Final exam is Wednesday, December 16, 2009 at 8pm-9:50pm.
There will be class on Monday night, 12/14. Therefore, there are 3 class periods left.
Tonight: Chapters 15 and 16.
Next week: Chapter 21 - The Monetary System
The following week: Chapter 22 - Money Growth and Inflation
This begins the study of Macroeconomics. More interesting, more exciting, more arguable. More questions and fewer answers and therefore more intellectually exciting. 100 questions and 300 answers.
Tonight, we will cover 2 of the 3 major macroeconomic statistics: GDP and CPI.
US economists are most concerned with GDP these days, but we could be focusing on CPI in the near future.
GDP appears to be increasing at present. It went up in 3rd quarter of 2009 and may continue to increase in the next quarter.
Where do these statistics come from?
GDP come from the US department of commerce. The Bureau of Economic Analysis (http://www.bea.gov/) calculates the GDP. The census bureau also plays a part. BEA also provides foreign trade information. They hire thousands of people to put the GDP statistics together. GDP data comes out quarterly. They collect quarterly data from companies.
CPI and Unemployment Rate come from the Bureau of Labor Statistics (part of the Department of Labor). The data is provided monthly.
Gross Domestic Product (GDP)
Definition: Total money value of the final goods and services produced by the residents of a nation during a specific time period.
It used to be measured in GNP, but now the US conforms to the rest of the world and measures GDP. GNP replaces "residents" with "citizens". Therefore, GDP of countries like Dubai is high, but GNP is relatively low.
Ex: If a Greek woman works for a French company at a US location, that production is calculated into the US GDP, because it's produced on US soil, and Greece's GNP because the person doing the producing is a Greek citizen.
GDP is always expressed in monetary terms because its the thing that all goods and services have in common. Ex: Baseball, hot dogs, apple pie and Chevrolet.
GDP measures the value of final goods.
Ex: Paint may or may not be a final product. If it's used to paint a picture that is never sold, then the paint is the final product. If it's used by an artist to paint a picture which is sold, then the paint is an intermediate good and the picture is the final good.
In a country like the US, most of the GDP is in services - non-tangible.
GDP measures production. Even if they're not sold.
GDP is national. However, the EU now also has a consolidated GDP measurement for all 27 member states.
GDP is almost always measured annually or quarterly on an annual basis.
See table 3 pg 339 - 12 most populous countries.
Real GDP is adjusted for inflation. In international terms, its adjusted for "purchasing power" for different exchange rates.
Table 3 implies that GDP tends to influence quality of life.
FYI box on pg 340 implies that GDP tends to influence whether a country will be successful in the Olympics.
Pres Sakozy of France created a commission on the measurement of economic performance and social progress, chaired by Joseph Stiglitz. See http://www.stiglitz-sen-fitoussi.fr/
There is sometimes a trade-off between leisure and economic production. For example, US workers work more hours per year than the workers do in Germany, so it makes sense that US GDP is larger. However, since German workers get more paid vacation per year, you could make an argument that Germans have a high quality of life.
The Stiglitz commission made several recommendations on how to improve the GDP measurement.
The National Income Equation
Y = C + I + G + NX
Y (national income, GDP) is the sum of 4 components.
C = Consumption, spending of the household sector, ~ 70% of GDP. Does not include new residential structures; that is considered investment. C is always tangible.
1. Non-durable goods
2. Durable goods (has most volatility)
3. Services
Only applies to new goods, not on second sales of houses or other similar goods.
I = Investment. There are the expenditures that businesses make in order to produce more stuff.
1. Capital goods - equipment, machinery
2. Structures - buildings, shopping centers
3. Inventories - this is where GDP counts the stuff that is produced but doesn't get sold. This number is good for short-term forecasting, especially the inventories/GDP ratio. If inventories are rising, then there is likely to be a cutback in production in the future. Inventory and supply chain management are the keys to just-in-time production for Toyota. Inventory management is also a key to the success of Walmart.
