Macroeconomics lecture notes
Macroeconomics lecture notes 2305
Popular in PRINCIPLES OF MACROECONOMICS
Popular in Macro Economics
This 19 page Class Notes was uploaded by Sanat Upasani on Tuesday July 26, 2016. The Class Notes belongs to 2305 at University of Texas at Arlington taught by Ronnie W Liggett in Summer 2016. Since its upload, it has received 8 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Macro Economics at University of Texas at Arlington.
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Date Created: 07/26/16
New York once banned any soft drinks that were above 20oz. Philadelphia tries a different approach - Tax on sugary drinks. o Passed by city council (13-4) - 1.5 cents per oz. - At the distribution level… - Money used for??? o What else… education? - Remember- if you want less of something… o TAX IT!! Price and wage controls Price ceiling- Limiting price increases - Rent control - Gasoline prices- 1970’s - Nixon wage and price controls- 1970 Price floor- Minimum price is established Price ceiling - Rent control o New York o California o Other areas o Per text- approx. 200 cities and towns What’s the purpose? Affordable housing Moral intervention (???) What are the results? - Shortage - T/F of income (From…to…?) o LANDLORD TO TENANT! - No incentive to construct housing. - Non-price discrimination. - Black market. o Grease the palm… o Key deposit… Reduce maintenance - What gets left out? - What happens to property? o Property values o Tax base Law of unintended consequences. Minimum wage What’s the purpose? Who works for minimum wage? Update- the push for 15 dollars - Seattle, San Francisco, LA – move to 15 dollars per hour is on the way. - Seattle – 9.47 to 11.00 - San Francisco- 10.47 to 12.25 - LA- 15.37 for Hotel Workers - CBO- est. a Federal move to 10.10 = 500,000 less jobs. - In regards to the top cities… first wave results… o Seattle= Loss of 1,100 food service jobs. o San Fran= Loss of 2,000 jobs. What are the results? - Surplus. - Reduced Qd for labor. - Layoffs. - Reduced hours. - Reduced benefits. - Wage progression (among other workers) - Some economists (Krugman) disagree… Who gets the boot?? - Highest paid??? o No - Least productive - Lowest skilled Is there ALWAYS a surplus? - Mid-cities - What does the graph look like? Price controls- final observations - Simple ideas in theory, but EXTREMELY complicated exercises in practice. - Political pressures invariably arise among “favored” producers. - Unintended consequences. They DISTORT markets… Negative externality - supply side. Positive externality - demand side. Pollution: Ethanol People in labor force 16 or older, working or looking for a job Labor force participation rate. How many are I labor force In exam you have to calculate labor force participation rate. Unemployment rate Discouraged workers - Individuals who have stopped looking for a job because they are convinced they will not find a suitable one. - They are a subset of a larger group- marginally attached workers Inflation and price levels… Prices and comments Price index - The cost of today’s market basket of goods expressed as a percentage of the cost of the same market basket during a base year. o Price index = Cost of market basket today/ Cost of market basket in base year Market basket of goods- CPI - Food and beverages - Housing shelter - Housing fuels and utilities - Housing household furnishings and ops - Apparel - Transportation - Medical care CPI comparison This is CPI price index 1927- 17.5 cents 1955- 26.7 cents 1983- 1.00 1991- 1.34 2011- 2.20 2013- 2.33 By how much have prices increased between 1991 and 2013? (2.33-1.34)/1.34 Protecting against inflation - Cost of living adjustments (COLAs) o Clauses in contracts that allow for increases in specified nominal values Gas price 1955 v. 2013 Gas= 20.5 cents per gallon in 1955 Is this higher or lower than what we pay today? What is the equivalent price in 2013 dollars? - Nominal dollars= unadjusted - Real dollars= Adjusted - 1955 price * (2013 $$/1955 $$) - 0.205 * (2.33/ 0.267) = 1.79 Joe DiMaggio earned 50K in 1955. What is his salary in 2013 dollars? 50,000 * 2.33 / 0.267 = 436,330 Index= Prices in current yr. / Prices in base yr. CPI flaws – p.158 - Slow to adjust - Problems dealing with technology increases. - How to deal with “quality” - Generally – CPI likely “overstates” inflation. Other indexes PCE- Federal reserve PPI- Producer price index GDP Deflator - Broader - More adjustment Circular flow - Product markets - Factor markets (Resource markets) - See page 173 What is GDP? Total market value of all final goods and services produced during a year by factors of production located within a nation’s borders. - Market value - Final goods and services - Within borders - Timeframe Excluded transactions Financial transactions - Buy/sell securities - Private transactions, government transactions Used goods - Why not? - 2 ndhand – already included