Download 17 (MACRO) plus extra stuff - Cameron School of Business

CH 17
Macroeconomics:
The Bird’s-Eye View
of the Economy
MB
MC
MB MC
Introduction


The Great Depression
Important dates & stats:







October 24th, 1929 "Black Thursday," recorded sales of
shares hits 12,895,000
October 29th, 1929 "Black Tuesday," recorded sales of
shares hits 16,410,000.
December 1930, 1350 banks have suspended operations
January 7th, 1931 report on unemployment shows that 4 to 5
million Americans are out of work.
2,293 banks suspended operations during 1931
1,493 banks suspended operations during 1932
4,000 banks suspended operations in 1933
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 2
MB MC
Introduction

The Great Depression

Overall Impact In the U.S.:
 Factories
cut production 31%
 Number of people without jobs nearly tripled by 1933
when the unemployment rate hit 25%
 Stocks lost a third of their value in 3 weeks

In Germany:
 Nearly
a third of all workers were without jobs
 Banking system collapsed
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 3
MB MC
Introduction

The Great Depression

What was the cause?
 The
Federal Reserve raising interest rates?
 The Stock market crash?
 “Hoarding” of money?
 A rigid money supply due to the gold standard?
 “Sticky” Prices & Wages ?
 Capitalism in general?
 Poor economic planning?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 4
MB MC
Schools of Macroeconomic Thought


Discussion of the causes and “cures” of
the GD provide a great example of 2
distinct schools of thought on how the
economy works and how gov’t “should”
be involved.
Indeed, we’ll see that the GD is the
basis for the different points of view.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 5
MB MC
Schools of Macroeconomic Thought

We have two problems: first, to meet the immediate
distress; second, to build up on a basis of permanent
employment. As to "immediate relief," the first
principle is that this nation...owes a positive duty that
no citizen shall be permitted to starve....In addition to
providing emergency relief, the Federal Government
should and must provide temporary work wherever
that is possible. You and I know that in the national
forests, on flood prevention, and on the development
of waterway projects....tens of thousands, and even
hundreds of thousands of our unemployed citizens
can be given at least temporary employment....
--Franklin D. Roosevelt, 1932
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 6
MB MC
Schools of Macroeconomic Thought

The proposals of our opponents will endanger or
destroy our system....I especially emphasize that
promise to promote "employment for all surplus labor
at all times." At first I could not believe that anyone
would be so cruel as to hold out a hope so absolutely
impossible of realization to these 10,000,000 who are
unemployed....If it were possible to give this
employment to 10,000,000 people by the
government, it would cost upwards of $9,000,000,000
a year....It would pull down the employment of those
who are still at work by the high taxes and the
demoralization of credit upon which their employment
is dependent....It would mean the growth of a fearful
bureaucracy which, once established, could never be
dislodged.
--Herbert Hoover, 1932
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 7
MB MC
Introduction

The Great Depression

The (FDR/ “Keynesian”) response:
 Macroeconomic
policies
o Government actions designed to affect the
performance of the economy as a whole
» Monetary Policy & Fiscal Policy
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 8
MB MC
Macroeconomic Policy

Monetary Policy
Determination of the nation’s money supply
 Controlled by the central bank or, in the
U.S., the Federal Reserve System (Fed)
 By changing the money supply,
government can affect the economy
(output, employment, interest rates,
inflation, stock prices, the value of the
dollar).

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 9
MB MC
Monetary Policy
The Fed can increase money supply (buy
bonds from the public, or decrease
required reserves) to lower interest rates in
an attempt to stimulate the economy during
periods of downturn
= expansionary monetary policy
 The Fed can decrease the money supply
(sell bonds, increase required reserves) to
lower interest rates and slow the economy
down.
= contractionary monetary policy

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 10
MB MC
Macroeconomic Policy

Fiscal Policy
Decisions that determine the government’s
budget, including the amount and
composition of government expenditures
and government revenues
 Taxation
 Government spending

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 11
MB MC
Macroeconomic Policy

Fiscal policy influences the balance
between government spending and
taxes:
A deficit occurs when government
spending is greater than tax revenue.
 A surplus occurs when government
spending is less than tax revenue.
 The national debt is the summation of
previous year’s deficits

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 12
MB MC
Fiscal Policy



The government is our largest
consumer and can spend money to
stimulate the national economy (think
FDR and the New Deal).
The government can also decrease
taxes to put more money in the hands of
individual consumers.
These are “expansionary fiscal policy”
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 13
MB MC
Macroeconomic Issues







“Economic growth”
The “standard of living”
Productivity
The price level & inflation
Recessions, expansions and business cycles
Unemployment
Measurement issues (aggregation and
indices)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 14
MB MC
Macroeconomic Goals


1.
2.
3.
There are some things that everyone
can agree on…
Goals:
Rapid economic growth
“Full” employment
Stable prices
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 15
MB MC
How to achieve those goals?

