MACROECONOMICS

2. MACROECONOMICS United States Fiscal Policy & International Trade

3. Fiscal Policy Spending, taxing, and borrowing policies of the United States government within a 12-month period of time

4. Types of Taxes • Proportional • Progressive • Regressive

5. How does the government collect taxes? • Individual Income Tax • Corporate Income Tax • Social Security Tax • Excise Tax • Estate & Gift Tax • Customs Duties

6. Supply-Side Economics • Say’s Law, law of markets • Laissez-faire • Reduce government regulations • Supply-side economics

7. Fiscal Policy Problems • To invest or not to invest? • What budget areas get cut?

8. Demand-Side Economics • John M. Keynes • Government involvement • Government spending • More production • Lower unemployment • Newly employed spend, create more demand for production • Employment Act of 1946

9. Five Tools of Fiscal Policy • Marginal Tax Rates • Tax Incentives • Government Spending • Public Transfer Payments • Progressive Income Taxes

10. Marginal Tax Rates • Lowering taxes: increases individual and business spending power, unemployment rates decrease • Raising taxes: decreases individual and business spending power, limiting inflation

11. Tax Incentives Government Spending Tax breaks given to businesses in the hope that they will invest in new capital goods • Decrease in spending: slows down business activity and reduces inflation • Increase in spending: reduces unemployment and increases business activity

12. Public Transfer Payments • Unemployment checks • Welfare checks • Social Security checks • Veteran’s benefits • Medicare and Medicaid coverage

13. Progressive Income Taxes • People and businesses naturally fall into lower tax brackets during a recession • Conversely, they move up into higher tax brackets during a time of prosperity

14. Limitations of Fiscal Policy • Timing and Unpredictability: Difficult to predict what the economy will do • Political Pressure: Voters will remove elected officials if they feel the economy is not proceeding down a positive path • Lack of Coordination: Government agencies cannot always work together quickly enough to get an economic policy in place

15. How Is the Federal Budget Created? • The President consults with • Advisers • Office of Management & Budget (OMB) • Council of Economic Advisers • Department of the Treasury • President sends proposed budget to Congress for review • Congress passes it with changes and sends it back to the President for his signature

16. Budget Deficits • Deficits: Occur when more money is spent than is taken in than tax revenues • Deficit Spending: The government spends more money on its programs than its tax revenues can cover • Four reasons for deficit spending: • Promote economic stability • Stimulate the economy • Provide public goods • Provide help during national emergencies

17. The National Debt The term “National Debt” refers to how much the government has borrowed. It includes money carried over from previous years. Debt to the Penny: Examples 08/19/2004 $7,343,012,590,769.26 08/18/2004 $7,337,786,947,237.37 08/17/2004 $7,341,461,448,755.40 08/16/2004 $7,335,563,157,880.75 08/13/2004 $7,312,230,696,984.50 08/12/2004 $7,312,306,434,333.71 08/11/2004 $7,305,246,621,955.51 08/10/2004 $7,308,629,683,239.34

18. International Trade • Specialization • Absolute advantage • Comparative advantage

19. International Trade Foreign Exchange Rates August 20, 2004

20. Balance of Payments • Keeps track of money invested in the U.S. by other nations and vice versa

21. Foreign Direct Investment in the U.S. Country and Industry Detail for Capital Inflows, 2003 [Millions of dollars; not seasonally adjusted; outflows(-)] Year 2003 I II III IVr All countries, all industries ............. 29,772 29,635 -1,191 -4,145 5,473 Europe ................................................ 6,572 30,932 -7,176 -11,583 -5,602 Latin America and other Western Hemisphere .............. 3,525 481 3,606 637 -1,199 Africa ...................................................... -50 -116 138 42 -113 Middle East ........................................... 522 380 -78 377 -157 Asia and Pacific ............................... 10,086 -1,755 1,363 4,431 6,048 European Union (15)/1/ .................... 11,516 25,392 -9,818 -10,501 6,443

22. Balance of Trade • The difference between imports and exports

23. Trade Barriers • Tariffs: taxes on imports • Revenue tariffs • Protective tariffs • Import quotas • Voluntary trade restrictions

24. International Trade Cooperation • Reciprocal Trade Agreements • Regional Trade Organizations • European Union • Caribbean Community & Common Market • Association of Southeast Asian Nations • International Trade Agreements • General Agreement on Tariffs & Trade 1947 • World Trade Organization 1995

25. North American Free Trade Organization(NAFTA) • Signed in 1992 by the Canada, the U.S., and Mexico • Reduced, then eventually eliminated tariffs

