Midterm Study Guide
Midterm Study Guide Econ 104H - Gerald Epstein - Macroeconomics
Popular in Introduction to Macroeconomics
Econ 104H - Gerald Epstein - Macroeconomics
verified elite notetaker
Popular in Economcs
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
Aja' Lee Gaskins
verified elite notetaker
One Day of Notes
verified elite notetaker
This 13 page Study Guide was uploaded by Jovanna Notetaker on Sunday March 8, 2015. The Study Guide belongs to Econ 104H - Gerald Epstein - Macroeconomics at University of Massachusetts taught by Gerald Epstein in Spring2015. Since its upload, it has received 175 views. For similar materials see Introduction to Macroeconomics in Economcs at University of Massachusetts.
Reviews for Midterm Study Guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 03/08/15
Introduction to Macroeconomics Econ 103H Midterm Study Guide Jovanna Mason 120 Keynes amp quotLaws of Economics British economist inventor of modern macroeconomics Great Depression of 1930 1 in 4 unemployed in the US led to WWII fascism rose in Europe militarism in Japan quot said mass unemployment couldn39t last because supply amp demand says price of labor fails when excess supply wage cuts but didn39t actually happen since people weren39t spending so no money was going into the economy wages have two functions Keynes 1 Cost of doing business 2 Source of for workers aka source of for products cut wages gt gt cut income gt gt cut demand for products role of in economy and the importance of income in creating demand AD the total demand for all goods and services in a national economy in a simple model without government or foreign trade what households and rms intend to spend on consumption and investment AD C l Macro in Context de nition individual economic decision making and how it all adds up in the market system looks at the economy as a whole output unemployment in ation economic growth total effects are different from the sum of the parts massive increase of inequality majority of income to the top percent problem because wealthier spend less won t stimulate economy Republicans claim that there are makers amp takers the rich invest so better in the long run 122 Money Power amp Wall Street seling credit derivatives quottoo big to failquot subprime mortgages lack of regulation repeal of the GlassSteagall Acts does free market work handsoff approach government should let markets work on their own government will make markets inef cient free market economics 1775 The Wealth ofNations capitalism market works like an invisible hand amazing engine of prosperity creation of wealth why some countries were becoming wealthier amp other39s weren39t worked in a paradoxical surprising way people in a capitalist system tend to be greedy how to limitcontrol greed Smith said that a free market turns individual greed into markets tend to be anonymous ends up producing goods competition prevents producers from exploiting customers drives down cost the market will set the right prices for the right products this will create wealth social good prior to the nancial crisis this was the dominant view however many problems with this theory 1 competition ineffective because all banks were greedy 2 no transparency about products 3 opaque people didn39t understand how things worked 4 time bomb in the products they would fail nobody knew these were bad products bankers making a lot of money didn39t want to know quot make assumptions that the market will have real competition transparency and good information anonymity and opaqueness problem banks didn39t care if the product was good or not if people buy crappy investments it39s their problem tricking lying and manipulation compicated interconnected system not their problem everyone s problem almost dragged down the entire economy all these interconnections and feedbacks made total gt sum of parts interdependence interconnections when an action has impacts on others that the individual doesn39t have to take into account example company polluting environment finance has a lot of externalities that need regulation bail someone out no incentive to do it again bailouts need restrictions amp conditions bail out banks could39ve not bailed out bankers probem with need to break up banks so if it goes under again it doesn39t bring down the entire economy 129 Market Transactions Adam Smith 1775 quotinvisible handquot greed can be good if there39s competition in the market glue that holds society together and makes it work well is a sense of morals a sense of rightwrong market transactions for a long time economists ignored other spheres like family Gary Becker Nobel winner University of Chicago the reason why in most American families women stay home and men earn money is because women have a comparative advantaoe when taking care of children and men have advantage working outside the home problem social norm not really choice society is governed by social norms Becker later realized that it was a joint decision family works together as a group cooperationsacrifice not just in families nonpro t organizations desire to help others even sacri ce can be reinterpreted in the longrun as two societies driving selfinterest or strong morals not clear which economy will work better role in market transactions people need trust in banksinstitutions to investput money into them if they don39t have trust they39ll pull out their money trust in labor people hiring you need some