1、ECONOMICS what is it and why study it?,Social Science Efficiency,How to increase output,Economic Resources Anything that can be used to produce output can be viewed as a resource (input, or factor of production) Main categories of resources: Land (inclusive of natural resources) Physical Capital (pr
2、oductive capital) Encouragement of saving (IRAs) Labor Immigration Human Capital Subsidized education Entrepreneurship Development of favorable business environment,Standard of Living = Income = Output,efficiency,Output can be increased through increases in the resource base, but it can also be incr
3、eased or “improved” through efficiency Fundamental Economic Questions: What to Produce (allocative efficiency) How to Produce (productive efficiency) For Whom to Produce (allocative efficiency) The Society answers these questions in large part through the choice of the economic system,Economic syste
4、ms,Capitalism Socialism Communism These systems differ in the allocation of the ownership of productive resources The differences in these systems can also be formulated in terms of how they address the fundamental questions (e.g. command economy versus market economy)Feudalism Mercantilism,Natural
5、emergence Adam Smiths “invisible hand” concept Simplified role of the government Institutional support for economic activity Property rights laws Stable political system Well defined legal system Transparent business regulations System of checks and balances for govt officials,Capitalism,Socialism,P
6、hilosophical Foundation Socialist Movement of the mid XIX century Role of the government Includes economic decisions in terms of allocation of resources and output, and possibly production,Modern Economies,Mixed system (capitalism + socialism) EU versus US versus RU versus China,Source: World Bank,
7、WDI 2003,Unemployment rate comparison,Source: World Bank, WDI 2003,The Concept of Cost in Economics,Every undertaken activity has a foregone sacrifice associated with it Opportunity Cost The value of the next BEST (highest valued) alternative (the value of the sacrifice that would have become the ne
8、xt choice) E.g. opportunity cost of this class E.g. Opportunity cost of the Colanders book (relative price) E.g. Opportunity cost of physical capital,The world of trade-offs,Budget Constraint and Relative Price Production Possibilities Frontier,Gains from Trade,Specialization and increased output Tw
9、o-country two-product world Absolute advantage principle Why specialize in the production of something that is cheaper to purchase from abroad? Comparative advantage principle Specialize in the production of those products in which you have the lowest relative (opportunity) cost of production Shape
10、of PPF and lack of complete specialization US trade data available on BEA website at: http:/www.bea.gov/bea/di/home/trade.htm,For the US see BEA,Globalization and International Risks,Globalization = economic integration Trade Investment Labor mobility Economic union (EU) Globalization and spread of
11、economic recessions,Correlation in economic growth (GDP growth rates: 1990-2005) between the US and some of its major trading partners),Markets,Defining a market Product definition (and competition) Geographical boundaries (internet, shipping cost reduction globalization and outsourcing) Market forc
12、es: Buyers (demand) versus Sellers (supply) Price and quantity as the outcome,demand,Quantity = f (price, other factors) Price and the Law of Demand Other factors Income (normal versus inferior) Related in consumption goods Substitutes Complements Expectations about the future OTHER FACTORS ,supply,
13、Quantity = f ( price, other factors) Price and the Law of Supply Other factors Costs of Production (MC, and price as MB) Goods related in production Substitutes: (agricultural products) Note, identical to costs of production since is based on opportunity cost concept Complements: (like gold and silv
14、er) Producer expectations of future prices Other factors,Market equilibrium,Qs = Qd Shortage and surplus as unstable states and the stability property of the equilibrium Market efficiency Shifts in demand and supply Is the equilibrium really efficient? Productive and allocative efficiency,Market exa
15、mple: ForEx,How can the US run a trade deficit consistently? Or, differently put, can one live on credit forever?,Does Dollar Matter?,Should We Be Concerned With The Fluctuating Dollar?,TRADE and Currency Fluctuations Price Changes Standard of Living Commodity Prices,The ForEx market,Supply of the U
16、SD Imports to the US Goods (trade) Services (tourism) US investment abroad Foreign Financial Markets Direct investment abroad Central Banks Speculation,Demand for the USD US Exports Goods Services (tourism) Foreign Investment into US US Financial markets Direct investment Central Banks Speculation,T
17、he Interesting 90s,1991-92: Collapse of the USSR Block, beginning of the Transitional Recession in Eastern Europe 1994 Mexican Currency Crisis 1991(2)-95 The Balkan Wars 1998 Recession in Japan 1997 (July) Beginning of the Asian Financial Crisis 1998 major Rouble Crisis,The market for USD in the 90s
