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week 4 notes

by: Lordiah Obas

week 4 notes ECO 105

Lordiah Obas
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just notes
Introduction to Macroeconomics
Jessica Singer
Class Notes
Economics, Macroeconomics




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This 18 page Class Notes was uploaded by Lordiah Obas on Monday February 22, 2016. The Class Notes belongs to ECO 105 at Pace University taught by Jessica Singer in Spring 2016. Since its upload, it has received 37 views. For similar materials see Introduction to Macroeconomics in Economcs at Pace University.

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Date Created: 02/22/16
Professor Jessica Singer INTRODUCTION TO MACROECONOMICS- ECO 105 Lordiah Obas Introduction to Macroeconomics Professor Singer Spring 2016 Week 1 (1/29/16): Overall Labor productivity (agriculture) Making the world smaller  Selling ships  Steam ships  Canals  Railroads  Air travel Industrial Revolution (England)  World Trade Development wasn’t distributed evenly (rich white folk) Capitalism: changed the nature of work  Specialization dependent of employment  Working conditions Transformation: material wealth of family  3 people (family unit) Change of Government: Before- Queen by tax collection (never really since and participate to the people) Now- President taxes for school, police, army, etc… Chapter 1 ECONOMICS :THE STUDY OF HOW HUMANS COORDINATES THEIR WANTS /DESIRES,GIVEN DECISIONS-MAKING MECHANISM ,SOCIAL CUSTOMS , POLITICAL REALITIES AND BUDGE. 3 Central Coordinates Problems: 1. What and how much to produce 2. How to product it 3. For whom to produce it Guidelines for economics reasoning:  Benefits  cost, do it  Marginal benefits (incremental) marginal costs Two kind of costs: 1. Money 2. Opportunity: the value of the next best alternative (other thing you didn’t do/pick/buy) Economic reality is controlled by 3 forces: 1. “Invisible hand”- market is self-regulating decreasing lead to efficient/beneficial outcomes without direct regulation. 2. Social and historical forces 3. Political and legal forces So the “invisible hand” markets regulating mechanism and prices in shortage goes up and surplus prices does down. Chapter 2 Opportunity cost can be demonstrated by  Production Possibly Curve (PPC) PPC  1. measures the maximum combination of outputs that can be achieved from a given number of inputs [physical resources] 2. Slope downward Butter *C *A *B Maximum of resources are on the curve A= efficient B= inefficient C= unattainable 1mil Guns Butter Shift in the PPC *C A= efficient B= inefficient C= unattainable Guns How do we increase resources? 1. Technology, makes existing resources more productive, land and labor  Apply machines  Overtime  Immigration Butter Butter Guns Guns  Tech for guns increase not  Tech increase for production butter of butter     Butter Tech/ resources increase for everything        Guns  Why “bowed out?” ­ Producing a combination of butter and guns results in more of both ­ Inputs/ resources are specialized (comparative advantage) ­ Good at one thing ­ If you allow resources to do what they’re best at they will be more efficient    Chapter 3  “Economics institutions” - market economy: economic system based on private property (own by yourself) 1. People are encouraged to follow their own self-interest 2. People are free to do whatever they want as long as it legal 3. Prices coordinates people wants 4. Goods are distributed according to ability, effort, and inherited property and historical social forces 5. Government allocates & enforces property rights 6. A system of rewards (wages) and payments (profits) create incentives for individuals to business  Who’s is it  U.S. economy divided into 3 groups of “economicactors” 1. Household  single or groups of people living together and making decisions,  - supply “factors of production” (labor time) to business and are paid for doing so (demand good/service) 2. Business  private producing units  - Produce and sells goods and services to the household and the government  - They decide what, how much, for whom 3. Government  referee  - buys goods and services and employees people  Circular Flow Goods Markets Househol Governme Business d nt Factor Markets (labor)   Red arrows: (clockwise) 1. Money 2. Money 3. Wages 4. Wages  Black arrows: (counter-clockwise) 1. Stuff 2. Labor time 3. Labor 4. Stuff  Blue arrows: - Taxes  Bolded black arrows: Aid  Six roles of the government: 1. Provide a stable set of institutions and rules  - Legal structure 2. Promote effective and workable competition  -why desirable prices stay low 3. Converting for externalities  -when individual do not take into account the effect that try have on third parties   +  -  Education  Museums/operas  Pollution  Smoking  Subsidizes  Carpool  Traffic congestion 4. Ensuring economic