basic trust in you that there is truth in your references etc if no trust in society skillsreferences won t work connections the only way to get job trust very important in and any market that has longterm effectsresults Recession people started abusing other s trust quottoo big to failquot do whatever you want no penalties lack of regulation repeal of GlassSteagall credit default swaps led people to be immoral Montaigne need to limit greed because otherwise people with no morals most greedy will be on the top those with morals on the bottom laws allow everyone a fair chance crucial to understand that a is embedded in a broader set of social and political institutions and behaviors moralsnorms family environment role of government must understand all these interactions to understand economy M W in Europe people wanted freedom from government liberals means freedom in Latin quotneoliberalismquot new people who like laissez faire Europe liberals US conservatives quotsmall governmentquot national defense protect property rights quot quot public education public investment national health insurance ranging from Democratic Sweden US liberals eft wing progressives to Authoritarian Russia China Beyond this economy property largely publicly owned rights private ownership Capitalist to public ownership SocialistCommunist think about institutional structure rather than labels after WWII institutions nationalized then little by little privatized debates in macroeconomics often around the appropriate role of government 23 Income Distribution and Minimum Wage top 20 income has risen over the last 20 years bottom 20 income relatively stayed the same cost of living tends to go up in ation virtually all the gains all of the increases in income has gone to the top 1 federal min wage has gone down 1967 825 1979 838 2011 725 controlled for in ation between 1980 and 1990 minimum wage plummeted not because it was lowered but because there was in ation and it wasn t changed if it had been it would39ve stayed the same why minimum wage isn39t indexed if people are willing to work for that wage then congress has no incentive to raise it why people might accept low wages people have no other choice rates level of wages in otherjobs other sources of support family welfare what affects minimum wage politics foreign competition unemployment productivity amount of output products that can be produced for each unit of input output produced per worker who gets productivity increases 19605 roughly 5050 share between workers and owners workers real wages increased as productivity increased until 1980 workers stopped getting more wages despite the increasing productivity why technological change labor saving technological change demise of unions income how much you39re bringing in wealth how much you39ve accumulated over time net worth assets what you have adds to wealth liability debts etc takes from wealth A LNW America s net worth top 1 35 top 1110 38 bottom 90 27 dereguationittle regulation increases income inequality 25 GDP Accounting and its Discontents four essential economic activities resource maintenance depreciation of equipment production production of goods and services distribution of income of wealth who gets how much pie consumption actual consumption of goods and services quotdepreciationquot maintain it aso true of the environment depreciate over time as well clean water clean air all part of the production process capacity to absorb greenhouse gases these need to be preservedmaintained natural capital environmental resources manufactured capital technology human capital knowledge skills capacity to do tasks social capital connections not in GDP nancial capital nancial assets unstable doesn39t go into GDP human capital can depreciate skis need to be updated with technological innova ons assetscommodities become more like nancial assets ie people39s homes General StockFlow Diagram Era53 Flam5 43534 5 l tl i39iurem L Familial E th f l i p quotIu rI EL 3939 I H 7mm Bathtub Style Diagram a ilimvb Hf Uni new I ll j Eithlrriiiu 39 m rmware example of bathtub style income minus what you consume is wealth over time stream of inputoutput over time accumulation of that ow measured at a point in time Social and Environmental Contexts of Economic Activity a quotJWWw m 5 lt I 5 39Wr39quotrquot39t w a 9 I v 39 1quot 3915 I quot7 twig 939 j t r 27 u 4 w h r National Accounting Gross Domestic Product a measure of all the goods and services produced in an economy over a period of time of change of GDP measure of not a good measure of how the economy is working China has a higher GDP because higher population 13 billion so not a good way to compare economies GDP population accounts for in ation National Income and Product Accounts used to allocate resources for WWII John Maynard Keynes Circular Flow Diag for the Basic Neoclassical Model v GDP Product I Fa Sector amp Production Production Approach Table 52 quot Subsector by Sector by ii V I SUbseCtOF 1 production Wuquot asthan 39 a u 39 quot inmglmwmfm g output market prIces valued 3 gain 2spending demand Etta Sector amp Spending by Spending by Type of Sector Type 39 Spending 7 391quot u mw materials machines utilities rent have to subtract what we spend in foreign counties for a correct GDP Key Issue Avoid Double Counting excude the value of intermediate products GDP value of production of goods and services by a country over a period of time factories but things from