MACRO Notes

Monday 1/7 am Pre-Term BLS ~ Bureau of Labor Statistics Current Numbers “Good” Numbers GDP Growth 3.4% 3% Inflation Rate 2.2% 2% Unemployment 3.9% 5% Business Cycle 90506822922273711870601 Real GDP When there is an increase there is Expansion When there is a decrease there is Recession (Contraction) 746449231892 Time Expansion ~ The economy is doing better and there is growth that benefits the nation Recession (Contraction) ~ The economy is doing bad and there is no benefits in the nation You want the economy to be like a Ferris Wheel Monetary and Fiscal Policy We want to use these tools to measure the economy Section 1 GDP GDP Definition Circular Flow Model How it is calculated (& Limitations) Expenditure Method Real vs. Nominal GDP/GDP per capita Business Cycle Potential GDP GDP Definition ~ GDP (Gross Domestic Product) is measured in dollar terms, we need to know quantity and the market value that is based on price of all “final” goods and services produced domestically within the nation ’s boarders in a given year; sometimes quarterly. Example ~ Right now the GDP of the USA is $18 Trillion whereas Europe is $17 Trillion The Circular Flow Model ‘Y’ is Income, money earned ‘NT’ is Net Taxes ‘S’ is Savings, money that isn’t spent on consumptions or taxes ‘C’ is Consumption, products or services purchased to be used ‘I’ is Investment, Businesses investing to grow their business ‘G’ is Government Spending on goods and services ‘NX’ is Net Exports from other countries (Exports-Imports) How is it Calculated? $18 Trillion (real) $20.7 Trillion (nominal) Income Approach ~ Y = NT + S + C *Expenditure Approach ~ C + I + G + NX = GDP* 8880426506800 GDP = C + I + G + NX Bureau of Economic Analysis Includes: Goods/Services produced by foreign companies in the U.S. Excludes: U.S. owned companies’ production overseas, purchases of stocks and bonds, used goods, intermediate goods, household production, & illegal goods/services Measured Quarterly Data is compiled and distributed a while after that quarter had ended 1st Quarter ~ Jan.- March 2nd Quarter ~ April - June 3rd Quarter ~ July- Sept. 4th Quarter ~ Oct. – Dec. When…….. Wages go up ? Demand goes up ? Prices go up Wages necessarily do not go up when inflation increases GDP vs. GDP per capita USA Nominal GDP = 20.7 T330 M USA Nominal GDP per capita = $62,727 Standard of living China Nominal GDP = 20.7 T 1.6 B China Nominal GDP per capita = $12,937 Country Comparisons Country GDP (Trillion) GDP Growth GDP per capita HDI A $3.8 1.5% $47,000 .916 (6th) B $3.5 -5.3% $23,700 .798 (50th) C $3.2 -3.0% $15,800 .755 (75th) D $2.8 4.7% $11,300 .684 (110th) E $2.7 2.5% $41,200 .907 (14th) F $2.2 2.3% $18,500 .756 (74th) G $1.6 1.0% $45,900 .913 (9th) H $1.6 3.0% $20,500 .761 (72nd) HDI ~ Human Development Index Question ~ Does a higher GDP or GDP per capita mean that there is a better standard of living in that country? Answer ~ With having a higher GDP or GDP per capita does not mean that there is a better standard of living. The two are possibly correlated but they may not be causable, that means that they might not directly affect the standard of living. The idea of having a better way of life in the nation means that everyone is thriving and there are underlying factors that affect the way of life; the government, natural disasters, location, etc. Just by looking at the table above we see how they could be correlated but they will not be causable with each other. Real vs. Nominal Nominal GDP ~ Measured using current year/specific year prices, will change if price and/or quantity change Real GDP ~ Measured using a base year price(BEA uses 2009); real GDP is adjusted for inflation, will only change if quantity changes ‘Nominal’ tends to be greater then ‘Real’ because ‘Nominal’ will either increase or decrease depending on if the price and/or quantity changes; look at half sheet over ‘Nominal vs. Real’. Potential GDP Potential GDP ~ What we could potentially be making on our PPF (Production Possibilities Frontier) if we are being economically efficient in all aspects of that market. The Business Cycle Fluctuations in the pace of expansion of real GDP is called the Business Cycle *The business cycle is a periodic, but irregular, up and down movement of total production and other measures of economic activity.