1.
2.
Schools of thought
Conventional wisdom (“Classical Theory”) =
leave the economy alone
J.M. Keynes = the economy needs
guidance, hence government should
intervene into markets through monetary
and fiscal policy
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 16
MB MC
The Major Macroeconomic Issues

The “Standard of Living”


The degree to which people have access to goods
and services that make their lives easier, healthier,
safer, and more enjoyable
Output per person produced in a nation
(note: this is not the same as output per worker)
What is not included in this definition?
(leisure time, good health, clean environment …)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 17
MB MC
Standard of Living

Beginning of the 20th century:
Typical work week = 60 hours
 Annual salary = $450 ($8,000 in today’s $)
 Average life expectancy = 47 years


End of the 20th century:
Typical work week = 35 hours
 Annual salary = $35,000 + benefits
 Average life expectancy = 76 years

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 18
MB MC
Standard of Living

Why have we seen these changes in
the standard of living over the past 100
years?
Rapid economic growth!
 Productivity (output of goods and services)
has grown faster than the population.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 19
MB MC
The Major Macroeconomic Issues

Economic Growth

A process of steady increases in the
quantity and quality of the goods and
services the economy can produce.
How should we measure economic growth?

Real GDP
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 20
MB MC
Real Gross Domestic Product

Real GDP = the market value of final goods
and services produced in a nation in a given
year.



“Market value” = price x quantity ($)
Only include “final” goods and services because
we don’t want to “double-count”.
“In a nation” = within the physical borders of the
country, regardless of who owns the company.
 Eg:
value of Honda cars produced in Ohio counts in US
GDP

Calendar year of when it was produced.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 21
MB MC
The 3 Faces of GDP


Gross Domestic Product measures output of
our nation, but also measures expenditure by
households (consumption), businesses
(investment), government (gov’t purchases)
and the foreign sector (exports – imports).
Since every dollar spent is also a dollar
earned, GDP also measures incomes of
capital (payments to owners of capital) and
labor (wages and salaries).
 Note:
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
capital income = 25%, labor income = 75%
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 22
MB MC
Nominal vs. Real GDP



Real GDP is a measure of output,
expenditure or income expressed in values in
a base year rather than in current prices. As
such, real GDP measures actual physical
volume of output.
Nominal GDP values GDP at current prices
and as such measures the current dollar
value of production.
Which is a better measure to use in gauging
changes in output between years?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 23
MB MC
Real GDP

Is Real GDP a good measure of economic
well being?


Good, but not great.
Higher GDP generally means higher incomes, but
many factors that contribute to “well being” are not
measured in GDP because they are not sold in
markets.
 Leisure
time
 Environmental quality
 Income equality
 Underground economy
Each of these may have an inverse relationship with GDP
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 24
MB MC
GDP

Interesting question: How has the increase in
women's participation in the labor force
affected GDP?


Women now producing output that is measured
and included in GDP
Families now paying for goods and services that
were previously produced without being counted
• The increase in female labor force
participation has overstated GDP growth.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 25
MB MC
Percentages of American Men and Women over
Age 16 Working Outside the Home, 1960 - 2001.
• Increase in female labor force participation increases the demand for
housekeeping and child care.
• Unpaid household work is not counted in GDP.
• Paid household work is counted in GDP.
• The increase in female labor force participation has overstated GDP growth.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 26
MB MC
GDP


Female labor force participation is now
more than 50% higher than in the 60’s
Why has female participation in the
labor force increased so much?
Changes in social customs and norms
 The principle of comparative advantage