18、,D,S,Influx of investment stimulated Demand,Increase in imports stimulated Supply,Demand Effect Dominated (thus positively effecting consumers standard of living),P of USD,The post 90s era,United Europe 10 New Countries Entered the Union on May 1st of 2004, bringing the total number of member states
19、 to 25, with combined population of over 430 million (US population is 293 million). Strong Growth in Russia and China Emerging Economies of Brazil and India Threat of Terrorism to the US Continuous Growth in US Trade Deficit More Recently, the French and Dutch Referendums on the EU Constitution,The
20、 BIG picture,Rise in Imports Increase in Supply Depreciation Rise in Exports Increase in Demand Appreciation Influx of Investment Increase in Demand Appreciation Outflow of Investment Increase in Supply DepreciationBALANCE OF PAYMENTS An Economys International Balance Sheet (www.bea.gov),Demand for
21、the dollardifferent economic agents that purchase the dollar: Foreigners who wish to purchase US goods or services, foreign tourists who wish to travel to the US (US exports) Foreigners who wish to invest in the US (higher US interest rate, attractive US stock market returns)Supply of the dollardiff
22、erent economic agents that sell the dollar: US consumers/firms that want to purchase foreign goods or services, US tourists who wish to travel abroad (US imports) US residents who wish to invest abroad (higher interest rates abroad, etc.)The dollar will appreciate if demand exceeds supply at the cur
23、rent exchange rate. The increase in the demand creates a temporary shortage, but that shortage disappears due to the increase in the price. The price adjustment is the markets correction mechanism to the changing conditions. Note that when you purchase a foreign made product, the cost of the product
24、ion of that product is paid in foreign currency, hence somewhere between the production process and your purchase someone would have to convert your currency into that foreign currency in order to pay for the production.,Measuring Economic Activity,OUTPUT EMPLOYMENT INFLATION,Gross Domestic Productt
25、he total market value of all final goods and services produced by factors of production located within a nations borders over a period of time (usually one year) Gross National Productthe total market value of all final goods and services produced by factors of production owned by a nation over a pe
26、riod of time (usually one year),Output,Measuring production Time period Final goods and services (value added) Market prices Defining an economy (geographical boundaries versus resource ownership) Gross Domestic Product Gross National Product www.bea.gov Table 1.7.5 http:/www.bea.gov/bea/dn/nipaweb/
27、TableView.asp?SelectedTable=43&FirstYear=2003&LastYear=2005&Freq=Qtr,GDP per capita in 2005 (using 2000 USD),Greater than $9910 (2445, 9910) (1172, 2445) (430, 1172)less than $430 no data available,The World Economy in 2004,Source: WDI: 2006, World Bank,Correlation between life expectancy and the st
28、andard of living as measured by the GDP per capita (PPP) is positive 0.65, see the stats table; correlation between GDP per capita and life expectancy is 0.57 (based on the 2005 data from WDI of 2007,The planet Earth in the darkness of the night*,* Image source: NASA (http:/antwrp.gsfc.nasa.gov/apod
29、/ap001127.html),Issues in GDP computation/comparison,Survey of economic activity Self-employed/small businesses Market prices and the government sector Illegal activities Underground economy (“shadow” sector) Tax compliance Defining legal vs illegal Labor force participation/wages Household vs marke
30、t setting,Equivalence between expenditure and income approaches in GDP computation,Circular flaw concept Production of output creates income Income finances consumption of output,Households,Businesses,Input markets,Output markets,Wages, interest, profits,Labor, capital,prices,output,Income = output,
31、GDP = GNP NET FOREIGN INCOME NI = GNP depreciation indirect business taxes PI = NI - (Transfer payments from Govt, net non-business interest income) + (Social Insurance tax, corporate retained earnings) DI = PI Personal Taxes See Table 1.7.5 (www.bea.gov),Income approach,Disposable Income (in 2004:
32、8,646.9 billion $) Income that households actually receive Available for consumption and saving Personal Income (in 2004: 9,689.6 billion $) Household income prior to personal taxes and transfers PI= DI + Personal Taxes National Income Summation of factor payments Employment compensation Interest re
33、ceived from private business Profits Rental income NI = PI + (Transfer payments from Govt, net non-business interest income) (Social Insurance tax, corporate retained earnings) Gross National Product GNP = NI + Dep.Allowance + Indirect Business Taxes GDP = GNP - Net Foreign Income,Expenditures Appro
