Intro to MacroeconomicsIntro to MacroeconomicsAP Comp GovAP Comp Gov

Economic SystemsEconomic Systems

Fundamental problem: scarcityFundamental problem: scarcityPartial solution: efficiencyPartial solution: efficiency3 Economic Qs: what, how, who?3 Economic Qs: what, how, who?Systems’ answers to the Qs:Systems’ answers to the Qs:Market/capitalist: the market (Market/capitalist: the market (cigarettes)cigarettes)Command: Stalin (Command: Stalin (tanks)tanks)Traditional: the way we’ve always done it Traditional: the way we’ve always done it ((food)food)The US: all 3 combined (The US: all 3 combined (iPhones used to drop iPhones used to drop bombs on people so we can get their oil to drive bombs on people so we can get their oil to drive our Escalades with spinner rims)our Escalades with spinner rims)

GDPGDPGross Domestic Product: total market value Gross Domestic Product: total market value ($) of all final goods and services produced ($) of all final goods and services produced within a country in 1 yearwithin a country in 1 yearGDP= C + I + G + XnGDP= C + I + G + XnC: personal consumption (durable, C: personal consumption (durable, nondurable, services; about 70% of US)nondurable, services; about 70% of US)I: investment: esp. capital goodsI: investment: esp. capital goodsG: government expendituresG: government expendituresXn: exports – imports (what did Americans Xn: exports – imports (what did Americans make)make)

Nominal vs. Real and InflationNominal vs. Real and Inflation

Consumer Price Index = (price market Consumer Price Index = (price market basket specific year)/(price same basket in basket specific year)/(price same basket in base year) x 100base year) x 100

Inflation: rising price levelInflation: rising price level Inflation rateInflation rate Disinflation: slow in rate; 4% Disinflation: slow in rate; 4% 2% 2% Hyperinflation: warm, flat beerHyperinflation: warm, flat beer Deflation: great depressionDeflation: great depression

Both Hyper- and de- Both Hyper- and de- economic shutdown economic shutdown

UnemploymentUnemployment

Frictional, structural, cyclical, seasonalFrictional, structural, cyclical, seasonal

Full employment/natural rateFull employment/natural rate potential output potential output Okun’s Law: every 1% actual U > natural rate, GDP Okun’s Law: every 1% actual U > natural rate, GDP

gap (actual less than potential) 2%gap (actual less than potential) 2% Unequal burdens: occupation, age, race, gender, Unequal burdens: occupation, age, race, gender,

education, durationeducation, duration Noneconomic costs: depression, crime, political Noneconomic costs: depression, crime, political

impactsimpacts

Unemployed, discouraged, underemployedUnemployed, discouraged, underemployed ““Real” unemployment rate closer to 16%Real” unemployment rate closer to 16%

CyclesCycles

ExpansionExpansion recession recession expansion expansion

Causation of cycles: 1) major Causation of cycles: 1) major innovationsinnovations I and C; 2) Political and I and C; 2) Political and random events (war); 3) Money supplyrandom events (war); 3) Money supply

Noncyclical fluctuations: seasonal Noncyclical fluctuations: seasonal variations, secular trendvariations, secular trend

Aggregate Supply and Aggregate DemandAggregate Supply and Aggregate Demand

Real GDP = employment level

Price Level

AS

AD0 AD1

AD2

Shifts in ADShifts in ADChange in any components of GDP: C, I, G, X-Change in any components of GDP: C, I, G, X-MM entire curve shifts (if increase, “right,” if entire curve shifts (if increase, “right,” if decrease, “left”)decrease, “left”)Multiplier effect: a change in a component of agg Multiplier effect: a change in a component of agg expenditures leads to a larger change in expenditures leads to a larger change in equilibrium GDPequilibrium GDPUS estimated “complex multiplier”: 2xUS estimated “complex multiplier”: 2x So $100B increase GSo $100B increase G $200B increase GDP; $50B $200B increase GDP; $50B decreasedecrease $100 $100 decreasedecrease GDP GDP

Tax cuts have much smaller multiplier: approx 0.9Tax cuts have much smaller multiplier: approx 0.9 larger tax cuts to achieve same spending effectlarger tax cuts to achieve same spending effect

BUT: “crowding out effect”: G pushes private firms out BUT: “crowding out effect”: G pushes private firms out of the business (but NOT at “zero lower limit”; i.e. 2009)of the business (but NOT at “zero lower limit”; i.e. 2009)

Shifts in ASShifts in AS

1) Input Prices1) Input Prices Domestic Resources: land, labor, capital, Domestic Resources: land, labor, capital,

entrepreneurial ability; Price Imported entrepreneurial ability; Price Imported Resources; Market PowerResources; Market Power

2) Productivity2) Productivity Total output/total inputsTotal output/total inputs Per unit prod.= total input cost/total outputPer unit prod.= total input cost/total output

3) Legal-Institutional Environment3) Legal-Institutional Environment Taxes and Subsidies, RegulationTaxes and Subsidies, Regulation

rGDP

AD

AS1

PL

AS2

AS3

TradeTrade

Comparative advantage: what can do Comparative advantage: what can do cheapestcheapest Focus on: land, labor, capital, entrepreneurial Focus on: land, labor, capital, entrepreneurial

abilityability

Currency manipulation: China buys $1.4 Currency manipulation: China buys $1.4 trilliontrillion stronger dollar/weaker stronger dollar/weaker renminbi/yuanrenminbi/yuan relatively cheaper relatively cheaper Chinese productsChinese products US trade deficit US trade deficit