stability and growth  Fear of uncertainty  Fiscal policy (direct government spending)  Monetary policy (federal target and interest rates) 5. Provides public goods: a good that supplied to one person, must be supplied to everyone; the consumption of public good by one individual does not prevent its consumption by another  National defenses  Public transit  Utilities (electricity, water,  Playgrounds trash)  Libraries  Roads  Hospitals  Parks  State parks  (this is not profitable because it’s a private market and it don’t supply them without the government these thing on top wouldn’t exist) 6. Adjusting for the undesirable market result - Redistribute income from the rich to the poor - HUD, Food Stamps, Medicaid, Medicare, Social Security, unemployment insurance, SSI disability AFDC - Decides what is best for people - Disincentive “demerit goods”: cigarettes(tax), alcohol(tax), prostitutes(ban), gambling (regular tax), illegal drugs(ban) - Incentivize “merit goods”: (subsidized) donating to charity (tax break)   Week 2 (2/5/16)  Chapter 4  Supply and Demand  “Law of demand”: quantity demanded rises as price falls, other things constant-  demand goes up, price goes down  What accounts for the law of demand? - Why when price goes up, do people buy less? - Outside of budget - *** substitute for a cheaper alternative      “Quantity demanded” - Result in a movement along the demand curve Vs  “Demand”  (the actual amount price attached of # of units)  (entire curve)  “Change in quantity demanded”  “Change in demand” - Because of a change in price - Because “other things” aren’t (only) constant - Result in a shift in the entire demand curve          Stuff factors for demand: 1. Income: - Up for income shift demand right - Down for income shift demand left 2. Price of substitutes goes down, demand for good question will go down 3. Change in tastes 4. Expectations 5. Taxes: - Taxes goes down disposable income, demand is less   “Law of Supply” - As price up, supply up (assuming else constant)  Why upward sloping?   As prices goes up, if the cost don’t increase, profit goes up more profits = better   A change in price win result in a movement along the curve   When “all else” not constant supply will shift either left or right.            Shift Factor for Supply 1. Changes in the prices of inputs (production cost)  If production cost goes up, profits goes down, supply shift left  If production cost goes down, profits goes down, supply shift right 2. Improved technology  Cost goes down, profits goes up, supply shift right 3. Expectations  Not rosy expectation shift left 4. Taxes  Taxes goes up, cost goes up, profits go down, supply shift left   Market Equilibrium 1. Market for banana strain introduced, up portability  Market Force - Excess supply price tend to go down - Excess demand prices tend to go up  Steps: 1. Movement or shift  (changing in price vs anything else) 2. Supply or demand 3. Left or right  2. All white-clothing at NYC fashion show 3. Market for SUV, global gas prices up            Week 3 (2/12/16)  Long run framework  how long?  No specific time (when all inputs are variable)  Focused on topics of growth supply side “economics” productive capacity  Short run framework   Economic growth:  The U.S. economy is growing how do we know? - We measure: Gross Domestic Product (GDP) dollar market value of goods and services produced domestically in one year.    Cost  Benefits +  Financed) debt service  More jobs  Pollution  More stuffs  Environmental degradation  Quality of life “productive caplity”  Resource exhaustion  Business Cycle: Outputs  4 Phrase 1. Peak 2. Downturn 3. Trough 4. Upturn   Time  Why?  Demand-side Issues - Consumers (aggregate demands)  How to identify where in the business cycle we are?  Leading indicators: 1. Unemployment claims 2. Manufactures order for consumer goods to material 3. Index of consumer expectations 4. Orders for plants and equipment 5. Number of new building permits for private housing units 6. Stock price changes  Unemployment: related directly to short run business cycle - Willing to be able to work, actively looking for work, cannot find a job       Unemployment rate: number of people who cannot find a job a percent of people who are willing and able to work. (willing and able labor time) 1. Cyclical unemployment due to fluctuations in economic activity 2. Structural unemployment caused by change in the institution structure of the economy - Existed before capitalism, fast now 3. Frictional unemployment: unemployment caused by now extranets into the job for the BBS, BLS, to measure unemployment  [unemployment= unemployment/ labor force x100]  Accurate is employment rate? 1. Discourage workers not counted: unemployment is lower than they should 2. Underemployed, but for fewer hours than they would like  Unemployment to potential outputs (complex version PPC) - The outputs that