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Next stop: Paradise

Next stop: Paradise. Macro Review (some new). Overview. Hit some new stuff first Review foundations In and out in 30 minutes (or so). Why? Why? Why?. Where did macro come from? When? Who? How? WHY? The gov’t’s only job in INTERVENING is to _____. What happens if they don’t?.

jethro
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Next stop: Paradise

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  1. Next stop: Paradise Macro Review (some new)

  2. Overview • Hit some new stuff first • Review foundations • In and out in 30 minutes (or so)

  3. Why? Why? Why? • Where did macro come from? • When? Who? How? • WHY? • The gov’t’s only job in INTERVENING is to _____. • What happens if they don’t?

  4. We love Maynard • Our studies have been based on Keynesian economics • Idea that gov’t needs to (is responsible to) stabilize • Why is it necessary? • “sticky” wages & equilibrium below desired level

  5. Graph • 3 parts • Not using everything, pay more to get more, pay more to get it • Can be anywhere & stay anywhere • Gov’t uses fiscal & monetary to “fix” • Prices & wages “sticky”; adjust spending (CIGX) to keep right

  6. Was’t always like this • Throw a baby in water, they will swim • Old people say economy will too • Let it alone & it will fix itself • Classical economists favored laissez-faire (hands off approach) • Still have business cycle • “flexible” prices & wages keep it @ LRAS

  7. Why? • What changes to keep economy in LRAS? • Think about recession…if not working do you eat? • Not eating makes you willing to work for less • If not doing something economy values you are in trouble

  8. But it will be ok • What goes down must come up • SAY’S LAW: supply creates it’s own demand • We switched to Keynesian thought b/c we weren’t willing to wait

  9. Neither are “right” • General ideas as to how to act • Monetarists different yet • Give credence to sticky but don’t think fiscal policy works • RATIONAL EXPECTATIONS • CROWDING-OUT

  10. Answer is $ • Keep to stability is maintaining money $ • Set it at a level & keep it there • Will smooth out fluctuations • If stick to monetary rule all will be better • Keep $ under control to set inflation & prices

  11. All just ideas • Obviously don’t have kinks worked out • Wouldn’t have had another massive recession • Ideas as to how waves can be smoothed

  12. II: How big is it? • In order for the gov’t to know what to do, must know how well the economy is doing • Section 2 sets up way for the gov’t to evaluate the economy

  13. GDP • Total value of goods & services produced in a country in a given year • How much stuff we are making • Not a perfect figure, but best single number snapshot

  14. Two ways to get it • Income approach: WIRP • Expenditure approach: CIGX • Since money spent by you is money earned elsewhere the 2 should be equal • To keep accurate, avoid several problems

  15. problemo • 1. Double-counting: adding same element more than one time • Value added approach (VAT) • OBAMA ADMIN RIGHT NOW!!! • Only count final goods/services • 2. Prices change…distorting output

  16. Key is how MUCH • Not how much we pay, but how much we get • Don’t care about prices • Care about quantity • As prices change, the apparent value of what we are producing changes, but do we get more

  17. Real vs nominal • Nominal calculates value based on prices right NOW • Easier to do, but not as good • Real keeps prices constant so any changes reflect quantity • Harder, but actually has value

  18. Two are connected • The only difference btwn them is Nominal is inflated by INFLATION • GDP deflator used to “undo” impact of inflation • Real = (Nominal / GDP deflator) x 100 • GDP deflator = (Nom/Real) x 100

  19. Whole point? • Tell how well economy is doing so we can stabilize the business cycle • But individually we don’t care about GDP…we care about me • Cycle impacts 3 other key things • Inflation, unemployment, growth

  20. Inflation • Prices go up • Some more than others, some go down • Price Index measures change in prices in general • CPI: what average urban consumer buys

  21. Starts with a basket • First identify what’s in the market basket (never changes) • See how much that group of things changes over time • That is how you measure inflation

  22. Steps • 1. Calculate basket • P x Q for all things in it • 2. Calculate CPI • Current basket / base basket x 100 • 3. Calculate inflation • (CPI 2-CPI 1) / CPI 1 x 100

  23. General goal • See how much prices are affecting us (nobody can escape them) • Two graphs showing how it can happen

  24. Unemployment • People w/o jobs who want one • Biggest thing is that it reduces our EFFICIENCY (OKUN’S LAW) • PPF • AS/AD • Full employment = natural rate of unemployment = LRAS = potential GDP

  25. GROWTH • Need to be using all resources to get most stuff • Need to emphasize capital to get more in the future • Foregoing present consumption to increase future output • Weird thing is GDP not effected

  26. Won’t matter till later • Later never comes but the past’s later is now • Want economy growing but sacrifices now help future • 2 ways to show growth • Worst thing possible is to have the opposite (STAGFLATION)

  27. SUMMARY • Gov’t assumed role of business cycle moderator • GDP & crew are used to evaluate how well economy is doing • Inflation, unemployment, growth sub-measures of it • Next class look at how they do it

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