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 27
MB MC
Output of the U.S.
Economy, 1900-2001
In 2001 output of the U.S. economy was:
•25 times the 1900 level
•5 times the 1950 level
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 28
MB MC
Output per Person and per Worker in
the U.S. Economy, 1900-2001
In 2001:
•Output/person was 7 times the 1900 level
•Output/worker was 5 times the 1900 level
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 29
MB MC
The Major Macroeconomic Issues

Productivity
In 2001 the average U.S. worker could
produce five times more than in 1900.
 Average labor productivity:

Total output
 output per employed worker
Number of people employed
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 30
MB MC
The Major Macroeconomic Issues

Productivity

U.S. trends in output per employed worker
 1950
- 1973: increased 2.1%/yr
 1973 - 1995: increased less than 1%/yr
 1995 - present: increased nearly 2%/yr
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 31
MB MC
The Major Macroeconomic Issues

Productivity and Living Standards in
China and the United States
2001
Output
Population
Employed
Output/person
Average labor
productivity
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
United States
China
$10,200 billion
285 million
135 million
$35,790
$1,160 billion (U.S.)
1,262 million
710 million
$919
$75,556
$1,634
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 32
MB MC
Recessions, Depressions & Expansions




The economy does not grow at a constant
rate at all times. Rather, we experience ups
and downs in output.
These cyclical ups and downs are called the
“business cycle”
Recession = 2 consecutive quarters of
declining aggregate output
Depression = a prolonged, deep recession
(no common definition)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 33
MB MC
Output of the U.S.
Economy, 1900-2001
Recessions: slowdowns in economic growth
•1930s (depression); 1941-’45; 1973-’75; 1981-’82; 1990-’91;2001
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 34
MB MC
Recessions, Depressions & Expansions


Expansions are periods of rapid
economic growth
The most notable recent period of
expansion lasted nearly 11 years, from
1991 - 2001
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 35
MB MC
Output of the U.S.
Economy, 1900-2001
Expansions: periods of rapid economic growth
•1945-’48; 1961-’69; 1975-’80; 1982-’90; 1991-2001
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 36
MB MC
Employment & Unemployment

The unemployment rate is the percentage of
the labor force* that is unemployed.
= an excess supply (surplus) of labor.
* A person must be > 16 years old, not working
but available for work, and be actively seeking
employment during the last month to be
considered unemployed.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 37
MB MC
The U.S. Unemployment
Rate, 1900-2001
The unemployment rate:
•% of the labor force that is out of work
Observations:
•Rises during recessions
•Always greater than zero
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 38
MB MC
Increases In Unemployment
During Recessions
Unemployment
rate at beginning
of recession (%)
4.8 (Nov. 1973)
6.3 (Jan. 1980)
5.5 (July 1990)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Peak
unemployment
rate (%)
Increase in
unemployment
rate (%)
9.0 (May 1975)
10.8 (Nov./Dec. 1982)
7.8 (June 1992)
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
+ 4.2
+ 4.5
+ 2.3
Slide 39
MB MC
The Major Macroeconomic Issues

Unemployment rates differ from country
to country:



For the past 20 years, more than 10% of the
European workforce has been unemployed.
European unemployment is double the rate in the
U.S.
During the 1950s & ‘60s, the European
unemployment rate was generally lower than in
the U.S.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 40
MB MC
Employment & Unemployment



Is all unemployment the result of
macroeconomic changes?
Should we ever expect zero
unemployment?
Why doesn’t the labor market clear
(wages decrease) to eliminate the
surplus?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 41
MB MC
Unemployment



Is all unemployment the result of
macroeconomic changes?
Some of it is, but not all…
3 types of unemployment:
Frictional
 Structural
 Cyclical

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 42
MB MC
Unemployment



Frictional Unemployment is generally short
term unemployment that results from the time
it takes to properly match a new employee
with a particular job.
From the worker’s perspective, this is
unemployment that may be experienced as
you “search” for a new job.
Is frictional unemployment bad?