* The National Bureau of Economic Research(NBER) measure and record all of the recessions Monday 1/7 pm International Trade Production Possibilities Frontier Comparative Advantage Benefits & Costs of Trade Exports & Imports graphs Protectionism Tariffs Exchange Rates Production Possibilities Frontier *Refer to handout* PPF represents what we can produce at an efficient state or an inefficient state, or what we couldn’t produce which is outside the curve, this also shows potential GDP. Key Economic Principles that the PPF illustrate are…. Scarcity Efficiency – on the curve Opportunity Cost Growth Absolute Advantage ~ Is the ability to produce more or better goods and services than somebody else. Comparative Advantage ~ Is the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume. Costs and Benefits of Trade Costs More Price with lower Quantities Dependency Lost Jobs due to increased competition Benefits You gain new products/resources Establish Diplomatic ties Help develop countries; gain skills More Quantity with lower Prices Specialization Build bigger Markets Create Jobs Forces innovation Exports and Imports Graph 755650223079 Cotton (Domestic Industry) 78295597190 102636721518700 P 914400833200 CS S 909734213850076467072701 World Price 186499515449900 PS 77343026244900 Exports D Q With Trading Exports… Price goes up, CS goes down, PS goes up by more than CS goes down. 737118247806Sugar 62048623811200102636721518700 P 914400833200 S 186499515449900 CS 135210920764500 135293910487900825881907590082052386308 World Price 75457427114500 PS Imports D QD QS Q With Trading Imports… Price goes down, CS goes up, PS goes down by more than CS goes up, QD goes up, and QS goes down. Who does the US Trade with? (Top 6) 1.Canada $322B 2.Mexico $262B 3.China $170B 4.UK $121B 5.Japan $109B 6.Germany $80B What does the US Trade(Export)? What does the US Trade(Import)? Capital Goods Capital Goods Industrial Supplies Industrial Supplies Consumer Goods Consumer Goods Automotive Automotive Food/Beverage Food/ Beverage Services Services International Trade Restrictions Arguments for imposing trade restrictions along with their counter-arguments…. International Trade Saves Jobs Counter ~ Protects jobs by restricting imports, so the jobs stay at home not overseas. International Trade is an Infant Industry Counter ~ International Trade is used by older, inefficient industries, where there is little growth in the domestic industry. International Trade helps with our National Defense Counter ~ Trading with multiple countries will minimize the risk of a war breaking out. International Trade is used just for Dumping Counter ~ Predatory pricing is a temporary; firms can re-enter when prices go up, along with foreign firms often having competitors in other countries. Why would a government impose a tariff? They would impose a tariff mainly because they want to raise the revenue and to protect the domestic industries from the international or foreign competition since consumers will probably buy a foreign-product which is known to be more cheaper. How would this change price and quantity? It would change the price of goods by going down and having a greater quantity. Since the price has increased, suppliers are willing to produce more goods so their production increases Is it efficient to impose a tariff? It would be efficient to impose a tariff because of the Government wanting to raise the revenue and only benefit the domestic producers, where the prices could be to high for the average person to pay. Who are the winners and losers when a tariff is imposed? Winners: Producers & Government Losers: Consumers & Import Producers What are some unintended consequences of the tariff? Some unintended consequences would be high prices in domestic producers because of the limitations of imports. It is detrimental to the Import Producers as well. Tuesday 1/8 am Inflation Definition Inflation Rate & Deflation Consumer Price index “Basket of Goods” Limitations/Biases Calculations Real and Nominal Definition ~ Inflation is the general increase in prices and fall in the purchasing value of money. What do we know about Inflation? Inflation is mostly bad (but a little bit is OK) It devalues your money (i.e. your purchasing power) Purchasing power: the amount of goods/services you can buy with the same amount of money (i.e. a fixed income) In fact, the value of money is the inverse of the price level Inflation can get out of control, and if it does, it can be very painful to get it back under control Hyperinflation ~ Often described as inflation > 50% per month Inflation rate ~ The percent change in the price level from one year to the next. To find the rate…… New-OldOld x 100 Base Year ’82-’84, & value of CPI in base year…. 