26. NAFTA Effects • U.S. agricultural exports worldwide • U.S. farm and food exports to NAFTA partners • Increases

27. MICROECONOMICS Demand and Supply through Market Structures

28. Microeconomics is the study of… • Individuals • Households • Businesses • Industries

29. Microeconomics revolves around two very important concepts: • Demand • Supply

30. Demand • The desire and ability to purchase a good or a service • Demand represents the consumer’s point of view

31. You may desire to purchase a…

32. Scarcity • A lack of resources • The desire to purchase the Corvette may be strong, but the ability may not be there due to a scarcity of…

33. Trade Off & • Trade Off: choosing between two things • Opportunity Cost: the thing given up in order to attain the other thing Opportunity Cost OR

34. Law of Demand As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down. EXAMPLE: If the price of flip flops is $5 per pair, 50 people would go to buy them. If the price went up to $50 per pair, there would only be five people who would buy them.

35. Price Quantity Demanded $5 50 $25 25 $50 5 Demand Curves & Schedules D 50 Quantity 25 5 $5 $25 $50 Price Curve Schedule

36. Supply • The desire and ability to sell a good or service to people • Supply represents the producer’s point of view

37. Law of Supply As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down. EXAMPLE: If the price of flip flops is $5 per pair, 50 people would go to buy them; however, the store might only have 5 pairs on the shelves. If the price went up to $50 per pair, there would only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.

38. Price Quantity Supplied $5 5 $25 25 $50 50 Supply Curves and Schedules S 50 25 Quantity 5 $5 $25 $50 Price

39. Benefits of the Price System • Information • Incentives • Choice • Efficiency • Flexibility

40. Limitations of the Price System • Externalities • Public Goods • Instability

41. Quantity Demanded Price Quantity Supplied 50 $5 5 25 $25 25 5 $50 50 Demand and Supply Curves and Schedules 50 D S Surplus 25 Equilibrium Quantity Shortage 5 $5 $25 $50 Price Schedule Curve

42. Government Regulations and the Price System D S • Price Ceilings $50 Surplus Price Floor Quantity $25 Equilibrium Price Ceiling • Price Floor Shortage $5 $5 $25 $50 Price

43. Productivity • The amount of goods and services produced per unit of input • Productivity has an impact on what producers can supply at various prices

44. Labor Input Total Product Marginal Product 0 0 0 1 36 36 2 72 36 3 108 36 4 144 36 5 170 36 6 206 36 7 254 48 8 278 24 9 265 -13 10 258 -7 11 245 -13 12 240 -5 13 238 -2 Production Schedule and Curve: Vanilla Mint Cookies 300 275 250 225 200 175 150 125 100 75 50 25 Number of Cookies Produced 1 2 3 4 5 6 7 8 9 10 11 12 13 Labor Input

45. Labor Input Total Product Marginal Product Fixed Costs Variable Costs Total Costs Marginal Costs 0 0 0 $500 0 $500 -- 1 36 36 $500 $150 $650 $1.39 2 72 36 $500 $253 $753 $2.86 3 108 36 $500 $400 $900 $7.03 4 144 36 $500 $527 $1,027 $3.53 5 170 36 $500 $672 $1,172 $4.03 6 206 36 $500 $785 $1,285 $3.14 7 254 48 $500 $889 $1,389 $2.17 8 278 24 $500 $994 $1,494 4.38 9 265 -13 $500 $1,079 $1,579 -6.54 10 258 -7 $500 $1,198 $1,698 -17 11 245 -13 $500 $1,874 $2,374 -52 12 240 -5 $500 $2,326 $2,826 -90.4 13 238 -2 $500 $2,868 $3,368 -271 Marginal Product and Costs: Vanilla Mint Cookies

46. Market Structures Four types of competition and market structures: • Pefect Competition • Monopolistic Competition • Oligopoly • Pure Monopoly

47. Perfect Competition Characteristics of a market that has perfect competition: • Many buyers and sellers • All the products are identical • There are no price regulations in the market • Sellers/Producers can enter and exit the market very easily

48. Monopolistic Competition Characteristics of a market that has monopolistic competition: • Many buyers and sellers • Product differentiation is necessary because the products essentially do the same thing • Non-price competition exists because buyers will purchase their favorite product regardless of price • Sellers/producers can enter and exit the market easily

49. Oligopoly Characteristics of a market that has an oligopoly: • There are only a few sellers/producers • Products can be identical or very similar • The market is very difficult for other producers to enter into • Non-price competition exists among buyers of the products

50. Monopoly Characteristics of a market that has a monopoly: • There is only one seller/producer • There is no substitute for the product • No other sellers/producers can enter into the market easily • The seller/producer has complete control over the price of the product