other factories to make products so cannot be counted example US Steel amp General Motors steel produced and steel bought are counted twice which is incorrect steel intermediate product cars nal two ways to avoid double counting 1 at every level 2 only count nal output net production General Motors only added what it took to make cars out of steel so eliminates double counting 50000 steel 50000 more to make it into a car 100000 if not calculated correctly GDP is an overestimate important for measuring the incomes available for people in the economy what39s left over for 39 grows by increases in productivity circuar ow important relationship in modern economy more income more people can spend Keynesian idea GDP Includes some quotbadsquot Excluded quotgoodsquot polution costs not subtracted from household goods and services output childcare risk isn39t subtracted vounteer work spending to x depreciated capital underground economy drugs babyst ng quotgoodquot or a quotbadquot prisonspolice work go into GDP lots of crime would add to GDP nancial assets and liabilities are not included anywhere in GDP because GDP is a measure of nal goods and services in a country over time assets are titles things that aren39t considered art used cars paying debts some services are put in by the asset itself isn39t 29 juan Antonio Montecino Lecture Data Measurements GDP per hour worked can eliminate the notion that some countries are poorer because they didn39t work as hard US close to China in income inequality Gini coef cient China recently had a huge increase in inequality shocking that we re so close to them probems with Average Life Satisfaction survey who you take the survey of misrepresentation happiness can39t be assigned a numerical value may mean different things across countriescultures in ation and unemployment negatively correlated Phillip39s curve seectivey choosing information to highlight when making an argument using data debt increase and overall budget balance of GDP graphs show government isn39t doing well net interest of US government debt how much of a burden the debt actually is which isn39t much low debt burden how much you actually have to pay from the revenue interest rates currently low important to not take graphs at face value Exploring a data set 1 What is the unit of analysis macro data typically countrystate level nancial data unit individual stock or interest rate micro data individuals or rms 2 What39s the frequency macro mostly annual or quarterly nancial data higher frequency daily or even hourly 3 How is the data structured are some variable subcomponents of other variables q imossibie n l 39l ugl E sltrmlmd 3quot Mum lawman m WI mm 7 is lzo 7 if lj G j i m technology od vcwumwm 39 5 i i39 i5t Jr n 39quot LL r L t if lumlrm q 3991th would 39 QMH am a M iii quotll l 77 7 7 n n J h 4 How is the data measured economic indicator are often indexes percent what currency 212 juan Antonio Montecino Lecture Mode5 verbal logical or mathematical formal de nitions of objects or variables of interest assumptions about relationships between variables typica economic model endowments resources wealth technology how these can be combined for production preferences what consumers what advantage of economic model use it to make predictions simplify to highlight speci c aspects of reality formal and logically consistent argument quotceteris paribusquot all else equal disadvantage may ignore important features of reality some questions may be easier to express in math false sense of rigor false assumptions a curve showing the maximum amounts of two outputs that society could produce from given resources over a given time period Macro in Context de nition probem assuming that things are static however there is technological change path dependence poor countries might get locked into producing low technology goods differences in production shift curve over time quotpromarketsquot view markets are quotselfregulatingquot require very little or no government intervention function very well from both an ef ciency and normative perspective laissezfaire examples Milton Friedman Smith39s invisible hand the quotmarket mechanismquot ensures the economy is always on the PPF skeptica view of markets quotmarket failuresquot are common not necessarily self regulating Keynesian view of the economy government intervention is sometimes very important no mechanism that ensures we are always on the PPF externalities are present consumershousehods maximize quotutilityquot take prices as given choose how muchwhat to consume demand and how much labor to supply probem people may not know the best way to maximize utility strong assumptions rms maximize quotpro tsquot take prices as given perfect competition in nite of rms novery few rms have an advantagemarket power choose how much labor to hire and how much capital to use in production probem perfect competition rare I 7 rms have market power 1 I r3 Qrices adiust to ensure supply demand no wasted resources equilibrium maximizes utility prices signals that keep us on the PPF socially desirable and ef cient outcome H s PngmE i i 039 r i re j jl N r in a I economic activities that impose costs or bene ts that are not taken into account by decentralized or individual consumers or rms unintended consequences of individual choices negative externalities pollution imposing costs on someone else positive externalities factory opening technological innovations lead to