Download Lecture 7

From Markets to Macro
Lecture 7
Dr. Jennifer P. Wissink
©2016 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 22, 2016
Announcements: 1120 S2016

If you have a conflict with Prelim 1, make sure you have...
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
Final Exam Schedule for Spring 2016 Has Been Posted
– We have been given Tuesday May 17 at 2pm for our final.
– Everyone should be prepared to take the final that day and time.
– The makeup final the next week (probably on the 23rd) will only be for people who
qualify under Cornell’s guideline OR for people who come and see me in person with
extremely compelling reasons. I am very very tough on this. Papers that are due at the
end of the term do not count as extremely compelling since you know they are due and
have plenty of time to get them done. So don’t procrastinate! Also make sure you
carefully read Cornell’s guidelines – many people seem to misinterpret them.
– See: https://registrar.cornell.edu/Sched/rules.html

Sorry, but I (Wissink) need to move my 1-2pm office hour tomorrow (2/22) until
Wednesday (2/24). I will still be in my office from 11:30am-1pm tomorrow if you
want to stop by. But then have to run. This is for this week only.
3 Classic Government Interventions
 Price
Floors
 Price Ceilings
 Quantity Quotas
Ambrogio Lorenzetti, The Effects of Good
Government in the city, Siena Italy, circa 1338
Price Ceilings

Government established maximum
selling price.
– Must be below P* to be binding.
– Why? Government usually thinks the
market price is too high for some reason.

Usually end up with….
– Shortages!
– And all the problems they generate.

Examples:
– Gas price ceilings
– Apartment rent control
Price Ceilings & Market Shortage

Equilibrium is at
P*=17 and Q*=23.

Pceiling=$10.

At the artificially low
price of $10, buyers
want to buy 30.

But sellers only want
to sell 16.
Price
Demand
Supply
17
10

There is a shortage
of 14.
Shortage = 14
16
23
30
Quantity
Quantity Quota
 Government
established maximum number
of units sold.
– Qmax must be below Q* to be binding.
– Why? Government thinks too many units are
being traded.
– Example: import restrictions
 Usually end up with...
– Higher prices and more.
Quantity Quotas
P
P
D
S
D
Q
S
Q
Final Comments
The Roots of Macroeconomics

The Great Depression
–
a period of severe economic contraction and
high unemployment that began in 1929 and
continued throughout the 1930s.

Classical economists applied
microeconomic models, or “market
clearing” models, to economywide problems.

However, simple classical models
failed to explain the prolonged
existence of high unemployment
during the Great Depression.

This provided the impetus for the
development of macroeconomics.
The Roots of Macroeconomics

In 1936, John Maynard Keynes published
The General Theory of Employment, Interest,
and Money.

Keynes believed governments could
intervene in the economy and affect the level
of output and employment.

During periods of low private demand, the
government can stimulate aggregate demand
to lift the economy out of recession.
– Fiscal policy
– Monetary policy

For nice short bio, see
http://homepage.newschool.edu/het//profiles/
keynes.htm
John Maynard
Keynes
A Very Brief Macroeconomic History

F.D.R. and The New Deal

WWII and its aftermath

Keynesian “success” into the 60’s
–

Fine-tuning was the phrase used by Walter
Heller in the 60’s to refer to the government’s
role in regulating inflation and
unemployment.
Keynesian “disillusionment”
–
–
The use of Keynesian policy to fine-tune the
economy in the 1960s, led to disillusionment
in the 1970s and early 1980s.
Inflation and Stagflation
» Inflation occurs when there an increase in the
overall price level.
» Stagflation occurs when the overall price level
rises rapidly (inflation) during periods of
recession or high and persistent
unemployment (stagnation).
–
–

Supply Side and “Reaganomics” in the 80’s
Micro-foundations of macroeconomics
Keynesian “renaissance?”
Macroeconomic Concerns

Output/Production

Income/Employment

Price Levels/Interest Rates
 Global

Trade
Growth
Output & Growth: Short & Long Run

The business cycle is the cycle of short-term ups and downs in the
economy.

Growth looks at what happens to output (inter alia) over long periods
of time.

