433cac8434bbf31aed2388d365eeb9f9_EC103 Week 01 S14.ppt

8/9/2019 433cac8434bbf31aed2388d365eeb9f9_EC103 Week 01 S14.ppt

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Quote of the Day

Like it or not we live in interesting

times. They are times of danger and

uncertainty; but they are also more

open to the creative energy of men

than any other time in history. And

everyone here will ultimately be

judged - will ultimately judge himself

- on the effort he has contributed to

building a new world society and the

extent to which his ideals and goals

have shaped that effort.

Robert F. Kennedy, 1925-68

1


2/32

2

Welcome to Macro: Big

Truth Our twin objectives: Pleasure: Mcroecono!ic "orces under#y !ny o" t$e%ret events o" wor#d $istory &e.%., w$t's t$e #in( between!cro nd t$e rise o" )it#er nd onset o" **++, ndunderstndin% t$e tides o" $istory wi## !(e you wiser,happiererson. /itto understndin% conte!orry eventsnd &o"t-n%ry o#icy debtes

Profit: 0nderstndin% t$e business cyc#e 3 eseci##y t$ecurrent recession 3 cn be source o" erson# we#t$

+nvest!ent returns corre#te $i%$#y wit$ t$e !croecono!y 4roer business #nnin% reuires wreness o" cyc#es


3/32

3

Assignment 1: Rea and retainthe !ylla"us

M(e sureyou understnd: Objectivesnture o" t$is course 7our redin% sc$edu#e $e co!onents o" your %rde

seci##y ttendncerticition nd o#icy on yoursin%#e ui dro

4roer ti!e ##oction

)ow to "ind stu"" on Mood#e $e ris(s o" unet$ic# be$vior, t$e i!ortnce o"

observin% c#ssroo! etiuette
http://moodle.loyola.edu/http://moodle.loyola.edu/


4/32

#

The Walters $rae !cale

; < 9=> ?> < @2.5 - @5

;- < 85 3 9= ? < [email protected] 3 @2.5

A> < 82.5 3 85 ?- < 65 3 [email protected]

A < @@.5 3 82.5 / < 55 - 65

A- < @5 3 @@.5 F < B 55


5/32

%

Before you "egin Macro&&&

+" necessry, reviewbsic Micro too#s &i.e.,c$ters 2, C, D in )EO, eseci##y: Oortunity cost ?o!rtive dvnt%e nd trde $e #ws o" su#y nd de!nd

ote! "e#ll build $macro% models here& but some of this

will rely on your recall of how $micro% markets work

""iciency nd !r(et eui#ibriu! $e rice syste! &i.e., t$e rtionin% nd si%n#in%

"unctions o" rices


6/32

!ome Day 1 re'ie(:

The supply of and demandfor credit $e First w o" /e!nd sys t$e de!nd

"or credit &or #onb#e "unds, in )EO is

ne%tive#y re#ted to its riceG w$ic$ is t$einterest rateborrowers y to borrow

Hi!i#r#y, #enders wi## o""er !ore credit t

$i%$er rice &interest rte t$n #ow one Ho we'## $ve n eui#ibriu! riceG but w$t

$ens i" de!nd s$i"ts "or so!e reson

)


7/32

*sing Micro in Macro: Initial

equilibrium in the loanablefunds market

+


8/32

What happens if Uncle Samborrows addl $100 billion

!oes "erise to $#00 billion

,


9/32

ne price rises% whats thenet e&ect on pri'ateborrowers

-


10/32

In sum(

$e eItr J1==b o" %ov't borrowin% incresest$e !ount o" #onb#e "unds eIc$n%ed toJ55=b nd bu!s t$e interest rte u to

5.5 in t$is $yot$etic# Hince t$e %ov't doesn't cre w$t rice it

ys "or credit, its J1==b o" borrowin%

crowds out bout J5=b o" rivte borrowin%,nd t$e $i%$er rice &5.5 L 5 encour%esJ5=b !ore in #endin% &"ro! w$o! or w$ere

1.


11/32

11

)nd note how the price systemworked here $is de!nd "or borrowin% robb#y ori%inted in t$e

%overn!ent's desire to sti!u#te %%re%te de!nd&bout w$ic$ much!oreG #ter t$is se!ester

Aut it wi## #so...1. increse its s$re o" resent consu!tion o" resources nd

2. s$i"t so!e rivte consu!tion or invest!ent "ro! t$e resentto t$e "utureN

;nd %ov't's wi##in%ness to y $i%$er rdoes bot$: ov't crves out #r%er s$re o" society's current

svin% &rationing"unction o" rice ;nd tot# svin% increses becuse we %et t$e

!ess%e "ro! t$e $i%$er r&signaling"unction o"rice to deferso!e o" our #ns.


