Transcript PPT - Ave Maria University

Thinking Like
An Economist
Principles of Macroeconomics
Dr. Gabriel X. Martinez
Ave Maria University
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Economics: Studying
Choice In a World of Scarcity
 The Scarcity Principle
– Boundless wants cannot be satisfied with
limited resources.
– Therefore, having more of one thing usually
means having less of another.
– Because of scarcity we must make choices.
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Chapter 1: Thinking Like an
Economist
2
Economics: Studying
Choice In a World of Scarcity
Unlimited Wants vs. Limited Resources
Scarcity
Choices
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Chapter 1: Thinking Like an
Economist
3
Economics: Studying
Choice In a World of Scarcity
 Economics
– The study of how people make choices under
conditions of scarcity and of the results of those
choices for society.
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Chapter 1: Thinking Like an
Economist
4
Economics: Studying
Choice In a World of Scarcity
 Economics
– Alternatively, the study of how human being
satisfy their wants and desires by coordinating
the available material resources, given the
decision-making mechanisms, social customs,
and political realities of the society.
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Chapter 1: Thinking Like an
Economist
5
Applying The Cost-Benefit
Principle
 The Role of Economic Models
– Economic models are abstract constructs
(simplified descriptions) that allow us to analyze
situations in a logical way
– Other examples of abstract models
 A computer model of climate change
 A road map
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Chapter 1: Thinking Like an
Economist
6
Economics: Micro and Macro
 M i croeconomics
– The study of individual choice under scarcity
and its implications for the behavior of prices
and quantities in individual markets.
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Chapter 1: Thinking Like an
Economist
7
Economics: Micro and Macro
 M a croeconomics
– The study of the performance of national
economies, and of the policies that
governments use to try to improve that
performance.
 Because of scarcity, resources must be coordinated
to satisfy wants. This coordination, on a grand scale,
is what macroeconomics studies.
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Chapter 1: Thinking Like an
Economist
8
Macroeconomics:
The Bird’s-Eye View of the
Economy
Introduction
 The Recent U.S. Recession

In the U.S.:


The economy almost came to a standstill in 2001.
The number of people without jobs increased by
50%
 From one in every 25 Americans to one in every 1617 Americans.

Scores of Internet-based businesses collapsed.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
10
Real GDP Growth Rate
2.5%
2.0%
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
0.0%
-0.5%
-1.0%
Jan-81
1.5%
1.0%
0.5%
-1.5%
-2.0%
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
11
Introduction
 The Recent U.S. Recession

The cause?



The Stock market bubble? Irrational
exuberance?
Capitalism?
Poor economic planning?
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
12
Introduction
 The Recent U.S. Recession

The response:

Macroeconomic policies
 Government actions designed to affect the
performance of the economy as a whole.


The Fed cut interest rates dramatically.
The Federal Government cut taxes and increased
spending.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
13
Copyright c 2004 by The McGraw-Hill
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
Jan-81
Government Surplus % of GDP
14
Introduction
 The Argentinian Collapse of 2001



The production of goods and services fell by
nearly 20 percent between 1998 and 2002.
About 1 of every 5 Argentinians was
unemployed.
The Argentinian peso lost two-thirds of its
value.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
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Introduction
 The Response to the Argentinian Collapse
 Major Reforms to the State and the banking system.
 Fiscal austerity (control of spending by the provincial
governments, higher taxes on exports).
 Fiscal: of, or relating to, government expenditures,
revenues, and debt
 Massive loss of value of the currency made Argentinian
goods attractive to foreigners.
 As a consequence, in 2003
 Production seems to have grown by 8.4% (!!) in 2003.
 Inflation is (relatively) low, at 3.7%
 Unemployment has fallen from 18.80% to 14.50%.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
16
Introduction
From The Economist
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
17
Introduction
 The East Asian “Miracle”


The Japanese economy became 12 times larger
between the end of WWII and today.
The Korean economy, in the same period,
became 28 times larger.



