Transcript Handout #7 - Department of Agricultural Economics

Slide Show #6
AGEC 430
Macroeconomics of Agriculture
Spring 2010
Handout #7
Suppose I invert a drinking glass and a long
neck bottle. Both containing the same
amount of beer. Which container will empty
first?
How is the measurement of capacity utilization useful to
macroeconomic policy makers?
Concept of Capacity Utilization at Market Level
Price
S1
Engineering
capacity
Concept of Capacity Utilization at Market Level
Price
S1
D1
P1
Economic Engineering
capacity
capacity
Concept of Capacity Utilization at Market Level
Price
S2
S1
Suppose an event occurs
such as a shortage of rail
cars to ship harvested
grain to ports overseas,
bottlenecking exports.
This shifts the supply
curve to the left.
D1
P1
Actual
supply
Economic Engineering
capacity
capacity
Concept of Capacity Utilization at Market Level
Price
S2
S1
D1
Raises spot market
price from P1 to P2.
P2
P1
Actual
supply
Economic Engineering
capacity
capacity
Concept of Capacity Utilization at Market Level
Price
S2
S1
The lack of rail cars
would cause a
bottleneck in this
market.
D1
P2
P1
Actual
supply
Economic Engineering
capacity
capacity
Bottleneck
Handout #8
Graph of the
Keynesian cross.
The 45 degree ray
out of the origin
signifies points
where aggregate
demand equals
aggregate supply.
Graph of the
Keynesian cross.
The 45 degree ray
out of the origin
signifies points
where aggregate
demand equals
aggregate supply.
Effects of an increase
in interest rates will
lower the aggregate
product market
equilibrium.
This is a repeat of the
bottom graph on the
previous page where
aggregate demand fell
as interest rates rose.
This is a repeat of the
bottom graph on the
previous page where
aggregate demand fell
as interest rates rose.
The aggregate demand
shifted to the left. But
since output fell as well,
the aggregate supply
curve shifted to the left,
leaving the general price
level unchanged.
AD
P
P1
AS
If the supply curve had not
shifted but was fixed in the
short run (classical range),
then the general price level
in the economy would fall
from P to P1.
Early classical
economists
argued that
supply is fixed in
the short run.
This is true of
the economy’s
YPOT potential
output.
Also referred to as
the Keynesian range
YFE = natural rate of full employment of capital and labor
YE = planned spending
YPOT = maximum potential output
Inflationary gap = YE > YFE Recessionary gap = YE < YFE
General Price
Level (CPI)
AD
AS
PE
YFE=YE YPOT
Gross Domestic
Product
The goal of macroeconomic policy is to achieve aggregate product
market equilibrium where the gap between YFE and YE is zero, or
where the economy is operating at a natural rate of full employment.
Handout #9
Today’s recession
The economy is
showing signs of
recovery but still
experiencing
negative growth.
The index of leading economic indicators typically signals the direction of
change in macroeconomic activity 6-9 months later? Why is this important?
Known as the Phillips curve.
Shows the short run tradeoff
between inflation and the
unemployment rate.
Where would
you prefer the
economy to
operate?
The graph to the left shows the importance of productivity in the economy.
This was a major consideration in the policies of President Reagan.
Productivity measured here as output per worker rose dramatically during
the 1990s as a result, in part, of the information technology boom. This
resulted a growing economy with low inflation.
Relative Importance Weights
in the CPI
Food and beverages
Food
Food at home
Food away from home
Alcoholic beverages
15.757
14.629
8.156
6.474
1.127
Housing
Apparel
Transportation
Medical care
Recreation
Education and communication
Other goods and services
43.421
3.691
15.314
6.390
5.741
6.301
3.386
Total
100.00
As od December 2008, urban
Consumers spent 14.628
percent of their budget on
food. Do you see where the
farm business sector plays
into the CPI?
Rate of Inflation
in Recent Recessions
1973-75
recession
1981-82
1981-82
recession
recession
Current
recession
The price deflator used to measure real GDP is the broadest measure of the
general price level and inflation in the economy.
Unemployment Rate
in Recent Recessions
Current
recession
1981-82
recession
1973-75
recession
We reached 10.5 percent in the 1981-82 recession. We may well equal or
exceed that level in the current recession.