12/32

Some questions to ponder%thou*h( +n 0H, our $u%e borrowin% $s notrent#y

us$ed ru si%ni"icnt#y. *$y not *$t is t$e e#sticity o" su#y o" #onb#e "unds,

nd w$y does t$is !tter +" t$e %ov't's eItr borrowin% does crowd out

so!e rivte borrowin%, is t$is ctu##y %ood

or bd "or t$e !cro-econo!y *$t, eIct#y, !i%$t be crowded out

*$t e#se !i%$t ""ect r

12


13/32

*e need to (now how we#re doing $e !ost co!!on#y used outut%u%e:

Gross Domestic Product&/4 < $e !r(etv#ue o" "in# %oods nd services roducedwit$in country durin% seci"ic ti!e eriod, usu##y yer.

ote that '() is measured in dollars; each good produced

increases output by the amount the purchaser paysfor thegood. "hich raises a *uestion! "hat about goods produced but not yet

sold+ "ho attaches prices to these , and might they be unrealistic+

/n to Macro&&&

0o" 1: $auges of economic erformance


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Stage of productionValue added to the product(equals income created)

Sales Receipts(at each stage of production)

Stage 1: farmers wheat

Stage 2:millers flour

Stage 3:bakers bread(wholesale)

Stage 4:grocers bread(retail)

$3!

$"#

$!

$1

b% farmer

$3!

b% grocer

$1!

b% miller

$3#b% baker

$2#

alculating $D

*$t counts towrd /4 On#yfinalgoods and services count

H#es t intermediatest%es o" roduction re not countedsince t$eir v#ue is e!bodied in t$e rice t$e "in# userys. $is wy we void doub#e &tri#e countin%.

&otal consumer e'penditure ( $1&otal )alue added ( $1


15/32

Financial transactionsndincome transfersreexcluded s t$ey don't re"#ectroduction.

On#y roduction within thegeographic borderso" t$ecountry is counted.

On#y t$ose %oods roducedduring the current periodre counted.

What counts to(ar $D4 +cont,-

*$ere is t$is !de


16/32

1)

56amles: What counts7 (hatoesn8tPO inc#uded in /4

0sed crs

rnny's Hoc. Hec.

c$ec( 7our urc$se o"

;!on.co! stoc(

Q#ue o" doin% yourown #undry

4roerty d!%e in stor!

+nc#uded in /4

Pew crs

rnny's urc$ses o"

FiIodent ;!on's urc$se o"

cororte jet

7our eIenditures t dry c#ener

Ienses to reirstor! d!%e


17/32

Production and Price Statistics for 2013

(1)

Product

(2)

Quantity

(3)Price per

Unit

ye eI!intions 1== J5=.==

4is 8= 1=.==

eItboo(s 2= 1==.==

4er 2,=== =.1=

?#cu#tin% /4

Ho#ved 4rob#e! 8.1

Huose t$t very si!#e econo!yroduces on#y "our %oods nd services:

eye eI!intions, is, teItboo(s,nd er.

;ssu!e t$t ## t$e er in t$is econo!yis used in t$e roduction o" teItboo(s.0se t$e in"or!tion in t$e "o##owin% tb#eto co!ute /4 "or t$e yer 2=1C:

Ho#vin% t$e 4rob#e!

Hte 1: Review t$e c$ter !teri#.

Hte 2: /eter!ine w$ic$ %oods nd services #isted in t$e tb#e s$ou#d be inc#uded in t$ec#cu#tion o" /4./4 is t$e v#ue o" ## "in# %oods nd services.

$ere"ore, we need to c#cu#te t$e v#ue o" t$e "in# %oods nd services #isted in t$e tb#e.ye eI!intions, is, nd teItboo(s re "in# %oods.4er wou#d #so be "in# %ood i", "or instnce, consu!er bou%$t it to use in rinter.)owever, $ere we re ssu!in% t$t ub#is$ers urc$se ## t$e er to use in!nu"cturin% teItboo(s, so t$e er is n inter!edite %ood, nd its v#ue is not inc#udedin /4.


18/32

Product(1)

Quantity(2)

Price per Unit(3)

Value

ye eI!intions 1== J5= J5,===

4is 8= 1= 8==

eItboo(s 2= 1== 2,===

?#cu#tin% /4

Ho#ved 4rob#e! 8.1

Hte C: ?#cu#te t$e v#ue o"t$e t$ree "in# %oods nd services

#isted in t$e tb#e.Q#ue is eu# to t$e untity roduced!u#ti#ied by t$e rice er unit,so we !u#ti#y t$e nu!bers in co#u!n &1by t$e nu!bers in co#u!n &2.

Hte D: ;dd t$e v#ue "or ec$ o" t$e t$ree "in# %oods nd services to "ind /4.

*+, ( Value of e%e e'aminations produced - Value of pi..as produced -

Value of te'tbooks produced ( $#/!!! - $0!! - $2/!!! ( $/0!!