can be achieved is the economy were performing at target level of employment and capacity utilization( rate of level operation for business)   Inflation: a continuous rise “price level” price measure (price index)  Comparing the prices of goods overtime 1. GDP deflator: GDP for years in question, relative to the base year 1960 vs. 2015 - GDP goes up, is it actual growth or have prices increased 2. Consumer price index (CPI) - Measures the change in prices of some basket of goods - “real” (adjusted for inflation) vs. “nominal” (prices)  Cost of inflation 1. Redistributes income from “winners” to “losers” or the people who change their prices from people who can’t respectively  Lender to borrowers in nominal prices - Reduces the information value of prices  Measuring the aggregate economy - Aggregate accounting GDP measures total value of goods and service produced domestically in 1 year.  Two ways of accounting: 1. Expenditure approaching (equal) 2. National income  GDP= C+I+G+X-M  C: consumption(HH)  I: investment(B) - Domestic good - Spending for the purpose of - Savings addition production - Taxes  X-M (NX): exports- imports - Foreign good  G: government spending  + If X>M - Expenditure spending by  - If X<M government for production of  M  spending in foreign goods and services goods - Does not include transfer payment  X  sale of domestic goods abroad  - GDP is a flow concept: occurs over a period of time (years) - GDP measures final outputs, doesn’t count “intermediate goods” (raw material inputs into production) - Why is this important? – Double counting  Example: Is it counted?  New car= yes  Sell used car= no  Sell used car to dealership= car yes but broker fee  Selling stock= no broker fee yes  GDP  GNP: (gross national vs. product) - Value of goods produced within - Value of goods produced by borders citizens domestically or abroad. - GNP + Net foreign fact income  (population abroad)     Net vs. Gross  GDP vs. NDP  NDP= GDP- depreciation (wear and tear on productive units)  Estimate value of economy: - National income= employee compensation + rent + interest + profits - National income flows inside and GDP outside  Shortcoming of GDP? - Measure market activity not “welfare” of the citizens in US GDP vs. Malawi GDP - Doesn’t distinguish between “goods” and “bonds”  Up GDP= “bad”  Natural disasters  Dissing a hole filing it broke up  Nonmarket activities  Childcare  Illegal market activity             Week 4 (2/19/16)  Growth: increase in the amount of goods and services an economy produces. (measures in $)  It is an increase “potential outputs” (maximum amount an economy is capable of producing many given year)  Long-run  focused on supply (producers)  Short-run  demand levels  Potential outputs are fixed and focused on reaching potential if for some reason the economy is not there  Early 1800s growth accelerated making specialization and division of labor- splitting up tastes to allow for specialized production. - Increased productivity - Reinforced by the Theory of Comparative Advantage: specialize in what you are most producing in and trade for everything else  Gain from growth are not always fairly distribution  From looking at distribution - Per capital growth (doesn’t perfectly capture distribution) - Best-medium growth  5 sources of growth: 1. Capital accumulation: physical and human capital (investment in productive capacity) - Investment  stock of capital growth - Depends on a functioning financial sector savings  loans  investment  growth 2. Available resources - Up land, up labor (1. Immigration 2. Make more people 3. Gender participation) 3. Institution with incentives compatible with growth - Incentives  people put in more effort - Private property 4. Technological development - Shift potential outputs out 5. Entrepreneurship: “ability to get things done”  All 5 things need each other to work and grow  Law of diminishing marginal productivity: - The more variable inputs are adapted to existing fixed inputs, the productivity of the marginal inputs will eventually decline (marginal productivity of labor) - For each additional person that you hire, given fixed inputs, eventually the productivity of the marginal workers will decline   Production Function: describes the relationship between the quantity of inputs used in production and the resulting outputs - Outputs= A*F (capital, labor) =  Y= A(technology) * F (K, L)  Classical growth model: - Focused on capital accumulation - Thomas Malthus: 1780s land is limited: - Growth  surplus - Population increase  outputs  - Per capital outputs  Growth is limited - Too many people  starvation   Outputs   Y= A* F (K, L)      Labor  Outputs        New Growth Theory:  Technology advance  investment  More technology advance  growth - Research to development - Learning by doing increasing returns to scale


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