An Overview of Economics what a year! Recession is here! Lecture Notes for Chapter 1 of MACROECONOMICS An Introduction

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Christine Copeland
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1 Lecture Ntes fr Chapter 1 f MACROECONOMICS An Intrductin An Overview f Ecnmics Cpyright by Charles R. Nelsn 01/05/ what a year! Faltering real estate market triggers credit crisis! Iffy mrtgage lans cause huge lsses. Of 5 majr Wall St investment banks, nly tw remain independent, tw cllapsed. Majr banks have been frced t merge, WaMu, Wachvia, IndyMac. Stcks dwn nearly 40%, bnds dwn 20%. Interest rates at near zer fr US Treasury! Recessin is here! Lay-ffs fllw rapid decline in rders. Retail sales fall, hliday seasn is abysmal. Detrit Big 3 autmakers beg fr rescue. Mutual funds reprt recrd lsses and investr withdrawals. Hedge fund implding daily. Wall Street rcked by disclsure f $50billin Pnzi scheme run by majr player. Obama cnsiders huge stimulus prgram. 1 1

2 In this lecture we will discuss: Basic cncepts abut the ecnmy. Sectrs f the ecnmy. What is micr ecnmics? What is macr ecnmics? A review f micr is at end f Chap 1 What is the Ecnmy? All the activities invlved in the prductin and distributin f gds and services. Ecnmics addresses three basic questins: What are the fundamental principles? Hw well des the ecnmy perfrm? What public plicies are best? 2 2

3 There are fur factrs f prductin: Land - ur natural endwment. Labr - peple, their effrt & skills. Capital - the tls f prductin. Entrepreneurship - rganizatin. Wh are sme famus entrepreneurs? What d they have in cmmn? Hw d we measure the success f an ecnmy? 3 3

4 By the standard f living it delivers Quantity f gds and services and their quality. Leisure time. Envirnmental quality. What abut the distributin f incme acrss peple? Is equality f incme mre imprtant than hw high average incme is? Hw d we try t balance these? Rle f prgressive incme tax. Hw can we achieve a higher standard f living? By becming mre prductive. Prductivity means: Output f gds and services per hur f labr effrt. 4 4

5 Higher prductivity makes pssible : Greater quantity f gds & services and higher quality. Mre leisure. Better envirnment. A cmbinatin f all. Prductivity is determined by - Land and capital per wrker. Technlgy. Skills. Creativity f entrepreneurs. Ecnmies with a high standard f living are ntable fr: Lts f capital, advanced technlgy, better educatin. Smetimes, lts f natural resurces. 5 5

6 Are large amunts f land r natural resurces necessary fr prsperity? Are there rich cuntries with little in natural resurces? What makes them rich? Why are many cuntries pr? Prductivity is lw but why? They d nt accumulate capital why? Crruptin, lack f rule-f f-law, inefficient gvernment sectr. Pr educatinal system mre crruptin. Prtectinist trade plicies that shield lcal industry that has plitical influence but is inefficient. Ecnmic grwth: imprvement in the standard f living ver decades. Incme per capita in the U.S. has dubled ver the last 30 years. 6 6

7 Ecnmic grwth requires investment in: Mre and better capital gds. Research and develpment. Educatin and training. Sectrs f the Ecnmy We think f fur: The business sectr: Firms Where entrepreneurship brings land, labr, and capital tgether. Where prductin and distributin f gds and services happens. 7 7

8 What is a capitalist r private enterprise ecnmy? Firms are privately wned. Alternative is gvernment wnership. Cmmunism attempted central cntrl. Scialism tday refers t the welfare state. Gvernment wnership is ut f fashin. Hey, what abut the current bail-uts??? Have we privatized prfit and scialized lss? Why is capitalism s unppular. With mral philsphers and thelgians? With intellectuals in arts and literature? With pliticians? Why has capitalism survived? What are the alternatives? What is the histrical recrd? 8 8

