Transcript Lecture 7
From Markets to Macro Lecture 7 Dr. Jennifer P. Wissink ©2016 John M. Abowd and Jennifer P. Wissink, all rights reserved. February 22, 2016 Announcements: 1120 S2016 If you have a conflict with Prelim 1, make sure you have... – read the syllabus concerning your options – and then use the link you can find on our Blackboard site (see left hand menu choices) and register for Option 1 or Option 2. » Note: You WILL NOT get any email reply from me or the head TA – all you need to do is sign up. If you want “proof” you signed up, print the screen you see once you submit the form. Final Exam Schedule for Spring 2016 Has Been Posted – We have been given Tuesday May 17 at 2pm for our final. – Everyone should be prepared to take the final that day and time. – The makeup final the next week (probably on the 23rd) will only be for people who qualify under Cornell’s guideline OR for people who come and see me in person with extremely compelling reasons. I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them. – See: https://registrar.cornell.edu/Sched/rules.html Sorry, but I (Wissink) need to move my 1-2pm office hour tomorrow (2/22) until Wednesday (2/24). I will still be in my office from 11:30am-1pm tomorrow if you want to stop by. But then have to run. This is for this week only. 3 Classic Government Interventions Price Floors Price Ceilings Quantity Quotas Ambrogio Lorenzetti, The Effects of Good Government in the city, Siena Italy, circa 1338 Price Ceilings Government established maximum selling price. – Must be below P* to be binding. – Why? Government usually thinks the market price is too high for some reason. Usually end up with…. – Shortages! – And all the problems they generate. Examples: – Gas price ceilings – Apartment rent control Price Ceilings & Market Shortage Equilibrium is at P*=17 and Q*=23. Pceiling=$10. At the artificially low price of $10, buyers want to buy 30. But sellers only want to sell 16. Price Demand Supply 17 10 There is a shortage of 14. Shortage = 14 16 23 30 Quantity Quantity Quota Government established maximum number of units sold. – Qmax must be below Q* to be binding. – Why? Government thinks too many units are being traded. – Example: import restrictions Usually end up with... – Higher prices and more. Quantity Quotas P P D S D Q S Q Final Comments The Roots of Macroeconomics The Great Depression – a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s. Classical economists applied microeconomic models, or “market clearing” models, to economywide problems. However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the impetus for the development of macroeconomics. The Roots of Macroeconomics In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money. Keynes believed governments could intervene in the economy and affect the level of output and employment. During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession. – Fiscal policy – Monetary policy For nice short bio, see http://homepage.newschool.edu/het//profiles/ keynes.htm John Maynard Keynes A Very Brief Macroeconomic History F.D.R. and The New Deal WWII and its aftermath Keynesian “success” into the 60’s – Fine-tuning was the phrase used by Walter Heller in the 60’s to refer to the government’s role in regulating inflation and unemployment. Keynesian “disillusionment” – – The use of Keynesian policy to fine-tune the economy in the 1960s, led to disillusionment in the 1970s and early 1980s. Inflation and Stagflation » Inflation occurs when there an increase in the overall price level. » Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation). – – Supply Side and “Reaganomics” in the 80’s Micro-foundations of macroeconomics Keynesian “renaissance?” Macroeconomic Concerns Output/Production Income/Employment Price Levels/Interest Rates Global Trade Growth Output & Growth: Short & Long Run The business cycle is the cycle of short-term ups and downs in the economy. Growth looks at what happens to output (inter alia) over long periods of time. The main measure of how an economy is doing is aggregate output. – Aggregate output is the total quantity of goods and services produced in an economy in a given period. » Note: In order to add up all the different things an economy produces, one uses a currency value. » For example, in the U.S., we use the dollar value of the total quantity of goods and services produced in the U.S. in a given period. » This is basically what we call “Gross Domestic Product” or GDP. Output & Growth: Short & Long Run A recession is a period during which aggregate output declines. Two consecutive quarters of decrease in output (as measured by real GDP) signal a recession. A prolonged and deep recession becomes a depression. Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run. “It's official: U.S. is in recession Economy began shrinking in December 2007, panel declares” http://www.msnbc.msn.com/id/27999557/ (on 12/1/2008) “Diagnosing depression: What is the difference between a recession and a depression?” http://www.economist.com/finance/economicsfocus/PrinterFriendly. cfm?story_id=12852043 Unemployment The unemployment rate is the percentage of the labor force that is unemployed. The unemployment rate is a key indicator of the economy’s health. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium. – Why do labor markets not clear when other markets do? Inflation and Deflation Inflation is an increase in the overall price level. Hyperinflation is a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation. Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation. Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation). The Business Cycle An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise. A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall. A positive trend line indicates long run growth. MACRO QUESTIONS Macroeconomic Data – Real Output Growth FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2009 The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output. Government Policy Options Main policies that the government considers to influence the economy: – Fiscal policy: government policies concerning taxes and spending. – Monetary policy: tools used by the Federal Reserve to control the quantity of money in the economy. – Growth or supply-side policies: government policies that focus on stimulating aggregate supply instead of aggregate demand; includes both fiscal and monetary as well as other policies (e.g., regulatory, industrial, antitrust...) Short term vs. Long term Counter-the-cycle vs. Growth The Circular Flow & National Income Accounting National Income & Product Accounts National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy. The U.S. Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of economic activity. – http://www.bea.gov/national/index.htm#gdp Arguably the most well known of these is GDP. GDP: Gross Domestic Product Gross Domestic Product (GDP) is the total “dollar” market value of all final goods and services currently produced within a given period by factors of production located within a country. About how big was it in the U.S. in 2014? $17,348 billion $15,962 billion Important GDP Notes Gross Domestic Product (GDP) is the total “dollar” market value of all final goods & services currently produced within a given period by factors of production located within a country. – Market value... – Final goods and services... » The term final goods and services in GDP refers to goods and services produced for final use. » Intermediate goods are goods produced by one firm for use in further processing (i.e., transformation) by another. » Value added is 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. » In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales. – Currently produced stuff... » Current » Productive – Located within, i.e., stuff produced HERE... » Output produced by a country’s citizens, regardless of where the output is produced, is measured by Gross National Product (GNP). – It’s gross... » Refers to investment purchases of newly produced capital like housing, plants, equipment, and inventory. GDP Observations & Limitations Population matters... Leisure matters... Quality matters... Home production matters... Illegal markets matter... Distribution matters... Social Benefits/Costs matter... What’s produced matters... Depreciation matters... So what do we do? – Try the best we can. – Look at various indicators and scale them or compare them in meaningful ways. How Happy Is America? – http://www.npr.org/blogs/money/2013/02/08/171414674/how -happy-is-america