Keynes ("animal spirits") said that capital goods and structures are the most volatile parts of GDP because they're not immediately necessary. They're based on expectations, and expectation are unmeasureable and unknowable. Government purchases are the "counterweight".
G = Government purchases
1. Federal - federal government can borrow funds and the central bank can create or free up money and can thus counteract the procyclic nature of the state and local government purchases
2. State - tends to be procyclical, they cut spending when incomes are lower, making the recession worse
3. Local
NX = Net Exports
I.e. Total exports-total imports
Not every country can have positive net exports. At least one country has to have a deficit.
Monday, November 30, 2009
Monday, November 9, 2009
Class 8 - Externalities and Public Goods
Tonight we will cover Chapters 10 and 11 and then have an exam review. Exam is next week, Nov 16 over parts 2 and 3. No class on 11/23.
Red Bull is headquartered just outside Salzberg, Austria.
Externalities
Important topic in both micro and macro economics. Basis for government intervention in a market economy.
There are external effects to market decisions.
Examples of market actions that have positive externalities (public goods, external benefits):
buying a swine flu shot, hiring a string quartet.
Education - we're all better off when others get a basic education. There are fewer external benefits to college education. (That's why economists favor public funding of basic ed, but not college ed.)
Medical research.
Publicly funded health care.
Income redistribution.
Govt intervention encourages these transactions in order for the public to receive the positive externalities.
Market transactions that have negative externalities (public bads, external costs):
Buying a cigarette and smoking it - gives harmful second-hand smoke to others
Listening to loud music - bothers others
These transactions may require govt intervention in order to reduce these negative externalities.
See figure 1, pg 205 - you have the classic supply and demand curves.
Supply is a function of the raw materials and labor - fixed and variable expenses of production. This is the private cost. The public cost includes the cost to the environment due to pollution during the process.
To include the total cost, we add in the public costs, shifting the supply curve upward (a higher total price) so we include the cost to the public for cleaning up the environment.
Total cost is private cost plus external costs. Environmental economists try to estimate the external costs, cleanup, lower life expectancy, poorer crops, etc. But it's very difficult.
This explains why, at some point in the future, we'll pay more for petroleum products. Now, we only pay for the private production costs (plus some taxes), which are low. In the future, we'll be paying for the environmental costs as well. (Although there are some positive externalities to low-cost fuel as well.)
For positive externalities, see figure 3, pg 208.
Example: paying to send kids to private school makes them more behaved. That has private value to the parents and also an external benefit to society.
Since these additional benefits apply to the consumers, we shift the demand curve up. This is what society "should do" so that the quantity demanded/supplied is increased.
See Krugman article - The Textbook Economics of Cap-and-Trade. This is very similar to figure 4 on page 214.
The deadweight loss (red triangle) is the amount that producers will no longer be able to earn money from for those additional emissions.
In this scenario, govt is setting the emissions cap. Permit price is determined by the market.
Copenhagen convention may determine the caps for each nation.
In favor: Sierra Club, Environmental Defense Fund
Distinguishing between public and private goods
See Figure 1 pg 226. Matrix is based on work of Paul Samuelson.
Key characteristics:
1. Rivalry in Consumption - is there competition? if one person has more, do others have less?
2. Excludable - can others be kept out
If both, it's a private good. Market system is the best allocator of private goods, especially if there are few external benefits or external costs.
If neither, it's a public good. No rivalry in comsumption and not excludable. Ex: tornado siren.
Red Bull is headquartered just outside Salzberg, Austria.
Externalities
Important topic in both micro and macro economics. Basis for government intervention in a market economy.
There are external effects to market decisions.
Examples of market actions that have positive externalities (public goods, external benefits):
buying a swine flu shot, hiring a string quartet.
Education - we're all better off when others get a basic education. There are fewer external benefits to college education. (That's why economists favor public funding of basic ed, but not college ed.)