The US economy, in the same period, became only 4
times larger.
The economy of Hong Kong became 10 times
larger over the same period.
Why?
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
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The Major Macroeconomic Issues
 The Major Economic Issues
1
2
3
4
5
6
Economic growth and living standards
Productivity
Recessions and expansions
Unemployment
Inflation
Economic interdependence among nations
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Chapter 17: Macroeconomics:The Bird's-Eye
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The Major Macroeconomic Issues
1
Standard of Living

The degree to which people have access to
goods and services that make their lives
easier, healthier, safer, and more enjoyable.
 Economic Growth

A process of steady increases in the quantity
and quality of the goods and services the
economy can produce.
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20
Output of the U.S.
Economy, 1900-2001
In 2001 output of the U.S. economy was:
•25 times the 1900 level
•5 times the 1950 level
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
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Economic growth and living standards
 In the U.S.:
 60 million households own two or more
automobiles.
 98% of household own a television (95% a color
TV).
 67% of households subscribe to cable.
 In 2002, 60 % of adults were regular Internet
users.
 80% of the adult population has a high school
diploma.
 25% of the adult population has a college degree.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
22
Economic growth and living standards
 Why did the US grow so fast during the 20th
century?
 Why did the East Asian nations grow faster
than the US during the second half of the 20th
century?
 Is there something about “the nature of India”
that makes it different from “the nature of
France” so that they grow at a different pace?
 What can be done to make Africa grow
faster?
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
23
The Major Macroeconomic Issues
2
Productivity


In 2001 the average U.S. worker could
produce five times more than in 1900.
Average labor productivity:
Total output
 output per employed worker
Number of people employed

Note Average Labor Productivity is NOT the same as output
per person (there are people who aren’t workers).
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Output per Person and per Worker
in the U.S. Economy, 1900-2001
In 2001:
•Output/person was 7 times the 1900 level
•Output/worker was 5 times the 1900 level
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Chapter 17: Macroeconomics:The Bird's-Eye
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Productivity
 Productivity and Living Standards in China
and the United States
2001
Output
Population
Employed
Output/person
Average labor
productivity
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United States
China
$10,200 billion
285 million
135 million
$35,790
$1,160 billion (U.S.)
1,262 million
710 million
$919
$75,556
$1,634
Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
26
Productivity

U.S. trends in output per employed worker
 1950 - 1973: increased 2.1%/yr
 1973 - 1995: increased less than 1%/yr
 1995 - present: increased nearly 2%/yr
 Why did productivity slow down for 20 years?
 Why did it speed up?
 Is this worrisome / encouraging?
 Is there a government policy that can replicate US
success (or avoid its mistakes) and make other
people from other countries more productive?
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
27
Recessions and Expansions
Total Output
3
0
Secular
growth
trend
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.Mar June Sept. Dec. Mar June Sept. Dec. Mar June
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
28
U. S. Business Cycles
20
Recovery
of 1895
Civil
10 War
World War I
World War II
Korean
War Vietnam War
0
Panic
of 1893
–10
Panic
of 1907
Great
Depression
–20
1860 ‘70
‘80
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‘90
1900
‘10
‘20
‘30 ‘40 ‘50 ‘60
Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
‘70 ‘80 ‘90 2000 ‘10
29
Recessions and Expansions
 What causes recessions?
 Can they be avoided?
 Whom do they hurt?
 What causes prosperities?
 Do they have any costs?
 Should we use government policy to
eliminate business cycles?
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Chapter 17: Macroeconomics:The Bird's-Eye
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30
The U.S. Unemployment
Rate, 1900-2001
4
The unemployment rate:
•% of the labor force that is out of work
Observations:
•Rises during recessions
•Always greaterChapter
than
zero
17: Macroeconomics:The Bird's-Eye
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View of the Economy
31
Increases In Unemployment
During Recessions
Unemployment
rate at beginning
of recession (%)
4.8 (Nov. 1973)
6.3 (Jan. 1980)
5.5 (July 1990)
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Peak
unemployment
rate (%)
9.0 (May 1975)
10.8 (Nov./Dec. 1982)
7.8 (June 1992)
Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Increase in
unemployment
rate (%)
+ 4.2
+ 4.5
+ 2.3
32
Unemployment
 Unemployment rates differ from country to
country:



For the past 20 years, more than 10% of the European
workforce has been unemployed.
European unemployment is double the rate in the U.S.
During the 1950s & ‘60s, the European unemployment
rate was generally lower than in the U.S.
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
33
Unemployment Rate, %
7.0
5.0
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
3.0
34
Unemployment
 What is the relation between output and
unemployment?
 Why do some countries always have more
unemployed people than others?
 Why is unemployment never zero, not even in the
best of economic times?

The lowest unemployment rate since WWII was 2.5%
in 1953.
 And that’s even after government started intervening
to reduce unemployment.
 Should unemployment be zero?
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Chapter 17: Macroeconomics:The Bird's-Eye
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35
The U.S. Inflation Rate, 1900-2001
5
Inflation
•The rate prices in general are increasing over time
•Varies over time -- high in the ‘70s and low in the ‘90’s and today
•Varies between countries -- in 2001: 3% in U.S. & 400% in Ukraine
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Chapter 17: Macroeconomics:The Bird's-Eye
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Inflation
 Inflation Rate

The speed at which prices rise.
 Why is Inflation a problem?