100 Example ~ Jan. 2018 - 247.867 Jan. 2016 – 245.1 245.1-240240 x 100=2.13% Ways to identify Price Level –Consumer Price Index (CPI) –Producer Price Index (PPI) –Gross Domestic Product (GDP) Price Index –Personal Consumption Expenditure (PCE) Price Index “Basket of Goods” On average, this how Americans spend their incomes….. Housing……. ………..38% Food/Beverage……….15% Transportation………..12% Medical Care…………9% Education/Comm…….7% Energy………………..7% Recreation……………6% Apparel……………….3% Other………………….3% Limitations/Biases People don’t spend their money exactly like the “Basket of Goods”, meaning it is not 100% accurate. “Basket of Goods” was started in 1913, so there is not an accurate depiction of the prices of today’s items, the new needs and wants of our era, and the biases we have with our era. Biases New Goods Bias Quality Change Bias “Technology Bias” Substitution Bias “Commodity Bias” “The CPI is overstated…” which is a common saying amongst most Economist because the BLS doesn’t take into consideration the way they gather data; the biases mentioned before. Calculations Interest Rates Real Interest Rate = Nominal Interest Rate- Inflation Rate Adjusting Nominal to Real Values Example ~ What is the highest grossing movie of all time? ‘Gone with the Wind’ $390 M in 1939 ‘Avatar’ $2.7 B in 2009 CPI CPI 1939 2009 14.0 214.5 $39014.0=$x214.5 x=390214.514 x=5,975 M…$5.91 B Tuesday 1/8 am/pm Unemployment How its Measured Limitations Discouraged Workers Alternative Measure Calculations: Unemployment & Labor Force Participation Rate Types of Unemployment The Natural Rate of Unemployment Potential GDP How its Measured Unemployment Rate=UnemployedLabor Force x 100 Labor Force Participation Rate=Labor ForceWorking Age Pop. Limitations Not included ~ Under 16, institutionalized, or military reserve Non-Labor Force ~ Retirees, disabled, not looking for work for more than 1 month, students, & stay at home parents If you fall in this category then you are not unemployed but not in the Labor Force Then you can fall into either Employed or Unemployed Total Labor Force: 163,240,000 Employed: 156,945,000 Unemployed: 6,294,000 Counts Part-Time work as Full-Time work Discouraged workers are not counted as unemployed U 6 Rate=Unemployment+Marginally Effected+Part Time(For Econ. reasons) Labor Force+Marginally Effected=% OOH ~ Occupational Outlook Handbook Types of Unemployment Frictional ~ Normal Labor turnover; think of it as voluntary work. Structural ~ Loss of jobs from improvements in technology & foreign competition. Cyclical ~ Unemployment that occurs in a recession Seasonal ~ Your employed seasonal; lifeguard during the summer or a ski resort worker during the winter Structure of the Economy (Labor) ~ Agriculture Manufacturing Services Self-Employed Natural Rate of Unemployment The Natural Rate of Unemployment is about 5% Potential GDP GDP you could produce full employment….. if unemployment = 5% then real GDP = Potential GDP Tuesday 1/8 pm Economic Growth (Long Term) Long Term Growth Real GDP/Person Labor Productivity Diminishing Marginal Return Preconditions Policies to Support Growth Long Term Growth Real GDP ~ Is used to measure economic growth (National Average) Real GDP/Person ~ Is used to show standard of living How do we push out the PPF rightwards? Improve the Quantity & Quality of Labor Quantity: Get more Labor Quality: Increase Human Capital (Human Capital are skillful, and knowledgeable workers) & Improve the Quantity & Quality of Efficiency Quantity: More Physical Capital Quality: Technology Labor Productivity Labor Productivity = Output per Worker Can also be measured as Real GDP per Labor Hour You can Improve Productivity by…… More Physical Capital Technology Human Capital Diminishing Marginal Returns Diminishing Marginal Returns ~ The slow and inefficient increase of the marginal output as input is increased, but where marginal output is not as prominent as before the new addition of input. Preconditions for Growth Rule of Law (Legal System) Property Rights Economic Freedom Market System Policies to Support Growth Public Goods ~ Provide WiFi Infrastructure Education Public Safety Grants/Subsidies Research Medical Advancements Encourage Savings (IRA)…….. more investment to the community Encourage Trade Wednesday 1/9 pm Section 2 Aggregate Supply & Aggregate Demand Model Aggerate Supply Model Influence on the Model Shifters Aggerate Demand Model Influence on the Model Shifters Recessionary Gap Inflationary Gap Demand-Pull Cost Push Changes in Aggregate Demand Fiscal & Monetary Policy Influence on the Model 19776751219210 Shift the Potential GDP Increase in Technology Increase in Capital Increases Productivity Increase in Physical Capital Increase in Labor Shift the Aggregate Supply Price of Inputs Anything that Shifts the Potential GDP Aggregate Demand Shifters Anything that shifts C, I, G, or NX 3 Situations for Macroeconomic Equilibrium Macro-equilibrium Ideal Situation ~ When Aggregate Supply & Aggregate Demand intersect 86404116891000 7277885066900General PGDP 18661221537000Price Level AS Solution? 40195501733984081111253000 AD 22855591971100 PL 1858010423510074485560519 “Current” 196875988939 AD RGDP RGDP RGDP > PGDP Inflationary Gap….. Expansion Phase 2677886169713007277884841600867410-171100General PGDP Price Level AS 4011930161731 Solution? AD 7371181793622855591971100 PL 2668270683860073037962256 “Current” AD RGDP RGDP RGDP < PGDP Recessionary Gap….. Recession Phase