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