MACROECONOMICS

United States Fiscal Policy & International Trade

Fiscal Policy

Spending, taxing, and borrowing policies of the United States government within a 12-month period of time

Types of Taxes

• Proportional• Progressive• Regressive

How does the government collect taxes?

• Individual Income Tax

• Corporate Income Tax

• Social Security Tax• Excise Tax• Estate & Gift Tax• Customs Duties

Supply-Side Economics

• Say’s Law, law of markets

• Laissez-faire • Reduce government

regulations• Supply-side

economics

Fiscal Policy Problems

1. To invest or not to invest?

2. What budget areas get cut?

Demand-Side Economics • John M. Keynes

• Government involvement

1. Government spending

2. More production3. Lower

unemployment4. Newly employed

spend, create more demand for production

• Employment Act of 1946

Five Tools of Fiscal Policy

1. Marginal Tax Rates

2. Tax Incentives

3. Government Spending

4. Public Transfer Payments

5. Progressive Income Taxes

Marginal Tax Rates

1. Lowering taxes: increases individual and business spending power, unemployment rates decrease

2. Raising taxes: decreases individual and business spending power, limiting inflation

Tax IncentivesTax breaks given to businesses in the hope that they will invest in new capital goods

1.Decrease in spending: slows down business activity and reduces inflation

2. Increase in spending: reduces unemployment and increases business activity

Government Spending

Public Transfer Payments

1. Unemployment checks

2. Welfare checks

3. Social Security checks

4. Veteran’s benefits

5. Medicare and Medicaid coverage

Progressive Income Taxes

1. People and businesses naturally fall into lower tax brackets during a recession

2. Conversely, they move up into higher tax brackets during a time of prosperity

Limitations of Fiscal Policy1. Timing and Unpredictability: Difficult to predict

what the economy will do 2. Political Pressure: Voters will remove elected

officials if they feel the economy is not proceeding down a positive path

3. Lack of Coordination: Government agencies cannot always work together quickly enough to get an economic policy in place

How Is the Federal Budget Created?

1. The President consults with• Advisers• Office of Management &

Budget (OMB)• Council of Economic Advisers• Department of the Treasury

2. President sends proposed budget to Congress for review

3. Congress passes it with changes and sends it back to the President for his signature

Budget Deficits

• Deficits: Occur when more money is spent than is taken in than tax revenues

• Deficit Spending: The government spends more money on its programs than its tax revenues can cover

• Four reasons for deficit spending:

1. Promote economic stability

2. Stimulate the economy

3. Provide public goods

4. Provide help during national emergencies

The National Debt

The term “National Debt” refers to how much the government has borrowed. It includes money carried over from previous years.

Debt to the Penny: Examples

08/19/2004 $7,343,012,590,769.26 08/18/2004 $7,337,786,947,237.37 08/17/2004 $7,341,461,448,755.40 08/16/2004 $7,335,563,157,880.75 08/13/2004 $7,312,230,696,984.50 08/12/2004 $7,312,306,434,333.71 08/11/2004 $7,305,246,621,955.51 08/10/2004 $7,308,629,683,239.34

International Trade

1. Specialization2. Absolute advantage3. Comparative

advantage

International Trade

Foreign Exchange Rates August 20, 2004Country Monetary

UnitAugust

16

August

17

August

18

August

19

August

20

Australia Dollar 0.7169 0.7148 0.7145 0.7245 0.7238

Brazil Real 3.0155 2.9960 2.9890 2.9780 2.2780

Canada Dollar 1.3076 1.3080 1.3074 1.2964 1.2980

China, P.R.

Yuan 8.2768 8.2767 8.2767 8.2768 8.2767

Denmark Krone 6.0305 6.0330 6.0470 6.0165 6.0270

EMU Members

Euro 1.2333 1.2329 1.2299 1.2368 1.2324

Balance of Payments

• Keeps track of money invested in the U.S. by other nations and vice versa

Country and Industry Detail for Capital Inflows, 2003 [Millions of dollars; not seasonally adjusted; outflows(-)]

Year 2003 I II III IVr

All countries, all industries ............. 29,772 29,635 -1,191 -4,145 5,473

Europe ................................................ 6,572 30,932 -7,176 -11,583 -5,602

Latin America and

other Western Hemisphere .............. 3,525 481 3,606 637 -1,199

Africa ...................................................... -50 -116 138 42 -113

Middle East ........................................... 522 380 -78 377 -157

Asia and Pacific ............................... 10,086 -1,755 1,363 4,431 6,048

European Union (15)/1/ .................... 11,516 25,392 -9,818 -10,501 6,443

Foreign Direct Investment in the U.S.

