EC 202 Week 3 Notes
EC 202 Week 3 Notes Econ 202
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This 5 page Class Notes was uploaded by Annie Notetaker on Thursday October 13, 2016. The Class Notes belongs to Econ 202 at University of Oregon taught by Urbancic M in Fall 2016. Since its upload, it has received 24 views. For similar materials see macroeconomics in Macro Economics at University of Oregon.
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Date Created: 10/13/16
EC 202- Tim Duy: Week 3, Chapter 6 Mon 10/10/16 Fiscal monetary policies, which normally affect the demand side of the economy, also have an impact on the supply side • The Federal Reserve is holding interest rates steadily low to encourage the unemployment rate to drop. • Some members think the rates should be raised as a preemptive measure against inflation, but the rest don’t want to slow the economic growth that has been slow since the recession Chapter 5 (continued) Core Inflation: Core inflation excludes volatile food and energy components to measure underlying trend of inflation Policy-makers don’t want to overreact to volatile prices, only persistent ones If inflation passes through to core, it is persistent. If not, it is probably temporary Headline (including food and energy) inflation will revert to core inflation over time • Core inflation is a better prediction of where inflation is going to be If inflation is higher than what the government claims, then real GDP is lower than what they claim. Unemployment rates would not be dropping, and we would be in a recessive state, which does not seem to be true Real Variables 100(Nominal Value/CPI) = Real Value at CPI Base Year 100(Nominal Wage/CPI) = Real Wage In nominal terms, wages have been improving, but in order to find out if workers are better off, you have to look at in real terms to see if workers can buy bigger baskets of good/services CHAPTER 6 Economic Growth What makes real GDP grow over time? Growth can be measured as: 1. The percentage change in real GDP per period 2. The percentage change in per capita real GDP per period: The amount of output per person in the economy • Critical for standards of living Economic Growth vs a Business Cycle Expansion Real GDP might be rising: 1. During the expansion phase of a business cycle : (Possibly) coming out of a recession, unemployment is falling. We care about this as a standard of living 2. Due to rising potential GDP: Supply side of the economy- the ability to produce goods/services. The side of the economy that is critical for long-term economic growth. (Demand side is responsible for more short-term economic growth). We care about this as real economic growth The Rule of 70: The number of years it takes for the level of a variable to double is approximately 70 divided by the annual percentage growth rate of the variable (i.e. 1% growth doubles in 70 years, 2% growth doubles in 35 years, 7% growth doubles in 10 years) What determines potential GDP? Potential GDP is the quantity of real GDP produced when the amount of labor employed is the full-employment amount 2 Graphs and models are used to clearly define issues and problems To determine potential GDP, we use a model with two comp onents: 1. Aggregate Production Function: The relationship between labor and output, ceteris paribus (technology, capital) Increase in labor hours = increase in real GDP 2. Aggregate Labor Market: Supply and demand in the labor market produce an equilibrium level of labor and real wages Labor surplus forces the real wage rate down Labor supply might grow because: Population Increase: More hours per worker, increase in labor force participation An increase in labor supply increases equilibrium quantity of lab or- causes a right shift in the labor supply curve- and raises potential GDP Growth of labor productivity: More output per unit of labor Due to: • More capital per worker (capital deepening) . Each worker is producing more goods/services: Can be physical or human (intelligence) capital • New technology: Makes us more efficient than we were previously 3 EC 202- Tim Duy: Week 3, Chapter 6 Wed 10/12/16 MIDTERM 1 IS ON MONDAY 10/17 If your nominal wage stays the same, and the price level goes up, the real wage is falling Wages are ‘sticky’ • Wages can get stuck at a rate higher than what firms are willing to pay • Firms higher less and less people to accommodate higher wages Higher labor productivity makes labor more valuable 1. Boosts the demand for labor 2. Raises real wages 3. Raises equilibrium quantity of labor and has a secondary positive impact on potential GDP: Potential GDP increases, subsequently, labor productivity increases and shifts the PF upwards (from graph in book) If output per worker is higher, labor becomes more valuable The great debate: ‘when will the robots take over?’ People go back and forth deciding whether technological advances are lowering the value of labor • Computers are cheaper than labor • They never call in sick • Don’t need to be paid after the initial investment What is the new normal for U.S. Growth? Estimates suggest that U.S. GDP growth has dropped between 1.5 -1.75% (according to John Fernald). When politicians claim to raise the growth rate to 4%, that should raise red flags. According to current statistics, that is not sustainable 4 Rule of Law is incredibly important. Something as simple as having your title on your property is crucial Without title on your property, no banks will give you a loan, lowers capital, bad for economic growth. Exists in places like Indonesia Policies for accelerating potential GDP growth 1. Stimulate savings (to finance investment): The saving that we (households) do, essentially is transferred through channels that allow firms to borrow that money (somewhat questionable argument). Discouraging savings could have a negative effect on the economy 2. Stimulate research and development: Increase research capacities at universities, grants for firms to do research 3. Improve quality of education: Reaching diminishing marginal returns. Not as readily able to reach needs as before. What do you do with a population where 30-40% have a college education? Can you increase it to 50%? 4. Encourage international trade: Allows nations and firms to focus on their specialties. If we didn’t have international trade, the number of jobs would likely be the same, but the composition of jobs would be different. Transition costs need to be taken into account to transition to and from an economy that uses international trade 5