34、ach,Personal Consumption Goods Durable Non-durable Services Gross Private Domestic Investment Fixed Investment Non-residential Structure Equipment and software Residential Business Government Spending (all levels) Exports of goods and services Imports of goods and services http:/www.bea.gov/bea/dn/n
35、ipaweb/TableView.asp?SelectedTable=35&FirstYear=2003&LastYear=2005&Freq=Qtr Table 1.5.5,employment,Labor force Labor force participation rate Unemployment Unemployment rate BLS www.bls.gov US statistics Industry data: ftp:/ftp.bls.gov/pub/suppl/empsit.ceseeb3.txtCategorizing unemployment Cyclical St
36、ructural Seasonal Frictional,More on unemployment,Accuracy of unemployment statistics Discouraged worker phenomenon Two surveys,Statistics for the US economy For March-July 2003 (seasonally adjusted). Source: BLS,Discouraged Worker Phenomenon,Historical unemployment rate in the US,inflation,Rate of
37、growth of the average of all prices Average price: weighted price Weight represents relative importance of the good Average price converted into index: price index Measuring inflation Consumer Price Index (CPI) www.bls.gov (http:/www.bls.gov/news.release/cpi.t01.htm) Producer Price Index (PPI) www.b
38、ls.gov,Real versus Nominal Measures,US Real and Nominal GDP. Source: BEA,Costs of (unanticipated) Inflation,Menu Cost Redistribution of Wealth Changes in Standard of Living Inflation and relative prices High inflation tends to be more volatile Increased Uncertainty in Forward Looking Financial Arrai
39、gnments Impact on the Exchange Rate (Purchasing Price Parity for internationally traded goods),Growth in Real GDP,Recessions in Recent US history:2000-2001:QIII:00QI:01QIII:011990-1991:QIV:90QI:911981-1982:QIV:81QI:82(QIII:82)1980: QII & QIII1974-1975QIII:74QIV74QI:75,Real Business Cycle - US Real G
40、DP: 1974-2006,Unemployment Rate: 1974-2006,Source: BLS,Core Consumer Prices,Source: BLS,The Business Cycle,Glut of goods and subsequent reduction in production,Real GDP (per capita),time,Recession a period of two or more consecutive quarters of decline in real output,Business Cycle,Relationship betw
41、een Output, Employment, and Inflation Causes of inflation Natural unemployment Other sources: monetary policy, currency depreciation, decreases in the supply of resources oil . Business Inventories and start of recession Deflation in the costs of production Foreign economy effect Change in confidenc
42、e,business cycle, unemployment and inflation,Inflation and unemployment are related. Inflation will decline, and even deflation may begin when unemployment rate is above the natural rate of unemployment. In fact, the natural rate of unemployment is defined as the rate of unemployment at which the in
43、flation rate remains constant. Another way of defining the natural rate of unemployment is to simply tie it to the level of real GDP. Natural rate of unemployment is the rate of unemployment that occurs when the real GDP is at its long term trend. Note that at the start of a recession the unemployme
44、nt rate may still be above the natural rate of unemployment and hence the rate of inflation may continue to increase. Similarly, early in the recovery, unemployment rate remains higher than the natural rate of unemployment which may further reduce inflation. Inflation is dependent on unemployment. I
45、f unemployment is high then there is little pressure on prices to go up, but if unemployment is low, then people can bid up prices because they have disposable incomes. There are some additional factors that can change inflation, including currency fluctuations, but that topic will be covered later
46、in the semester when we get to the international finance section.,This slide merely provides you with some definitions and a basic discussion (for your reading),Can future be predicted? Magical art of forecasting,Examples of Leading Indicators Average work hours in manufacturing Business inventories
47、 New orders for non-defense capital goods Sales tax receipts Stock index (index futures) Construction Employment Residential permits Examples of Coincident Indicators Total Tax Receipts Corporate Income Tax Receipts Average weekly claims for unemployment insurance Examples of Lagging Indicators Unem
48、ployment Rate,1994 Mexican currency crisis 1997 - Asian financial crisis 1998 Russian currency crisis Recession in Japan Slow Growth in Europe,Average Growth Rates by Component, 1996-2000,4,8%,Growth in components of Real GDP, 2000-2003 Seasonally adjusted at annual rates,Jobless Recovery,Seasonally
49、 adjusted US unemployment rate Source: BEA,Economy of Atlanta in the recession and jobless recovery,Source: BLS,A side-note: Job recovery in Atlanta,Aggregate Framework,GDP = C + I + G + X M Relationship between income (GDP), expenditures and saving Y =C + S Consumption function: C = a + mpc (Y) Autonomous versus induced expenditures a = f (wealth, expectations, real interest, subsistence needs) Incorporating income and non-income taxes into consumption function Solving for the GDP Multiplier and its role,