Balance of Trade

• The difference between imports and exports

U.S. Balance of Trade

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1 2 3 4 5 6 7 8 9 10 11

1992-2002

Qu

an

tity

Exports

Imports

Trade Barriers

• Tariffs: taxes on imports

1. Revenue tariffs

2. Protective tariffs

• Import quotas• Voluntary trade

restrictions

International Trade Cooperation

• Reciprocal Trade Agreements• Regional Trade Organizations

1. European Union2. Caribbean Community & Common

Market3. Association of Southeast Asian

Nations

• International Trade Agreements1. General Agreement on Tariffs &

Trade 19472. World Trade Organization 1995

North American Free

Trade Organization

(NAFTA)

• Signed in 1992 by the Canada, the U.S., and Mexico

• Reduced, then eventually eliminated tariffs

NAFTA Effects

1. U.S. agricultural exports worldwide

2. U.S. farm and food exports to NAFTA partners

3. Increases

MICROECONOMICS

Demand and Supply through

Market Structures

3 Basic Questions

• What goods and services are to be produced?

• How the goods and services to be produced?

• For whom are the goods and services to be produced?

Central Problem

• The central economic problem is SCARCITY.

• Human wants are unlimited, but resources are limited (scarce).

Microeconomics is the study of…

• Individuals• Households• Businesses• Industries

Microeconomics revolves around two very important concepts:

• Demand

• Supply

Demand

• The desire and ability to purchase a good or a service

• Demand represents the consumer’s point of view

You may desire to purchase a…

Scarcity

• A lack of resources • The desire to

purchase the Corvette may be strong, but the ability may not be there due to a scarcity of…

• Trade Off: choosing between two things

• Opportunity Cost: the thing given up in order to attain the other thing

OR

Trade Off

OpportunityCost

&

Law of Demand

As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down.

EXAMPLE:

If the price of flip flops is $5 per pair, 50 people would go to buy them. If the price went up to $50 per pair, there would only be five people who would buy them.

Demand Curves & Schedules

D50

5

$5 $50

Quantity

Price5$50

25$25

50$5

Quantity

Demanded

Price

25

$25

Curve

Schedule

Supply

• The desire and ability to sell a good or service to people

• Supply represents the producer’s point of view

Law of Supply

As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down.

EXAMPLE:If the price of flip flops is $5 per pair, 50 people would go to buy them; however, the store might only have 5 pairs on the shelves.

If the price went up to $50 per pair, there would only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.

Supply Curves and Schedules

50

25

5

$5 $25 $50

Quantity

Price

S

50$50

25$25

5$5

Quantity

Supplied

Price

Benefits of the Price System

• Information• Incentives• Choice• Efficiency• Flexibility

Limitations of the Price System

• Externalities• Public Goods• Instability

Demand and Supply Curves and Schedules

50

25

5

$5 $25 $50

Surplus

Shortage

50$505

25$2525

5$550

Quantity

Supplied

PriceQuantity

DemandedD S

Curve Schedule

Qu

anti

ty

Price

Equilibrium

Government Regulations

and the Price System

• Price Ceilings

D S

Equilibrium

Shortage

Surplus

Price

Ceiling

Price

Floor

$50

$25

$5Q

uan

tity

$5 $25 $50

Price

• Price Floor

Productivity

• The amount of goods and services produced per unit of input

• Productivity has an impact on what producers can supply at various prices

Production Schedule and Curve: Vanilla Mint Cookies

-223813

-524012

-1324511

-725810

-132659

242788

482547

362066

361705

361444

361083

36722

36361

000

Marginal Product

Total ProductLabor Input

Nu

mb

er

of

Co

ok

ies

Pro

du

ce

d

Labor Input1 2 3 4 5 6 7 8 9 10 11 12 13

300

275

250

225

200

175

150

125

100

75

50

25

Marginal Product and Costs: Vanilla Mint Cookies

-271$3,368$2,868$500-223813

12

11

10

9

8

7

6

5

4

3

2

1

0

Labor Input

240

245

258

265

278

254

206

170

144

108

72

36

0

Total Product

-5

-13

-7

-13

24

48

36

36

36

36

36

36

0

Marginal Product

-90.4$2,826$2,326$500

-52$2,374$1,874$500

-17$1,698$1,198$500

-6.54$1,579$1,079$500

4.38$1,494$994$500

$2.17$1,389$889$500

$3.14$1,285$785$500

$4.03$1,172$672$500

$3.53$1,027$527$500

$7.03$900$400$500

$2.86$753$253$500

$1.39$650$150$500

--$5000$500

Marginal

Costs

Total

Costs

Variable

Costs

Fixed

Costs

Market Structures

Four types of competition and market structures:

• Pefect Competition

• Monopolistic Competition

• Oligopoly

• Pure Monopoly

Perfect Competition

Characteristics of a market that has perfect competition:

1. Many buyers and sellers

2. All the products are identical

3. There are no price regulations in the market

4. Sellers/Producers can enter and exit the market very easily

Monopolistic Competition

Characteristics of a market that has monopolistic competition:

