Next stop: Paradise
description
Transcript of 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?
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
General goal
» See how much prices are affecting us (nobody can escape them)
» Two graphs showing how it can happen
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
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
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)
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