No. in fact it can be argued that this type of
unemployment is good and an essential part of a
smoothly functioning economy.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 43
MB MC
Unemployment



Structural Unemployment is long-term and
chronic unemployment that exists even with
the economy is producing at a normal rate.
A change in required skills, a lack of skills,
language barriers, discrimination and
structural features of the labor market (eg:
min wages and labor unions) may result in
this type of unemployment.
This type of unemployment may result from
rapid technological change.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 44
MB MC
Unemployment

Labor Unions

Benefits
 Reduced
worker exploitation
 Support progressive labor legislation
 Increase productivity (training, standards)
 Promote democracy in the workplace
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 45
MB MC
Unemployment

Labor Unions

Costs
 Unions
cause otherwise competitive labor
markets to function inefficiently – disequilibrium
and associated loss of surplus.
 Unions may prevent companies from
competing in the global economy.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 46
MB MC
Unemployment


Cyclical Unemployment is the extra
unemployment that occurs during
periods of recession.
Typically short-lived and associated with
downturns in productivity and output
(GDP).
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 47
MB MC
Inflation & Deflation



Inflation is a sustained increase in the
overall price level.
Deflation is a sustained decrease in the
overall price level
OK, so what is the “price level”?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 48
MB MC
Inflation & Deflation


The Price Level is the average level of dollar
prices in the economy.
Consider prices in NYC in 1905:




1 pound of coffee = $0.15
Broadway show = $0.40
A new suit= $6.00
Annual tuition at a private college = $200
 Are
these price changes the result of Microeconomic
(individual market) changes?
 Partially, but micro changes likely only account for a very
small fraction of the price changes
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 49
MB MC
Inflation and Deflation


Most measures of the price level are reported
in the form of an INDEX – a series of
numbers that each represent a specific
period, and are only meaningful when
compared to each other.
The most widely used index for the price level
is the Consumer Price Index (CPI), which is
tracked and reported by the Bureau of Labor
Statistics (BLS)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 50
MB MC
Inflation & Deflation



The CPI uses a “market basket” of goods and
services typically bought during a base period
(1993-1995).
This basket actually contains nearly 80,000
individual products, which are priced and repriced at regular monthly intervals.
The price of these goods are expressed in
terms of a percent of the base period’s price.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 51
MB MC
Inflation & Deflation
CPI example:
 In April 2003 the CPI reached 183.8
 This means that the cost of the total
market basket amounted to 183.8
percent of the base period cost.
 Another way of looking at it is that a
typical item costing $1.00 in the base
period cost $1.84 in April 2003.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 52
MB MC
Inflation & Deflation

The base year used for the CPI really doesn’t
matter for estimating inflation:
Example:
 April 2003 CPI = 183.8
 March 2002 CPI = 165.1


This means that prices in April 2003 were
183.8/165.1 = 1.113 times higher than they
were a year earlier.
This means that prices increased by 11.3
percent over this time period.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 53
MB MC
The U.S. Inflation Rate, 1900-2001
Inflation
•The rate prices in general are increasing over time
•Varies over time -- high in the ‘70s and low in the ‘90’s and today
•Varies between countries -- in 2001 3% in U.S. & 400% in Ukraine
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 54
MB MC
The Major Macroeconomic Issues

National economies are becoming
increasingly interdependent:

In 1999 the U.S.:
 Exported
10.8% of all goods and services
produced.
 Imported 13.3% of the goods and services
used by Americans.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 55
MB MC
The Major Macroeconomic Issues

The international flows create political
and economic issues:

The impact of trade on jobs
 The
steel and textile industries
 Trade agreements (NAFTA)

Trade imbalances
 When
exports and imports differ significantly
 Trade deficit: exports < imports
 Trade surplus: exports > imports
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 56
MB MC
Exports and Imports as a Share of
U.S. Output, 1900-2001.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 57
MB MC
Macro Issues in the News

Off shoring or Outsourcing
US corporations are sending jobs
overseas.
 Instead of hiring American workers at
home, corporations are hiring foreign
workers to do the same jobs.

 Examples:
call center work (tech questions for
computer or cell phone users), software
development, software debugging.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 58
MB MC
Off shoring or Outsourcing

Keep it simple: all that is happening is
that US firms are purchasing labor from
another country.


So, Red Sox fans are outsourcing jobs to
the Dominican Republic!
This is no different than any other form
of international trade, which is no
different from any other form of trade.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 59
MB MC
Off shoring or Outsourcing

What are the causes of this
phenomenon and is it bad or good for
the US?

Causes:
 Technology
has made the world very small
 The principle of comparative advantage and
low hanging fruit – use the low opportunity cost
resources first.
 Countries like China and India have finally
loosened their trade barriers and are pushing
the exportation of goods, including labor.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 60
MB MC
Off shoring or Outsourcing

Is off shoring “bad”?