Medical research.
Publicly funded health care.
Income redistribution.
Govt intervention encourages these transactions in order for the public to receive the positive externalities.
Market transactions that have negative externalities (public bads, external costs):
Buying a cigarette and smoking it - gives harmful second-hand smoke to others
Listening to loud music - bothers others
These transactions may require govt intervention in order to reduce these negative externalities.
See figure 1, pg 205 - you have the classic supply and demand curves.
Supply is a function of the raw materials and labor - fixed and variable expenses of production. This is the private cost. The public cost includes the cost to the environment due to pollution during the process.
To include the total cost, we add in the public costs, shifting the supply curve upward (a higher total price) so we include the cost to the public for cleaning up the environment.
Total cost is private cost plus external costs. Environmental economists try to estimate the external costs, cleanup, lower life expectancy, poorer crops, etc. But it's very difficult.
This explains why, at some point in the future, we'll pay more for petroleum products. Now, we only pay for the private production costs (plus some taxes), which are low. In the future, we'll be paying for the environmental costs as well. (Although there are some positive externalities to low-cost fuel as well.)
For positive externalities, see figure 3, pg 208.
Example: paying to send kids to private school makes them more behaved. That has private value to the parents and also an external benefit to society.
Since these additional benefits apply to the consumers, we shift the demand curve up. This is what society "should do" so that the quantity demanded/supplied is increased.
See Krugman article - The Textbook Economics of Cap-and-Trade. This is very similar to figure 4 on page 214.
The deadweight loss (red triangle) is the amount that producers will no longer be able to earn money from for those additional emissions.
In this scenario, govt is setting the emissions cap. Permit price is determined by the market.
Copenhagen convention may determine the caps for each nation.
In favor: Sierra Club, Environmental Defense Fund
Distinguishing between public and private goods
See Figure 1 pg 226. Matrix is based on work of Paul Samuelson.
Key characteristics:
1. Rivalry in Consumption - is there competition? if one person has more, do others have less?
2. Excludable - can others be kept out
If both, it's a private good. Market system is the best allocator of private goods, especially if there are few external benefits or external costs.
If neither, it's a public good. No rivalry in comsumption and not excludable. Ex: tornado siren.
Monday, November 2, 2009
Class 7 - Supply, Demand and Government Policies
Test will be Nov 16th, not on Nov 9th as previously announced. Covering chapters 4, 5, 6, 10 and 11.
Wants to cover externalities and public goods
Today Ch 6
Ch 9 will not be covered
Focus on Ch 10-11 next week
Revised schedule will be posted to Blackboard and an email will be sent.
After the test, focus will be on Macroeconomics.
See end of chapter 5 - pg 110-11 - problems and applications dealing with price elasticity of demand, midpoint formula (pg 92).
Alfred Marshall (mentor of Keynes at Cambridge) invented the demand elasticity curve. He wasn't a mathematician so he interchanged the independent and dependent axis on the curve.
1. a. mystery novels. required textbooks are a necessity so they are less elastic. (publishers understand this and therefore raise prices to the levels that we see)
b. beethoven. it's more narrowly defined and therefore there are more substitutes for it.
c. over 5 years. time horizon is broader. (cta is assuming price inelasticity for fares. however, over the long run, it may be elastic and lead to lower revenues.)
d. root beer is more elastic. there are many substitutes.
2. (more calculations than we would see in a test)
this is a question of yield mgmt (see Hemispheres magazine, main article on October issue)
a. use the midpoint formula for elasticity of demand:
for business travelers
[-100/(3900/2)] / [50/225] = -0.051 / 0.222 = 0.23
this is an inelastic demand curve. it's less than 1.
for vacationers
[-200/700] / [50/225] = -0.286/.222 = 1.287
this is an elastic demand curve. it's greater than 1.
b. there are substitutes
6. - never did this problem
12. To answer this question you must first know (or at least have a feeling for or a judgement of) the price elasticity of demand. If it's less than 1, increase the price. If it's more than 1, decrease the price.