market failures individuals fail to internalize the full effect of their actions prices do not re ect the true cost of bene t rationale for government intervention pubic goods have positive externalities but little incentive to create them because no pro t can be made playgrounds parks etc 219 Alternatives to GDP amp Inequality survey each additional dollar produces less happiness for a rich person than it does for a poor person marginal increment objective measures like GDP sometimes ignore ethics general impact on people both subjective and objective together better representation not entirely subjective components value of costs of etc objective components but subjective choice of what to include real GDP per capita life expectancy years of education gender adjusted environmentally adjusted additional measures HDI produces ratio area between actual line and line of equality A A area under actual line B AB level of inequality completely equal Gini coef cient 0 completely unequal 1 Branko Milanovich global Gini coef cient compared to the Ginis of selected countries 1 inequality within countries 2 inequality between countries 3 global inequality ignore what country people are from concept 3 may be so high because population differences countries like India China rapid industrialization but very unequal growth within their large populations economic growth spreading but increase in equality why are these happening at the same time quotThere39s a tradeoff between inequality and growthquot inverse between inequality and growth Leaky Bucket Arthur Okun why might there be an inverse relationor positive relationship between inequality and growth 224 Inequality amp Growth More Equality More Growth Equality Less Growth lower class have more money so will without investing there will be less work harder money in the economy stand of living increases economy standard of living decreases more productive poor spend more prices rise so less business more education more jobs low competition more education more innovation less incentive more money more time for innovation ength of growth quotspellsquot and inequality more inequality leads to less economic growth higher the degree of inequality shorter the growth spell credit market problems poorer people don39t have good credit poitica problems more inequality more corruption and instability ess equality less consumption lower investment in education and human capital lower health nutrition and productivity even if inequality is associated with lower economic growth redistribution of income may have a negative impact on growth lealq bucket negative effect incentives for work and investment what inequality is generated by the economy without including any government intervention takes government intervention into account redistribution gross inequality market net inequality Results of IMF study 1 more unequal societies tend to redistribute more 2 lower net inequality is robustly correlated with faster and more durable growth for a given level of redistribution 3 redistribution appears generally benign in terms of its impact on growth only in extreme cases is there some evidence that it may have direct negative effects on growth average relationship more equal faster and more durable growth you can redistribute as long as not extreme redistribution doesn39t have much of an effect on economic growthduration of growth however huge variations between countries reconstructed data on economic growth population trade and health statistics going back hundreds of years life expectancy increases health and science technology vaccines waste management improvements better nutrition male height increases population grows unti everybody has just enough food to survive gt gt WRONG because assumes xed technology innovations break out of that track GDP relatively the same until Industrial Revolution skyrocketed due to innovations advancements economic growth uneven Europe grew India stagnated what explains economic growth technological developments political environment wars educationliteracy rates urbanization twoway street access to resources population growth plant equipment factories etc this capital all the resources to create new products nancial capital nancial resources to create new products capitaism accumulation of massive capital technoogy is about making this capital more ef cient countries who want economic growth should invest BUT more complicated than that capital labor force resources accumuation and improvements of factors of production are seen as the major driving force of economic growth other factors as well world system countries interact not growing in isolation colonization past outsourcing currently 226 Economic Transformation and Financialzation as an economic system dominant in the world right now 1 production for pro t 2 production for sale on markets 3 production involves labor hired for a wage helped invent nation income accounting wanted to include a value of household labor in the GDP ways to measure household labor 1 apply the quotmarket wagequot to those who do the same work 2 quotopportunity costquot measurement how much they could make if they were spending their time at another job dif cult to measure value varies quotopportunity costquot hypothetical IOWU39gtUJNl 39 Categorizing Sectors harvesting and extracting raw materials and simple processing often sold for further processing manufacturing chemical petroleum re ning service