Other exclusions- non-reported cash payments Other excluded- Illegal activities GDP limitations Non-market transactions Quantity, not quality Leisure?? Environmental Not always the best estimate of “social welfare” Expenditures approach GDP = C + G + I + Xn C= Consumption expenditures I = Gross private domestic investment G= Government expenditures X= Net Exports (Exports – imports) GDP components Consumption - Durable, non-durable - Services - Largest component of GDP Government - Federal, state, local Investment - Capital goods - Factories, plants… - Inventories - Most volatile component Why is investment the most volatile component to GDP? - Many variables o Technology- waves… Electricity Automobile Computer chip o Interest rates o Taxes o Psychology, expectations Keynes- “animal spirits” GDP – Other accounts GDP NDP (Net domestic product) NI (National income) PI (Personal income) DI (Disposable income) GDP – Depreciation = NDP PI – Personal taxes = DI What do you do with disposable income? Spend (consume) or save Real v. Nominal GDP Real = Adjusted for changes in price level. Nominal = Unadjusted for changes… Remember… Apples v. Apples Adjust GDP for changes in price level. GDP- Yes or no? 12-yr old Johnny mowing is family’s lawn. Dave buys a used car Barbara buying 100 shares of Southwest Airlines. What about the brokerage fee she paid? Real v. Nominal GDP comparison Nominal GDP = 12.5 Billion (Base year) Nominal GDP = 15.9 Billion (Current year) GDP deflator index = 1.24 What is percent change in nominal GDP between the 2 years? What is real GDP in base year? What is real GDP in current year? What is percentage change in real GDP between the two years? Answer 1. 27.2 percent Answer 2. 12,500,000,000 Answer 3. 12,822,580,000 Answer 4. 2.6 Chapter 3: Supply and demand Variables and parameters Ceteris Paribus – “all other things equal” 3 Laws of economics: The law of demand: As price goes up, the quantity demanded goes down and vice versa. The law of supply: As price of input goes up, the quantity supplied goes up and vice versa. Law of equilibrium: The part where demand and supply intersect. The quantity demanded equals quantity supplied. Non-price determinants of demand - Tastes and preferences - Income= For normal goods, income increases and demand increases. For inferior goods, income increases and demand decreases. - Price of related goods - Expected future price. - Number of consumers that are willing to buy. Non-price determinants of supply - Price of inputs - Technology - Regulations - Subsidies - Price of other goods - Expectations Kelo decision- interesting result… - Who affirmed- conservative of liberal wing? - Affirmed – 5 o Breyer, Ginsburg, Kennedy, Souter, Stevens - Dissenting- 4 o O’ Connor, Rehnquist, Scalia, Thomas Micro failure - Unemployment - Inflation - National debt (?) - Trade deficit (??) “Government has a roll in economic stability” (?) - Employment act of 1946 o Full production, employment o Embraced Keynesian economics - Humphrey Hawkins- 1978 o Provided for specifics, attempt to quantify goals o 4 percent or less unemployment. o 4 percent or less inflation… down to 0 percent (not feasible) Chapter 7 – Unemployment Who is in the labor force? Labor force- summarized - Individuals aged 16 years or older. - Working or looking for jobs - Non institutionalized Labor force = Employed + Unemployed The major types of unemployment - The major types of unemployment. o Frictional o Structural o Cyclical o Seasonal NAIRU- Non Accelerating Inflation Rate of Unemployment Unemployment- costs - Lost output! o Think PPC o Erosion of skills over time - Psychological o Mental impact. o Stress induced illness. - Labor force participation rate o The proportion of non-institutionalized working age individuals who are employed or seeking employment. Essentially… o Total 16+ population (non-institutionalized) o How many are there in labor force. Why not… provide job losers with unemployment benefits indefinitely? - When the government provides unemployment benefits to unemployed individuals, it reduces the incentive for them to search seriously for a job. Discouraged workers - Individuals who have stopped looking for a job because they are convinced they will not find a suitable one. - They are a subset of a larger group- marginally attached workers. - How does the existence of discouraged workers bias the unemployment rate? Who is unemployed? Are they in the labor force? If yes- what type of unemployment? - Mary leaves her job to become a stay- at – home mom - Marty leaves his job as a cashier at Best Buy to look for work as a waiter. - Larry drops out of high school and has difficulty finding work. - Becky quits her job at GM in Arlington and moves to Florida to be closer to her boyfriend. - Maria is laid off of work at the bank when the economy experiences a recession. - Horatio is 22, he sleeps all day and then stays up all night playing Halo. He is unemployed and has no interest in finding a job since mom pays all his bills. - Chapter 1 Economics: Social science dealing with scarce resources. Economics Social science dealing with the use of scarce resources to meet unlimited wants. 