1. Many buyers and sellers

2. Product differentiation is necessary because the products essentially do the same thing

3. Non-price competition exists because buyers will purchase their favorite product regardless of price

4. Sellers/producers can enter and exit the market easily

Oligopoly

Characteristics of a market that has an oligopoly:

1. There are only a few sellers/producers

2. Products can be identical or very similar

3. The market is very difficult for other producers to enter into

4. Non-price competition exists among buyers of the products

Monopoly

Characteristics of a market that has a monopoly:

1. There is only one seller/producer

2. There is no substitute for the product

3. No other sellers/producers can enter into the market easily

4. The seller/producer has complete control over the price of the product

Four Main Types of

Monopolies

• Natural• Geographic• Technological• Government

MICROECONOMICS

Part II

Businesses, Unions, Saving, and Investing

Three main types of business organizations• Sole Proprietorship• Partnership• Corporation

Sole Proprietorship

A business owned and controlled by one person.

Advantages

1. Easy to start

2. Total control

3. Keep all profits

Disadvantages

1. Unlimited liability

2. Total responsibility

3. Limited growth

4. Limited life

Partnership

A business owned by two or more people.

Advantages

1. Easy to start

2. Partner specialization

3. Shared decisions

4. Shared losses

Disadvantages

1. Unlimited liability

2. Potential partner conflict

3. Limited life

4. Limited growth

CorporationA company owned by many stockholders, each of whom share limited liability.

Advantages

1. Limited liability

2. Separation of owners and managers

3. Easy fund raising

4. Unlimited life

Disadvantages

1. Expensive to start

2. Government regulations

3. Slow decision making

4. Double taxation

Steps in Forming a Corporation

• Articles of incorporation

• Board of directors• Corporate charter• Stocks and bonds

Corporate Combinations

• Horizontal mergers

• Vertical mergers• Conglomerates

The U.S. Labor Force

Six factors affecting the U.S. labor force:

• Wages• Skills• Working conditions• Work location• Intrinsic rewards• Market trends

Long-Term Changes Affecting

the Labor Force

Labor-Intensive Economy

(pre-Industrial Revolution)

Capital-Intensive Economy

(Industrial Revolution to the present)

History of Labor Unions

• Knights of Labor• American

Federation of Labor (AFL)

• Congress of Industrial Organizations (CIO)

• AFL-CIO

Types of Unions

Local Unions

Example: plumbers in a

certain county, group of counties,

or a state

Example: the AFL-CIO Example: the NEA

(National Educators

Association)

National Unions Independent Unions

Key Labor Legislation

• Clayton Antitrust Act (1914)

• Norris-La Guardia Act (1932)

• Wagner Act (1935)• Fair Labor

Standards Act (1938)

• Taft-Hartley Act (1947)

• Landrum-Griffin Act (1959)

Senator Robert F. Wagner

Senator Robert A. Taft

Union Bargaining

Contract Issues• Wages and fringe

benefits• Working conditions• Job security• Union security• Grievance

procedures

Negotiating Techniques

• Collective bargaining

• Mediation• Arbitration

Labor Tactics

Union Tactics• Striking• Picketing• Boycotting• Coordinated

campaigning

Management Tactics• Hiring scabs• Lockouts• Injunctions

Scabs being driven through a picket line

Saving

• Savings accounts• Money-market

accounts• Time deposits

- Certificates of deposit

- Savings bonds

Investments

Financial Plans• Budgets• Investment plans• Retirement

accounts• Estate plans

Stocks

Investing1. Profit and loss- Dividends- Capital gains and losses2. Stock splits

Trading

1. Brokers

2. Investment banks

3. Stock exchanges

-NYSE

-AMEX

4. Over-the-counter markets

-NASDAQ

Investments

Stock Prices

Ko

WalM

Tom

PacSun

%

Chng

WklyFriLastLoHiVol

Wkly

PEYieldDivNameLoHi

52 Week ChargeWeekly YTD

Bonds

• Yields• Corporate bonds

Minimum order

$5,000

Minimum order

$1,000–$5,000

Minimum order

$10,000

Matures

10–30 years

Matures

1–10 years

Matures

3 months to 1 year

Long-term investment

Long-term investment

Short-term investment

NotesBondsBills

• Municipal bonds• Government bonds

Credit

• Credit bureau- Credit rating

• Credit terms- Finance charges- Annual Percentage Rate (APR)

• Credit abuse- Bankruptcy

Credit as a Stimulant for the Economy

A lot of people and businesses

deposit their money in bank

accounts

The banks loan this

money out to businesses, people, and

the government

Businesses buy new equipment

with the borrowed

money

The people who borrow the

money buy different things

The government spends the

borrowed money on public goods

All of the spending

of this borrowed

money causes

DEMAND

to increase

When Demand

increases

SUPPLY

increases too