sector provision of services rather than tangible goods ex medical education productivitv orowth ef ciency has gone way up drop in share doesn39t necessarily mean we re producing less durable goods and nondurable goods percent of all employees in manufacturing 25 1950 10 2010 1 increased outsourcing 2 increased imports of manufacture goods 3 increased automationmechanization increased substitution of capital for labon Good Bad people might preferjobs in other losing jobs reducing employment prospects sectors lower prices for consumers exploits poor and vulnerable workers abroad safer work environment outsourcing and imports create dependency on foreign countries no need to worry about increases inequality employees if people are getting income then they can39t buy products health care expenditures increasing percentage of GDP more people getting access more diagnoses technology improvements expensive not much competition perfectly competitive many producers with now pricing power monopoly one producer lots of pricing power oligopoly several big producers dominate industry gt gt oligopolies need to produce a lot need a lot of producers companies need to produce related products size and breadth n iPhone iPad Australian economist then Harvard 19305 monopoliesoligopolies dominate major industries economies of scale big rms dominating industries gales of innovation new set of entrepreneurs dynamic force destructive of what was there before disruption disrupt old ways 33 Suppy Demand Unemployment Wages LF E LF U LF labor force E employed U unemployed doesn t include under 16 year olds people in an institution prison military active duty people not actively searching work people who aren39t available to start a job right away of type of productio Z of people looking for work V who have work LRPR non institutionalized people between ages 16 54 non military women in the labor force 35 1950 75 2010 men in the labor force 98 1950 89 2010 men decreasing participation stayathome dads women take some jobs more incarceration possibly women increasing participation Women39s Rights Movement increasing education for women households can no longer survive on just one adult working smaller families recession at least two consecutive quarters decline in GDP unemployment high going to be dif cult to get a job no matter how much education you have unemployment rates by race and ethnicity African Americans most unemployed then Hispanics then White people potentia workers who have stopped looking for work large increase at 2008 steadily increasing since 2013 unemployment rate vastly understating weakness in today39s labor market because not including those who stopped looking for work employment to population ratio better measure wages relatively increased as productivity increased until roughly 19805 real median family income stagnated while productivity still grew ethnic hierarchy povertylevel wages relatively 20 of African Americans roughly 20 of Hispanics only 10 of White people real earnings takes into account wages and hours worked for workers by gender 50033 Men 39157 Women Classical Labor Market Model r quot equilibrium point full employment 519W A 7 39au m m at ng quot Mfg Unemployment Labor 9 WM minimum wage creates unemployment We equilibrium wage Les Led equilibrium W gt We Ld lt Led is this the correct analysis 35 Suppy Demand Unemployment Wages l wage Supply a unQMPlDUmw mfcrb tmmm 39CM SSiCal w 39u mumt s approach 39r l w quot quot 3939 E Eiqml iwum at w Fulltwlwmtquot quotMel VIE L5 who Emi 39 ta d sue 7 quot W we 1 untmmwmw PearlD w 1 quot9 cause of u mmwma macs Tm hi th r l am m wwwt S lU UD n howevw ql l Lo LE L5 A Vj John Maynard Keynes started his book criticizing this model market would adjust those who wanted jobs would compete with other workers by lowering the wages they39re willing to work at W would decrease to We however if wages fell people wouldn39t spend as much demand curve would shift left decrease 4 year period start at 1050 minimum wage 3 increase of price high turnover rate at fast food industry increasing minimum wage lowers this turnover rate would save costs because keep experienced workers and wouldn39t have to help new workers industry will grow by approx 25 or more economy grows increase in prices would reduce demand but not by much famous study fast food workers in contiguous states New Jersey and Pennsylvania use of contiguous states similar economy living standards kind of like a controlled experiment no negative impacts of minimum wage on employment because use other adjustment measurements rather than by laying off employees Kevnesian aroument would lead to more growth and more employment because people on the lower end spend more more demand and more employment Macro negative effects raise prices in ation political dynamicpushback decline in enrollment of college substitution of higher skilled workers to lower skilled workers incentive to outsource labor people between jobs looking for work waiting for a good job to show up healthy not always a problem prevents underemployment due to business cycle insufficient aggregate demand high in recessions lack of demand Keynesian unemployment wages too high relative to productivity structural changes in economy skills mismatch geographical mismatch why are so many people still unemployed after this recession argument between cyclical and structural unemployment
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'