Production and Price Statistics for 2013

(1)

Product

(2)

Quantity

(3)Price per

Unit

ye eI!intions 1== J5=.==

4is 8= 1=.==

eItboo(s 2= 1==.==

4er 2,=== =.1=


19/32

!hortcomings of $D

H$ortco!in%s t$t!esure!ent error: +t doesn't count non-!r(et

or $ouse$o#droductionHo i" + y you J1= to do

!y #undry nd you y!e J1= to do yours,/4 rises J2=

+t doesn't count t$eunder%roundecono!yHo bewre interntion#

co!risons &next slide


20/32


21/32

!hortcomings 9cont +ssues t$t !is#edin% in"o

bout we##bein% Po djust!ent "or #eisure. Pot djusted "or eItern#itiesor

"or &un!esurb#e soci#rob#e!s

/oesn't consider inco!edistribution My understte %ins in #ivin%

stndrds becuse o" t$erob#e! o" esti!tin%i!rove!ents in t$e u#ityo"

roducts ;## t$t sid, it's retty %ood

wy to t(e t$e econo!y'ste!erture

21


22/32

$e di%r! #so s$ows t$t $ouse$o#dsuse t$eir inco!e to urc$se %oods ndservices, y tIes, nd sve.Fir!s nd t$e %overn!ent borrow t$e"unds t$t "#ow "ro! $ouse$o#ds intot$e financial system, w$ic$consists o" bn(s nd stoc( nd

bond !r(ets.Ienditures by "orei%n "ir!s nd$ouse$o#ds on do!estic##yroduced %oods nd services rec##ed exports,ndsendin% on "orei%n-roduced %oods

nd services is (nown s imports.*e cn !esure /4 eit$er by c#cu#tin%t$e tot# v#ue o" eIenditures on "in#%oods nd services, orby c#cu#tin% t$e v#ue o" tot# inco!e.

Fi%ure 8.1

The Circular Flo and the !easure"ent of #$P

rns"er y!ents 4y!ents by t$e %overn!ent to $ouse$o#ds "or w$ic$ t$e

%overn!ent does not receive new %ood or service in return.

$e ?ircu#r F#ow:*$y /4 < ? > + > > P


23/32

Fi%ure 8.2 ?o!onents o" /4 in2=1=

?onsu!tion ccounts "or @=.5 ercent o" /4, "r !ore t$n ny o" t$e ot$er co!onents.+n recent yers, net eIorts tyic##y $ve been ne%tive, w$ic$ reduces /4.Pote t$t t$e subtot#s !y not su! to t$e tot#s "or ec$ cte%ory becuse o" roundin%.


24/32

A ;ey issue: Real's&Nominal$D

9an other stu< measure in ollars

Realv#ues re djusted "or t$e c$n%in%v#ue or urc$sin% ower o" t$e do##r&i.e.,in"#tion or de"#tionN

Nominal v#ues ren't djusted "or in"#tion. cono!ists inventedprice indexesto !(e

t$ese djust!ents ;price index!esures t$e cost o" urc$sin%

!r(et bs(et or $bundle%/o" %oods t oint in ti!ere#tive to t$e cost o" urc$sin% t$e identic# !r(etbs(et durin% n er#ier re"erence or base/eriod.


25/32

T(o ;ey rice ine6es

Consumer Price Index&?4+:!esures t$e i!ct o" ricec$n%es on t$e cost o" tyic#bund#e o" %oods nd servicesurc$sed by $ouse$o#ds.

GDP Deflator:desi%ned to !esure t$ec$n%e in t$e ver%e rice o"## t$e %oods inc#uded in /4&w$ic$ !(es it broderindeI t$n t$e ?4+.


26/32

2)

!ome etaile rice in=ationata&&& 7ou cn "ind current nd $istoric# ?4+ dt t:AH /tbses, b#es E ?#cu#tors by Hubject .%., Hince Snury 2===, t$e ?4+ $s risen

"ro! 169.C to 2CC.88@ by Pov. T1C

*$t's t$t !en $t by Pov. T1C it costC8 !ore do##rs t$n it did in Sn. T== to buyt$e s!e bund#e o" %oods:

4ercent c$n%e: &2CC.88@ 3 169.C169.C < C8.