2-part definition – scarce resources and material wants. Scarcity Unlimited wants Resources Micro vs macro - Various differences 3 questions for an economic system What do we produce? How do we produce? Who will receive? What answers these questions? What are the choices? Choice 1 Demand driven economy. Market mechanism. Prices are the signal! Free enterprise. Choice 2 Command system. Central planning. Centralized control. “Authority” knows best. What is the result? Mixed economic systems Combination of both U.S. There is capitalism as well as command driven economies in a few places. Capitalism – Characteristics. It’s imperfect. There is no perfect economic system. 1. Limited government. 2. Private property. 3. System of markets and prices. (Stabilizing force). - What is a market? An institution that brings buyers and sellers together. - Prices are a SIGNAL. Note The essence of capitalism is not just a matter of exchanges as an end it is also about creating value by mobilizing both ingenuity and human energy. “Morality of capitalism” Palmer 4. Self-interest (Driving force) 5. Competition (Regulating force) 6. Free enterprise. Defined The freedom of businesses and individuals to organize and operate for profit in a competitive system without interference from government beyond same basic regulations necessary to protect the public. Resources (Factors of production) (THIS COULD BE ON THE EXAM) Human - Labor - Entrepreneurial Ability - Human capital Property - Land, etc. - Economic capital (The textbook refers to this as physical capital) o “Manufactured aid to production.” At any point in time they may be scarce What about money? Not a resource Not productive per se Consider what we lost on 9/11 More physical capital or human capital. Are resources the only answer to prosperity? Per economic studies 1. Political stability 2. Rule of law 3. Private property Chapter 2: Cost of highest value Miscellaneous terms Opportunity cost (Test question) “Cost of the highest valued, next-best alternative that is sacrificed.” We all have opportunity costs. Time- the true opportunity cost - How do we use our time… What do the numbers mean Millions Billions Trillions A “Time” perspective - Million seconds o 11 days (approx) - Billion seconds o 32 years (approx) - Trillion seconds o 32,000 years (approx.) Production possibilities curve. - Useful tool - 3 assumptions o Fixed technology o Fixed resources o Efficiency What do we see? Marginal costs. Opportunity costs Increasing marginal costs What is markets “fail”? What do we mean by “fail”? - Too few or too many resources in specific economic activity - Micro failures - Macro failures Market failure - A situation in which the unrestrained market economy leads to too few or too many resources going to a specific economic activity. o Prevents economic efficiency and individual freedom o Is addressed by public policy (Government) In a pure market system, economic efficiency occurs when individuals know and must bear the true opportunity cost of their actions - In some cases, the price that someone actually pays for a resource, good, or service Economic functions of a government For micro failures. Legal framework Maintain competition Re-distribution of income Reallocation of resources. For macro failures. Stabilize the economy (reluctantly) Legal framework - “Rules of the game” - Sports- think about the rules… o “Coach, we’re letting them play.” - Administration of justice o Legal system - FCC, FAA, EPA, SEC, FDA, etc. - (Perhaps the biggest impact of government?) Maintain competition - Monopoly situation - AT&T- early 80’s - Recent years- AT&T wireless and T - mobile. - American airlines and US air. - Don’t be misled by “competition…” Redistribution of income Income tax - Aren’t all taxes a “re-distribution”? (Re-dist to fund vs. re-dist for equity) Transfer payments - Define Price control - Per chapter 4 Re-allocation of resources - Public v. Private goods. o Private good: Consumption by one person excludes consumption by another. Public good- Consumption by one person does not exclude consumption by another. What’s the “free-rider” problem? - The person who benefits but does not contribute to the payment for the benefit. Positive externality st Pizza joint 1 floor Rents upstairs… You LOVE PIZZA! And the aroma! “Spillover benefit” Another example of positive externality… - You iive in an apartment - Neighbor plays sax… - You enjoy the “free music” - Spillover benefit… Education… What does it give us? - Degree/diploma - Job… What else do we get? - Social interaction - Informed citizens o Better decisions? Health, politics?? - Lower crime rate -
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