Econ 104 – 01 Professor Ozgur Orhangazi Email: Ozgur@umass.edu Office: Gordon Hall 211 Monday, Wednesday. Office Hours: 1:30-2:30 Go to every class. Seriously, they build up. Today: 1. Overview of the class and course material 2. Introduction Overview. “To understand how an economy works” Economics, in the most general term is thIf you want to learn more check out ttu checklist
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We also discuss several other topics like an elementary school is creating a new lunch menu. they send questionnaires to students with last names that begin with the letters m through r.
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e study of how decisions are made (mostly with money) This class measures all the decisions made by the society. “Aggregate Outcome” Learn 3 things; 1. How the economy works 2. Will learn a method of thinking. 3. how to apply this thinking. Definitely Read the relevant chapters, have a look at them before the course. After the course, give a 15 minutes to check out the course. The discussion will solve the exercise. Things I think are wrong with the economy: Not enough jobs. Too much pollution because companies are choosing profit over sustainability T Nominal vs Real GDP Current Dollars – The price we pay for goods and services Nominal GDP – Gross Domestic product measured in current dollars. GDP today, not regarding inflation. REAL GDP TO calculate the real GDP, This year’s production*Last Year’s prices. Real GDP ignores the change in prices. Example: you make $100k a year for two years, you can buy more things the first year than the second year because prices have increased. Base year – the year chosen which the prices are set *when looking at gdp on the government website, look for the real gdp* Limitations of the GDP concept. We are not always better off just because the GDP grows. GDP and Social Welfare If crime levels went down, society would bebetter off, but a decrease in crime is not an increase in output – not shown by the gdp. Increase in leisure is also an increase in social welfare, sometimes associated with a decrease in GDP.These are the rules of the game. Learn it well. Introduction: Three of the major concerns of macroeconomics are: Output growth Business cycle – the cycle of short term ups and downs in the economy. “there are expansions, where the economy is growing Recessions – economy is shrinking.” Depression – a prolonged and deep recession Aggregate output – the total quantity of goods and services produced in an economy in a given period. Recession – a period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters Expansion or boom – The period in the business cycle from a trough up to a peak during which output and employment grow. Unemployment Unemployment – One of the most important indicators of how an economy is doing. When an economy is expanding, unemployment goes down because more jobs are created. When an economy is in a recession, unemployment increases. Inflation and Deflation “Learn how to measure the movements, how to understand the movements, learn how to intervene and change the movements. – The basics.” Inflation and deflation Inflation average is ~2% per year. Components of Macroeconomy a. Households i. Work ii. Consume b. Firms (Institutions that undertake production) i. Produce ( Employing people is part of production along with raw material) ii. Invest (Building factories, buying machines) c. The Government i. Investments (Space pro ii. Consumes (Paper, cars, building materials) d. The Rest of the world i. Trade – Buy, sell The government is able to affect the economy – Keynsian economics. The government can set laws about working, consumption, sales, tax et cetera. *for simplicity, we will begin by not assuming the rest of the world exists. The Three Market arenas Another way of looking at the way households, firms, the government and the rest of the world relate to one another is to consider the markets in which they interact. We divide the markets into three broad arenas: 1. The goods and services market 2. The labor Market 3. The money (financial) market. Essentially, this economics course touches over everything future courses will be teaching about Future courses will be going deeper into a part of economics touched on over here. Margin Call – Movie about investment banking Freakonomics – Book about investments and stuff, very good. Lecture 2 Measuring National Output and National Income Most information is available online at the national income and product accounts Data collected and published by the government describing the various components of national product and income. GDP – Gross Domestic Product – The total market value of all final goods and services produced within a given period by factors of production located within a country. “Look at what we’re producing, look at the price and add em up” Final Goods and services – Goods and services produced for final use. Intermediate goods – goods that are produced by one firm for use in futher processing by another firm. Value added – the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. So in a GDP, identify all the final products in an economy, then add them up. ULTIMATELY – THERE ARE TWO WAYS OF CALCULATING THE GDP – Extremely important policy tool Expenditure approach add up all expenditure to calculate gdp Income approach – add up all income to calculate gdp 1. The expenditure approach – a. Four main categories of expenditure: i. Personal consumption expenditures (C): Household spending on consumer goods ii. Gross private domestic investment (I): spending by firms and households on new capital, plant, equipment, inventory and new residential structures. iii. Government consumption and gross investment (G) iv. Foreign trade b. Net exports – Exports – Imports. 