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Four Economies • Economic: Broad view of economic system’s output. • Commercial: Goods and services sold and bought domestically • Financial: Banks and other lenders, financial markets—provides money for commercial ventures • International: Commercial, financial transactions across border (c) 2001 by Russell G. Todd Key Economic Developments • 1913: Federal Reserve created • 1930s: Fiscal vs. monetary policy • Post-WWII: Bretton Woods, creation of IMF, World Bank, GATT • 1972-74: U.S. leaves gold standard; forex market created • 1980s: Volcker Fed • 1986-94: Uruguay round creates WTO • 1989-91: Collapse of socialist states • Late ’90s: Creation of Euro; Greenspan ascends (c) 2001 by Russell G. Todd The Economic Cycle • Supply and demand drive economic cycles. • Sellers and buyers borrow money beyond that which they earn. • Sellers and buyers tend to over-do things. Sellers invest too much in business; buyers purchase too much stuff on credit. • During economic contractions, production and income fall until credit stabilizes. • Expansion is possible when both sellers and buyers are relying on earned income, not credit. • National economic cycles don't necessarily correlate with each other. • National monetary authorities seek to "smooth" cycles by restraining growth during expansions and relaxing restraints during contractions. • The use of fiscal policy by national governments is heavily (c) 2001 by Russell G. Todd influenced by politics. Earnings & Inflation • Real earnings=earnings minus inflation • Inflation has varying impacts on wageearners, financial markets, borrowers and lenders • Fed’s focus: preventing inflation by controlling rates (c) 2001 by Russell G. Todd How the Fed Controls Rates • Fed lowers rates by purchasing securities • Bank reserves grow, lending rises, money supply rises, demand rises • Fed raises rates by selling securities • Bank reserves shrink, lending shrinks, money supply shrinks, demand falls (c) 2001 by Russell G. Todd Productivity & Prices Supply Demand Price Comment 100 100 1.00 supply and demand balance 105 100 0.95 productivity up, prices down 95 100 1.05 productivity down, prices up 100 100 95 105 0.95 demand down, prices down 1.05 demand up, prices up 110 105 95 105 110 105 0.95 productivity stronger than demand, prices down 1.05 demand stronger than productivity, prices up 1.11 productivity down, demand up, prices up (c) 2001 by Russell G. Todd Examples of Economic Indicators • • • • • Consumer price index: inflation GDP: Economic output Durable goods orders: capital investment Auto & home sales: biggest sectors Leading economic indicator: future economic output (c) 2001 by Russell G. Todd Friday June 1 8:58 AM ET Jobless Rate Falls in May By Caren Bohan WASHINGTON (Reuters) - The U.S. job market held up better than expected in May, as the unemployment rate fell for the first time in 8 months, a report from the Labor Department (news - web sites) showed on Friday. The jobless rate eased to 4.4 percent from 4.5 percent in April -- defying economists' predictions that unemployment would tick higher. The last time the jobless rate fell was in September 2000. But although the percentage of people out of work declined, trends in nonfarm payrolls remained weak. The number of workers on U.S. payrolls outside the farm sector fell by 19,000 -- a modest drop that was close to the 17,000 contraction expected by economists in a Reuters survey. The report included heavy revisions to prior months' data and some methodology changes. On balance, the job picture in recent months looked stronger after the changes. Prices of U.S. Treasuries eased after the report as traders scaled back expectations of the extent of additional rate cuts by the Federal Reserve (news - web sites). The dollar rose. ``Good news on all fronts. The payrolls number was not as bad as expected, the unemployment number was also better than expected. Another positive was that the April number was revised upward, in the sense that there were fewer job losses than originally anticipated,'' said Alex Beuzelin, foreign exchange analyst at Ruesch International in Washington. ``This report is going to support the idea that the worst of the downturn is over. It further supports the market's guarded optimism that the economy is on the way back up.'' The Fed has hacked 2.5 percentage points off overnight interest rates since the beginning of this year, acting on five separate occasions in one of the most aggressive rate-reduction sprees in history to reinvigorate a flagging economy. Labor said April payrolls fell by 182,000 -- a revision from the previously reported decline of 223,000. March payrolls grew by 59,000, in contrast to the originally reported 53,000 decrease. Workers' hourly wages grew in May by 0.3 percent to $14.26 from a revised $14.22 in April. Year-to-date, growth in hourly earnings is running at 4.3 percent.