13. slope of pharma demand curve is steeper than the computer demand curve. as supply increases and the supply curve shifts to the right, equilibrium price goes down. pharma experiences a greater decrease in price decrease. computers have larger change in quantity demanded. the elastic demand in computers means that the quantity increase is larger than the price decrease and therefore total revenues will increase. conversely, the quantity increase for pharma is smaller than the price decrease because the price elasticity of demand for pharma is less than 1.
Handout: The textbook economics of cap-and-trade by Paul Krugman, Sept 27, 2009
This article is background for understanding the UN-sponsored Copenhagen summit on climate change.
see fig 4b, pg 214
see figure in Krugman's blog
We will go thru this more next week.
Break. After the break, we will zip through Chapter 6.
See chapter 6 - figure 1
Price Ceilings
Non- binding ceiling must be above equilibrium. Such a ceiling is extraneous. It has no effect on the market.
Binding ceiling must be set below equilibrium. In such a case, it will create a shortage. This happens in "real" socialism. Very low prices and lots of shortages. Promise of socialism was that there would be an abundance at low prices. So they set price ceilings, but this caused shortages. Same thing happens with rent control.
Shortages are handled in many ways. Under socialism/communism, it led to long lines and corruption.
See figure 2 - attempts to control prices of gasoline in the 1970s.
initially, the price ceiling was above equilibrium. but then the supply curve shifted and the price ceiling was then below the equilibrium, leading to a shortage.
Rent Controls
see figure 3, pg 117.
An aside: "Friends" was based on rent control. Monica and Rachel's apartment were under rent control. Her grandmother's name was on the lease and the rent control laws said that the rent could not be raised if the leaseholder was still living there.
In the short run, figure A, rent control creates a shortage. In the long run, figure B, elasticity increases on both the supply and dmand side, and the shortage increases.
If there are people who are homeless, some solution needs to be found as an alternative to rent control: public housing (which has many problems) or housing vouchers. Instead of providing housing, provide income subsidies. Same answer for education: vouchers are a better solution than restricting people to a specific school.
Minimum Wage Law
See figure 5. Affect of minimum wage laws. This is controversial and there is a debate as to how much harm these laws do. These laws don't impact educated workers, only young, uneducated laborers. That is the market that the figures refer to. Not the entire US labor market.
Minimum wage laws lead to a labor surplus, i.e. unemployment, in this market segment.
Economists would prefer government subsidies to hire young workers, rather than establishing minimum wage levels.
Taxes on Sellers
see figure 6, pg 125
Supply curve shifts leftward/upward, raising the price to a new equilibrium, but not by the full amount of the tax - because the demand goes down and the sellers end up "eating" the difference.
In the example, the 50 cent tax cost the consumers 30 cents and suppliers 20 cents.
Tax on Buyers
see figure 7 pg 126
A simliar thing happens and the effect of the tax is shared between producers and consumers. It doesnt matter who the initial tax is put upon. It has the same effect.
How much is shared by each side depends on the elasticity of the demand/supply curve.
Wants to cover externalities and public goods
Today Ch 6
Ch 9 will not be covered
Focus on Ch 10-11 next week
Revised schedule will be posted to Blackboard and an email will be sent.
After the test, focus will be on Macroeconomics.
See end of chapter 5 - pg 110-11 - problems and applications dealing with price elasticity of demand, midpoint formula (pg 92).
Alfred Marshall (mentor of Keynes at Cambridge) invented the demand elasticity curve. He wasn't a mathematician so he interchanged the independent and dependent axis on the curve.