2. The Income approacha. National income – total income earned by the factors of production owned by a country’s citizens b. Compensation of employees – includes wages, salaris and various supplements – employer controbutions to social insurance and pension fund, for example – paid to households by firms and by the government c. Proprietors’ income – the income of unincorporated business d. Rental income – the income received by property owners in the form of rent e. Corporate profits f. Net interest – the nteres paid by business. Gist of the story is this – You can either add up all the expenditures or you can add up all the income when calculating gdp. We calculate gdp to 1 check stability of the economy. 2 check growth/shrink of economy. 3 Talks about the employment prospects of the economy. “Everything in a macroeconomy is connected – every move will always create series of other movements and that is what we study.”Unemployment Measuring Unemployment Employed – Any person 16 years or older who works for pay, either for someone else or in his or her own business for 1 or more hours per well (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. Unemployed – a person 16 years old or older who is not working, is available for work, and has made specific efforts to acquire a job. Not in labor force – a person who is not looking for work because he or she does not want a job or has given up looking. Labor force – the number of people employed plus the number of unemployed. *people you think should be unemployed sometimes isn’t because they are not looking for a job.* 5% unemployment = 5% of the LABOR FORCE NOT THE POPULATION. Frictional unemployment – the portion of unemployment that is due to the normal turnover in the labor market: used to denote short-run job/skill-matching problems Structural unemployment – the portion of unemployment that is due to changes in the structure of the economy that results in a significant loss of jobs in certain industries. Technology – making some workers redundant Change of location – companies migrating to a new country. Natural rate of unemployment – the unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of the frictional unemployment rate and the structural unemployment rate. Cyclical unemployment – unemployment that is above the frictional plus structural unemployment. Discouraged worker effect: The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force. – People who are no longer counted as part of unemployment because they gave up on looking for jobs.Inflation *We will be building our model to look at how the economy functions. The consumer price index. Consumer price index (CPI) A price index computed each month by the Bureau of Labor stats using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer. Producer price indexes (PPI’s) Measures of prices that producers receive for products at all stages in the production process. Once called wholesale price indexes, PPI’s are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials and crude materials, although there are subcategories. Prices move in different directions, how do we calculate it? We look at the average change in prices, however we don’t simply look at the average, we look at the percentage of each consumer. Ex. What is the most expensive thing you pay for? Look at the ratio/weight on the consumer. Figure 7.1 – the market basket. Look at what you spend on in your shopping basket and look at it for each person every year. Then get a weighted average. By doing this every month, you will get the price of everything in this basket and watch the change every year. Over time, you see how prices change in each item. The weighted average shows the change in price for owever long amount of time. When you look at the changes for long enough, you can form am index. Table 7.5 0 The CPI Almost all the time, the prices are increasing. The costs of inflation – During inflations, most prices – including input prices lik e wages – tend to rise together, and input prices deternmine both the incomes of workersand the incomes o f owners of capital and land SO inflation by itself does not nessecarily reduce ones purchasing power. What changes the prices? What else is happening in the economy? (the prices give a signal, the FED uses this as a signal to set the interest rate.) The costs of inflation *The nominal gdp is 5%, the inflation rate is 2%. The actthirday epual growth is 3% (5-2) because inflation. Prices of some products go down because these products. Inflation rate- different for each person. Dewde I dosed man, that was slowwwwww, but it was interesting. And I learned the use of PPI’s and inflation rates. What’s coming up next Output growth – growth Per capita growth Short run*** slides too quick. 0-100 What we’ve done Based on the idea that the total spending on the economy is = total production in the economy.