Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economics: Theory Through Applications 19-1 This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA 19-2 Chapter 19 The Interconnected Economy 19-3 Learning Objectives • What factors underlie the demand for housing? • What factors underlie the supply of housing? • What determines the amount of housing traded and the price of housing? • What are exogenous and endogenous events? • How does the equilibrium of a market respond to changes in exogenous variables? • What is comparative statics and how is it used? 19-4 Learning Objectives • What is the credit market and what determines the interest rate? • What is the labor market and what determines the real wage? • What is the foreign currency market and what determines the exchange rate? • How are the markets for goods, labor, credit and foreign currency linked? • How do we use those links to understand the crisis that began in 2008? 19-5 Figure 19.1 - The Market Demand for Houses 19-6 Figure 19.2 - A Shift in the Market Demand Curve 19-7 Figure 19.3 - The Market Supply of Houses 19-8 Figure 19.4 - A Shift in Supply of Houses 19-9 Figure 19.5 - Market Equilibrium 19-10 Table 19.1 - Market Equilibrium: An Example 19-11 Figure 19.6 - A Decrease in Demand for Housing 19-12 The Credit Market repayment amount 1 nominal interest rate loan amount 19-13 Figure 19.7 - A Market for $1,000 Loans 19-14 Figure 19.8 - A Reduction in Supply in the Mortgage Market 19-15 Nominal Interest Rates and Real Interest Rates real interest rate nominal interest rate – inflation rate 19-16 Figure 19.9 - The Aggregate Credit Market 19-17 Figure 19.10 - Equilibrium in the Market for Construction Workers 19-18 Figure 19.11 - A Decrease in Demand for Construction Workers 19-19 Figure 19.12 - Equilibrium in the Labor Market 19-20 Figure 19.13 - Equilibrium in the Foreign Exchange Market Where Dollars and Euros Are Exchanged 19-21 Figure 19.14 - Comparative Statics in the Euro Market 19-22 Figure 19.15 - Foreign Exchange Market Equilibrium 19-23 Figure 19.16 - The Circular Flow of Income 19-24 Figure 19.17 19-25 Figure 19.18 19-26 Figure 19.19 - A Decrease in Demand for Labor 19-27 Figure 19.20 19-28 Figure 19.21 - A Decrease in Demand for Shoeshines 19-29 Trade Flows and a Shift in the Demand For Foreign Exchange borrowing from abroad imports – exports or lending to abroad exports imports 19-30 Key Terms • Supply and demand: Supply and demand is a framework to explain and predict the equilibrium price and equilibrium quantity of a good • Competitive market: A market is said to be competitive, or more precisely to exhibit perfect competition, when there are many buyers and sellers and the goods produced by the sellers are perfect substitutes • Market demand curve: The number of units of a good or a service demanded at each price • Market supply curve: The number of units of a good or a service supplied at each price 19-31 Key Terms • Equilibrium price: A price such that the quantity supplied equals the quantity demanded • Equilibrium quantity: The quantity supplied and demanded at the equilibrium price 19-32 Key Terms • Exogenous: Something that comes from outside a model and is not explained in our analysis. • Endogenous: Something that is explained within our analysis • Comparative statics: Comparative statics is a technique that describes how market equilibrium prices and quantities depend on exogenous events • Nominal interest rate: The nominal interest rate is the number of additional dollars that must be repaid for every dollar that is borrowed • Real interest rate: The rate of return specified in terms of goods not money 19-33 Key Terms • Fisher equation: A formula for converting from nominal interest rates to real interest rates: the real interest rate equals the nominal interest rate minus the inflation rate • Credit market: The credit market brings together suppliers of credit, such as households who are saving, and demanders of credit, such as businesses and households who need to borrow. • Real wage: The real wage is the relative price of labor in terms of consumption goods – It equals the nominal wage (the wage in dollars) divided by the price level 19-34 Key Terms • Labor market: The labor market is the market which brings together households who supply labor services and firms who demand labor as an input into the production process • Foreign exchange market: A foreign exchange market is where one currency is traded for another • Nominal exchange rate: The nominal exchange rate is the price of one currency in terms of another • Current account balance: The current account balance is the difference between the value of exports and imports of goods and services • Net exports: Net exports equals exports minus imports 19-35 Key Takeaways • The primary factor influencing the demand for housing is the price of housing – By the law of demand, as the price of housing falls, the quantity of housing demanded increases – The demand for housing also depends on wealth of households, their current income and interest rates • The primary factor influencing the supply of housing is the price of housing – As the price increases, the quantity supplied increases as well – The supply of housing is shifted by changes in the price of inputs by changes in technology 19-36 Key Takeaways • The quantity and price of housing traded is determined by the equilibrium of the housing market • Exogenous variables are determined from outside a framework, while endogenous variables are determined within the framework • Changes in exogenous variables lead to shifts in market supply and/or market demand curves – These shifts in supply and demand then lead to changes in quantities and prices 19-37 Key Takeaways • Comparative statics is a technique to describe how changes in exogenous variables influence equilibrium quantities and prices – It is used to answer questions about how markets respond to changes in exogenous variables • The credit market brings together the suppliers (households) of credit with those who are demanding credit (other households, firms and the government) – The interest rate adjusts to attain a market equilibrium 19-38 Key Takeaways • The labor market is where labor services are traded – Households supply labor and firms demand labor – The real wage adjusts to attain a market equilibrium • The foreign exchange market brings together demanders and suppliers of foreign currency – The exchange rate, which is the price of one currency in terms of another, adjusts to attain a market equilibrium 19-39 Key Takeaways • Markets are linked because supply and demand in one market will generally depend on the prices in other markets – The circular flow of income illustrates some of these connections across markets • Although the crisis in 2008 may have started in the housing market, it did not end there – Instead, the crisis impacted markets for labor, credit, and foreign exchange 19-40