9 What is a crpratin? A crpratin is a legal entity. Many f rights and privileges f individuals. Owners are sharehlders, sharehlders, have limited liability. Prfit ges t sharehlders, reward fr use f their capital. The HOUSEHOLD sectr: Family units f sciety. Cnsumes gds and services. Supplies labr, receives wages in return. Owns the business sectr. Judges success f ecnmy: Hw well des it serve the husehld sectr? The GOVERNMENT Sectr What are its functins? 9 9

10 1. Prvides the legal framewrk, the "rules f the game" by which the ecnmy functins Prperty rights: wh can use prperty and what can they d with it. Cmmercial law: rights and bligatins in business transactins Licensing: wh is allwed t practice a prfessin? Regulatins: what a firm can't d, r must d. 2. Cllects taxes. Frm husehlds and firms. At federal, state, and lcal levels Based n incme, wages, retail sales, estates. 3. Prduces public gds Fire & plice, K-12 educatin, Natinal defense

11 4. Transfer payments under Scial Security Medicare Medicaid Fd Stamps Entitlements by law. The REST-OF OF-THE-WORLD All cuntries we d business with. ROW buys gds and services we exprt, sells gds and services imprted t the USA ROW invests in U.S. firms, lends mney t the U.S. gvernment. We invest in the ROW t. Tw way flws f gds and capital. Internatinal trade grwing fast. Plitically sensitive issues: Freign wnership f U.S. firms. Fluctuating in exchange rates. Is free trade gd? Agreements like NAFTA, GATT, WTO. Fast track authrity fr President. Trade deficit with China, Japan, and Eurpe

12 Micrecnmics is the study f markets We assume yu have taken micr-ecnmics. Or read the review f micr suppliment. In private enterprise ecnmies, it is in the marketplace that three fundamental decisins are made: 1. What will be prduced? 2. Hw will it be prduced? 3. Wh will cnsume it? Adam Smith wrte in The Wealth f Natins: "It is nt frm the benevlence f the butcher, the brewer, r the baker that we expect ur dinner, but frm their regard t their wn interest." Market ecnmy harnesses self-interest fr benefit f sciety. Altruism is rare. True evil is rare t! 12 12

13 Questins fr Micrecnmics: Has deregulatin f airlines been a success? Shuld Amtrak be subsidized? Are smkestack scrubbers cst effective? What is the effect f price cntrls? Is Micrsft Crp. a mnply? What t d? Macrecnmics is the big picture. Natinal Incme Cst f living and inflatin Interest Rates Recessin, Unemplyment, Grwth Mney and Banks The Federal Reserve and Mnetary Plicy Gvernment Taxatin, Spending, and Deficits Internatinal Trade and Exchange Rates What are sme majr macrecnmic issues and cncerns tday? 13 13

14 Macr issues are central t plitics: What t d abut the recessin?! Shuld Cngress cut taxes? Increase spending? Shuld the Fed cut interest rates? Can it?? Is inflatin really dead? Is recvery pssible in 09? Are trade agreements like NAFTA gd? Or des free trade cst jbs? Entitlements are a majr issue: Scial Security & Medicare: transfer frm yung t ld, r insurance benefits that were paid fr? Can the birth dearth generatin affrd the "baby bmers " " benefits? Will they be willing t pay the tab? Is there any way ut f the mess? Is it actually a huge Pnzi scheme??!! Hw are entitlements affecting: Medical care? Educatin? Ecnmic grwth? The welfare f yung families? 14 14

15 Ecnmics and electins: Ecnmy is usually the # 1 issue Bill Clintn s s mantra in 92: It s s the ecnmy, stupid! Candidates prmise smething fr nthing, always mre than they can deliver. Ecnmy is best predictr f electin. Recessin means incumbents in truble! The End! 15 15

Economic Activity Chapter 2

Economic Activity Chapter 2 Ecnmic Activity Chapter 2 Sectin 2.1 Measuring Ecnmic Activity Ecnmic Grwth: steady increase f gds and services Grss Dmestic Prduct (GDP): Ttal value f all final gds and services prduced in the cuntry