Obviously if you lose your job it is bad for
you, but …
Countries with the lowest barriers to
trade also have the highest rates of
economic growth and vice versa.
We can use supply and demand to see
that it can’t last forever…
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 61
MB MC
Off shoring or Outsourcing

Importing goods from other nations
results in higher demand for those
goods. So, as we demand more and
more foreign labor…
Market wages in foreign countries must rise
(eg: real wages in southern China are 6
times higher than they were 20 years ago)
 Eventually, wages will equilibrate between
nations.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 62
MB MC
Off shoring or Outsourcing



Finally, no one ever says anything about
Insourcing (foreign firms outsourcing to the
US) which is also on the rise.
Trade creates wealth and makes everyone
better off.
What type of unemployment is created by
outsourcing?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 63
MB MC
Social Security


Benefits are funded via a Social Security
payroll tax. This tax is 6.2% of an employee's
income paid directly by the employer, and
6.2% deducted from the employee's
paycheck, yielding an effective rate of 12.4%
of an employee's income.
Benefits from the program are paid out
according to a detailed formula. The amount
of benefits in retirement is typically based on
the total accumulation of Social Security
Income over a beneficiary's working career.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 64
MB MC
Macro Issues in the News

Social Security is not a retirement fund. It is
principally an age-based income subsidy
which uses a special tax system to ear-mark
funds to support it.
The Social Security “Crisis”
 Social security is “pay-as-you-go” system: SS
taxes on currently working individuals are
collected and used to pay current recipients
(there is no SS “trust fund”).
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 65
MB MC
Macro Issues in the News



Since its beginning, the revenues raised have
exceeded the mandated benefit levels. The
US government spends that extra money and
issues Treasury bonds (IOUs) to the Social
Security Trustees.
Example: At the end of 2003, the cumulative
excess of Social Security taxes received over
benefits paid out was more than $1.5 trillion.
In the past, SS recipients have done quite
well, receiving more benefits than they paid
in, because there were so many more
workers than retired people.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 66
MB MC
Macro Issues in the News


Now, the number of retirees is growing
faster than the number of people
entering the system and paying new
taxes.
According to most projections, the
Social Security trust fund will begin
drawing on its Treasury Notes around
2018 or 2019, at which time the
repayment of these notes will have to
be financed from the general fund.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 67
MB MC
SS

At some time thereafter, around 2042 (depending on
who is doing the estimating) the Social Security Trust
Fund will have exhausted the claim on general
revenues that had been built up during the years of
surplus.

This payout from general revenues will require tax
increases, selling other government assets, or
borrowing from the private sector. Some have argued
that this potential future requires changes to the
system. These people argue that Social Security is
facing a "crisis" -- Bush described it as a "structural
problem" and then said that Social Security "is on the
road to bankruptcy"
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 68
MB MC
Macro Issues in the News
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 69
MB MC
Macro Issues in the News


President Bush is now calling for
“privatization” of SS system. In other
words, he is proposing cutting SS
benefits (to make up the shortfall), but
allowing individuals to make-up some of
that lost benefit by seeking higher
returns in the stock market.
Hello? What’s going to happen when
they flop?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 70
MB MC
Macro Issues in the News


Controversy: the projections of payouts
vs. revenues are based upon estimates
of economic growth.
Demographic projections are also
estimates. For example, people are
living longer – does this mean longer
payout or are they working (and
therefore paying into SS) longer too?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 71
MB MC
The other side of the story


The problem really isn’t that big. A recent
CBO report finds that extending the life of the
SS into the 22nd century, with no change in
benefits, would require additional revenues
equal to only 0.54 percent of GDP, which is
less than 3 percent of federal spending –
much less than we're currently spending in
Iraq.
Given that, it is easy to come up with fiscal
packages (taxes) that would secure the
retirement program, with no major changes,
for generations to come.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 72
MB MC
Macro Issues in the News

Some estimate that restoring one quarter of
the recent tax cuts on the richest 1% of
Americans would provide indefinite solvency
for the system without cutting benefits at all.

Other solutions:
Remove the cap on SS taxable income (which
essentially makes the SS tax regressive in nature)
Increase the age of retirement
Balance the budget?



Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 4: Macroeconomics:The Bird's-Eye View of the Economy
Slide 73