1. a. mystery novels. required textbooks are a necessity so they are less elastic. (publishers understand this and therefore raise prices to the levels that we see)
b. beethoven. it's more narrowly defined and therefore there are more substitutes for it.
c. over 5 years. time horizon is broader. (cta is assuming price inelasticity for fares. however, over the long run, it may be elastic and lead to lower revenues.)
d. root beer is more elastic. there are many substitutes.
2. (more calculations than we would see in a test)
this is a question of yield mgmt (see Hemispheres magazine, main article on October issue)
a. use the midpoint formula for elasticity of demand:
for business travelers
[-100/(3900/2)] / [50/225] = -0.051 / 0.222 = 0.23
this is an inelastic demand curve. it's less than 1.
for vacationers
[-200/700] / [50/225] = -0.286/.222 = 1.287
this is an elastic demand curve. it's greater than 1.
b. there are substitutes
6. - never did this problem
12. To answer this question you must first know (or at least have a feeling for or a judgement of) the price elasticity of demand. If it's less than 1, increase the price. If it's more than 1, decrease the price.
13. slope of pharma demand curve is steeper than the computer demand curve. as supply increases and the supply curve shifts to the right, equilibrium price goes down. pharma experiences a greater decrease in price decrease. computers have larger change in quantity demanded. the elastic demand in computers means that the quantity increase is larger than the price decrease and therefore total revenues will increase. conversely, the quantity increase for pharma is smaller than the price decrease because the price elasticity of demand for pharma is less than 1.
Handout: The textbook economics of cap-and-trade by Paul Krugman, Sept 27, 2009
This article is background for understanding the UN-sponsored Copenhagen summit on climate change.
see fig 4b, pg 214
see figure in Krugman's blog
We will go thru this more next week.
Break. After the break, we will zip through Chapter 6.
See chapter 6 - figure 1
Price Ceilings
Non- binding ceiling must be above equilibrium. Such a ceiling is extraneous. It has no effect on the market.
Binding ceiling must be set below equilibrium. In such a case, it will create a shortage. This happens in "real" socialism. Very low prices and lots of shortages. Promise of socialism was that there would be an abundance at low prices. So they set price ceilings, but this caused shortages. Same thing happens with rent control.
Shortages are handled in many ways. Under socialism/communism, it led to long lines and corruption.
See figure 2 - attempts to control prices of gasoline in the 1970s.
initially, the price ceiling was above equilibrium. but then the supply curve shifted and the price ceiling was then below the equilibrium, leading to a shortage.
Rent Controls
see figure 3, pg 117.
An aside: "Friends" was based on rent control. Monica and Rachel's apartment were under rent control. Her grandmother's name was on the lease and the rent control laws said that the rent could not be raised if the leaseholder was still living there.
In the short run, figure A, rent control creates a shortage. In the long run, figure B, elasticity increases on both the supply and dmand side, and the shortage increases.
If there are people who are homeless, some solution needs to be found as an alternative to rent control: public housing (which has many problems) or housing vouchers. Instead of providing housing, provide income subsidies. Same answer for education: vouchers are a better solution than restricting people to a specific school.
Minimum Wage Law
See figure 5. Affect of minimum wage laws. This is controversial and there is a debate as to how much harm these laws do. These laws don't impact educated workers, only young, uneducated laborers. That is the market that the figures refer to. Not the entire US labor market.
Minimum wage laws lead to a labor surplus, i.e. unemployment, in this market segment.
Economists would prefer government subsidies to hire young workers, rather than establishing minimum wage levels.
Taxes on Sellers
see figure 6, pg 125
Supply curve shifts leftward/upward, raising the price to a new equilibrium, but not by the full amount of the tax - because the demand goes down and the sellers end up "eating" the difference.
In the example, the 50 cent tax cost the consumers 30 cents and suppliers 20 cents.
Tax on Buyers
see figure 7 pg 126
A simliar thing happens and the effect of the tax is shared between producers and consumers. It doesnt matter who the initial tax is put upon. It has the same effect.
How much is shared by each side depends on the elasticity of the demand/supply curve.
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