bonds can be traded in bond market
- Terms can be short or long; bonds are long term investments with 10+ yrs; notes are issued in 2,3,5,10 yr terms; t-bills are short term obligations within a term of 1 yr or less. -stock markets: stock is certificate of ownership and claim to the firm’s profits stocks, bonds, short-term securities and loans are called FINANCIAL ASSETS -financial institution is a firm that operates on both sides of the markets for financial capital; borrower in one market and a lender in another. e.g.) commerical banks, pension funds, insurance companies, federal reserve -net worth = market value lent – market value borrowed if net worth is positive – institution is SOLVENT (can operate, keep going)