The main measure of how an economy is doing is aggregate output.
– Aggregate output is the total quantity of goods and services
produced in an economy in a given period.
» Note: In order to add up all the different things an economy produces,
one uses a currency value.
» For example, in the U.S., we use the dollar value of the total quantity
of goods and services produced in the U.S. in a given period.
» This is basically what we call “Gross Domestic Product” or GDP.
Output & Growth: Short & Long Run




A recession is a period during which aggregate output declines.
Two consecutive quarters of decrease in output (as measured by
real GDP) signal a recession.
A prolonged and deep recession becomes a depression.
Policy makers attempt not only to smooth fluctuations in output
during a business cycle but also to increase the growth rate of
output in the long-run.
“It's official: U.S. is in recession
Economy began shrinking in December 2007, panel declares”
http://www.msnbc.msn.com/id/27999557/ (on 12/1/2008)

“Diagnosing depression: What is the difference between a
recession and a depression?”
http://www.economist.com/finance/economicsfocus/PrinterFriendly.
cfm?story_id=12852043
Unemployment

The unemployment rate is the percentage of the
labor force that is unemployed.

The unemployment rate is a key indicator of the
economy’s health.

The existence of unemployment seems to imply that
the aggregate labor market is not in equilibrium.
– Why do labor markets not clear when other markets do?
Inflation and Deflation

Inflation is an increase in the overall price level.

Hyperinflation is a period of very rapid increases in
the overall price level. Hyperinflations are rare, but
have been used to study the costs and consequences
of even moderate inflation.

Deflation is a decrease in the overall price level.
Prolonged periods of deflation can be just as
damaging for the economy as sustained inflation.

Stagflation occurs when the overall price level rises
rapidly (inflation) during periods of recession or high
and persistent unemployment (stagnation).
The Business Cycle

An expansion, or boom, is
the period in the business
cycle from a trough up to a
peak, during which output
and employment rise.

A contraction, recession, or
slump is the period in the
business cycle from a peak
down to a trough, during
which output and
employment fall.

A positive trend line indicates
long run growth.

MACRO QUESTIONS
Macroeconomic Data – Real Output Growth
FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2009
The periods of the Great Depression and World Wars I and II show the largest fluctuations in
aggregate output.
Government Policy Options

Main policies that the government considers to influence the
economy:
–
Fiscal policy: government policies concerning taxes and
spending.
–
Monetary policy: tools used by the Federal Reserve to
control the quantity of money in the economy.
–
Growth or supply-side policies: government policies
that focus on stimulating aggregate supply instead of
aggregate demand; includes both fiscal and monetary as
well as other policies (e.g., regulatory, industrial,
antitrust...)

Short term vs. Long term

Counter-the-cycle vs. Growth
The Circular Flow & National Income Accounting
National Income & Product Accounts

National income and product accounts are
data collected and published by the
government describing the various
components of national income and output in
the economy.
 The
U.S. Department of Commerce is
responsible for producing and maintaining the
“National Income and Product Accounts” that
keep track of economic activity.
– http://www.bea.gov/national/index.htm#gdp

Arguably the most well known of these is GDP.
GDP: Gross Domestic Product
 Gross
Domestic Product (GDP) is
the total “dollar” market value
of all final goods and services
currently produced within a given period
by factors of production located within a country.
 About
how big was it in the U.S. in 2014?
$17,348 billion
$15,962 billion
Important GDP Notes

Gross Domestic Product (GDP) is the total “dollar” market value of all
final goods & services currently produced within a given period by factors
of production located within a country.
– Market value...
– Final goods and services...
» The term final goods and services in GDP refers to goods and services produced
for final use.
» Intermediate goods are goods produced by one firm for use in further processing
(i.e., transformation) by another.
» Value added is the difference between the value of goods as they leave a stage of
production and the cost of the goods as they entered that stage.
» In calculating GDP, we can either sum up the value added at each stage of
production, or we can take the value of final sales.
– Currently produced stuff...
» Current
» Productive
– Located within, i.e., stuff produced HERE...
» Output produced by a country’s citizens, regardless of where the output is
produced, is measured by Gross National Product (GNP).
– It’s gross...
» Refers to investment purchases of newly produced capital like housing, plants, equipment, and
inventory.
GDP Observations & Limitations
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Population matters...
Leisure matters...
Quality matters...
Home production matters...
Illegal markets matter...
Distribution matters...
Social Benefits/Costs matter...
What’s produced matters...
Depreciation matters...
So what do we do?
– Try the best we can.
– Look at various indicators and scale them or compare them
in meaningful ways.

How Happy Is America?
– http://www.npr.org/blogs/money/2013/02/08/171414674/how
-happy-is-america