Ho the dollar $depreciated relative to goods% by012
http://www.bls.gov/data/http://www.bls.gov/data/


27/32

Wor;ing (ith rice ine6es

*e'## wor( #ot !ore wit$ t$e ?4+ nd /4de"#tor in ?$ter 9, but "or now note: 7ou cn correct "or in"#tion nd c#cu#te real

v#ue &re#tive to bse yer "ro! ny no"inal

one by si!#y dividin% by t$e rice indeI &4+ "ort$t yer, nd t$en !u#ti#yin% by 1== to !ove t$edeci!# #ce over

+.e.: Re#< &Po!in#4+U1== .%., i" %s costs JC.5= tody, wit$ ?4+ < 2CC.88@

re#tive to t$e 1982-D bse, t$e re#cost is&JC.5=2CC.88@U1== < J1.5=&in T82-D do##rs

2+


28/32

!ome etails on the $De=ator )EO s$ow $ow Re# /4 is c#cu#ted by usin% t$e new

!ounts o" outut roduced ec$ yer, nd !u#ti#yin%by t$e rices t$t revi#ed er#ier, in so!e rbitrri#yse#ected bse yer &s in 4rob#e! 8.C

Pote t$t t$is distorted !esure, since relativeprices c$n%e over ti!eN c$in wei%$tin% is s'osed to!ini!ie distortions

7ou don't $ve to !ster w$t t$t !ens, eIct#y, but i"

you wnt to see n eI!#e o" $ow it's done, see:; c$in-wei%$tin% eI!#e

2,
http://www.ssc.wisc.edu/~mchinn/chain_GDP.pdfhttp://www.ssc.wisc.edu/~mchinn/chain_GDP.pdf


29/32

?#cu#tin% Re# /4

Ho#ved 4rob#e! 8.C

Huose t$t very si!#e econo!y roduces on#y t$e "o##owin% t$ree "in# %oods ndservices: eye eI!intions, is, nd teItboo(s.

0se t$e in"or!tion in t$e tb#e be#ow to co!ute re# /4 "or t$e yer 2=1C.;ssu!e t$t t$e bse yer is 2==5.

Ho#vin% t$e 4rob#e!

Hte 1: Review t$e c$ter !teri#.Hte 2: ?#cu#te t$e v#ue o" t$e t$ree %oods nd services #isted in t$e tb#e, usin% t$euntities "or 2=1C nd t$e rices "or 2==5.Re!e!ber t$t re# /4 is t$e v#ue o" ## "in# %oods nd services, ev#uted t bse-yer rices.+n t$is cse, t$e bse yer is 2==5, nd we re %iven in"or!tion on t$e rice o" ec$

roduct in t$t yer.

200% 2013

Product Quantity Price Quantity Price

ye

eI!intions 8= JD= 1== J5=

4is 9= 11 8= 1=

eItboo(s 15 9= 2= 1==


30/32

?#cu#tin% Re# /4

Ho#ved 4rob#e! 8.C

Hte C: ;dd u t$e v#ues "or t$e t$ree roducts to "ind re# /4.

Re# /4 "or 2=1C eu#s t$e su! o":

uantit% of e%e e'aminations in 2!13 V,rice of e%e e'aminations in 2!!# ( $4/!!!uantit% of pi..as produced in 2!13 V,rice of pi..as in 2!!# ( $00!

uantit% of te'tbooks produced in 2!13 V,rice of te'tbooks in 2!!# ( $1/0!!or/ $"/"0!

$e untities o" ec$ %ood roduced in 2==5 were irre#evnt "or c#cu#tin% re# /4in 2=1C, t$e v#ue o" w$ic$ you'## notice is J1,12= #ower t$n t$e v#ue "or no!in# /4t$t we c#cu#ted "or t$e s!e yer in Ho#ved 4rob#e! 8.1.

7our urn:For !ore rctice, do re#ted rob#e! C.D t t$e end o" t$is c$ter.Myconb

Product

2013

Quantity 200% Price Valueye eI!intions 1== JD= JD,===

4is 8= 11 88=

eItboo(s 2= 9= 1,8==


31/32

?o!rin% Re# /4 nd Po!in# /4

Fi%ure 8.C

&o"inal #$P

and 'eal #$P

10*2010

?urrent#y, t$ebse yer "orc#cu#tin% /4is 2==5.+n t$e yers be"ore

2==5, rices were,on ver%e, #owert$n in 2==5, sono!in# /4 ws#ower t$n re# /4.+n 2==5, no!in# ndre# /4 were eu#.

Hince 2==5, rices$ve been, onver%e, $i%$er t$nin 2==5, so no!in#/4 is $i%$er t$nre# /4.


32/32

32

Remember to count your

blessings Heei!e ?ost o" oods: 7esterdy vs. ody

?o!re t$e !ount o" $ours t$e ver%e

wor(er$d to scri"ice to buy stu"" over ti!e .%., contcts cost 95 $ours o" #bor &t ve%.

w%e in 19@1, on#y D $ours in T9@ &i.e., D o"

its "or!er riceN $ow !uc$ tody 3uit complaining about how your parents

had it better than you will4
http://mjperry.blogspot.com/2007/08/blog-post_21.htmlhttp://mjperry.blogspot.com/2007/08/blog-post_21.html

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433cac8434bbf31aed2388d365eeb9f9_EC103 Week 01 S14.ppt