People who live on fixed incomes are able to
buy less with the same income.
 What causes inflation?
 What can be done about it?
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Chapter 17: Macroeconomics:The Bird's-Eye
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37
Consumer Price Index
250.0
200.0
150.0
100.0
50.0
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
0.0
38
Inflation Rate
14%
12%
10%
8%
6%
4%
2%
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
0%
39
The Major Macroeconomic Issues
6 National economies are becoming

increasingly interdependent:

In 2005 the U.S. (which is a pretty closed
economy):



Exported 13.56% of all goods and services
produced.
Imported 19.07% of the goods and services used
by Americans.
Countries like Hong Kong export and import
more than 100% percent of what they
produce.
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Exports and Imports as a Share of
U.S. Output, 1900-2001.
20%
16%
12%
Imports/GDP
Exports/GDP
8%
4%
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
0%
41
Economic interdependence among
nations
 The international flows create political and
economic issues:

The impact of trade on jobs



Trade imbalances




The steel and textile industries
Trade agreements (NAFTA and CAFTA)
When exports and imports differ significantly
Trade deficit: exports < imports
Trade surplus: exports > imports
Capital flows and financial crises.
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Chapter 17: Macroeconomics:The Bird's-Eye
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42
Transport and Communication Cost, 1930-1990
(Index 1930 = 100)
Index
(1930 = 100)
Average ocean freight
and port charges
120
per short ton of cargo
Average
air-transport cost
100
per passenger mile
80
Cost of a
3-minute
phone call
New York
60
40
to London
20
0
1930 1940 1950 1960 1970 1980 1990
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
Year
43
The Major Macroeconomic Issues
 The Major Economic Issues






Economic growth and living standards
Productivity
Recessions and expansions
Unemployment
Inflation
Economic interdependence among nations
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Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
44
Macroeconomic Policy
 Monetary Policy


Determination of the nation’s money supply
Controlled by the central bank




In the U.S., the Federal Reserve System (Fed)
It affects the interest rate…
…and through it, the cost of consuming, of
buying a house, setting up a plant,…
…and through it, the expansions and
recessions of a country.
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Chapter 17: Macroeconomics:The Bird's-Eye
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45
Every time unemployment rises, the Fed makes
borrowing cheaper, in order to move the economy
forward.
10.00
8.00
6.00
4.00
2.00
Fed Funds Interest Rate
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2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0.00
Unemployment Rate
Chapter 17: Macroeconomics:The Bird's-Eye
View of the Economy
46
Macroeconomic Policy
 Fiscal Policy




Decisions that determine the government’s
budget, including the amount and composition
of government expenditures and government
revenues.
It affects people’s income after taxes.
It creates (and destroys) jobs.
It alters the size of the government.
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Macroeconomic Policy
 Fiscal policy influences the balance between
government spending and taxes:


A deficit occurs when government spending is
greater than tax revenue.
A surplus occurs when government spending
is less than tax revenue.
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Macroeconomic Policy
 Structural Policy



Government policies aimed at changing the
underlying structure, or institutions, of the
nation’s economy.
Best analyzed by microeconomics.
But has major macroeconomic effects

Remember the resolution of the Argentinian
crisis.
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49
Macroeconomic Policy
 Positive versus Normative Analyses of
Macroeconomic Policy

Positive Analysis





Addresses the economic consequences of a
particular event or policy, not whether those
consequences are desirable.
What are the facts?
What is the production of a country?
How fast are prices rising?
How can we give jobs to more people?
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Macroeconomic Policy

Normative Analysis





Addresses the question of whether a policy
should be used; normative analysis inevitably
involves the values of the person doing the
analysis.
These values are derived from disciplines other
than economics: theology, philosophy, etc., and
from one’s own reflection and experience.
Should the country grow faster?
Should inflation be stopped at the cost of a
recession?
Is unemployment too high?
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Aggregation
 Aggregation

The adding up of the individual economic
variables to obtain economy-wide totals


Used to take a “bird’s-eye view” of the economy
Aggregate measurements in dollar values
allow economists to compare broad categories
of goods and services, such as exports and
imports.

Aggregation often obscures the fine detail of an
economic situation, but it simplifies the analysis.
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Aggregation
 Aggregation

M a croeconomics deals with aggregates.

M i croeconomics deals with separate
markets.
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53