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3006 Slides

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  • 1. Macroeconomics for Business
    • Microeconomics
    • Macroeconomics
      • Living Standards (y/pop.)
      • Inflation (P)
      • Unemployment (U)
    .
  • 2. Living Standards
    • Cross-Sectional Data
      • North America, Western Europe, Japan vs.
      • South America, Eastern Europe, South Asia, Africa
    • Time-Series Data
      • US over time; Sub-Saharan Africa
      • China; Singapore
  • 3.  
  • 4.  
  • 5.  
  • 6. Inflation
    • Rule of 72
    • Cross-Sectional Data--Venezuela vs. Japan
    • Time-Series Data--Germany Then and Now; USA
  • 7. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000
  • 8. Unemployment
    • Cross-Sectional Data:
      • Switzerland vs. Belgium
    • Time-Series Data:
      • The U.S. today vs. 1933
  • 9. Y, y: Gross Domestic Product
    • GDP vs. GNP
    • Market Value
    • Final Goods
    • Produced
    • Year
  • 10. Value Added = Sales - Cost of Purchased Materials Cotton $5 5-0 = 5 Shirt-Wholesale 15 15-5 = 10 Shirt-Retail 30 30-15 = 15 30 Sales Value Added
  • 11. Nominal GDP, Real GDP & the GDP Deflator Nominal (Y) = ( P 2005 x Q 2005 ) - (P 2005 x Q 2005 ) [sales] [materials] Real (y) = (P 1997 x Q 2005 ) - (P 1997 x Q 2005 ) GDP Deflator = Nominal GDP/Real GDP Base Year? Chain-Weighted Real GDP
  • 12. Alternative Measures of Y,y
    • NDP, NNP
    • National Income
    • Personal Income
    • DPI
    • Personal Consumption
    • Personal Savings
    • Size Distribution
    • Functional Distribution
  • 13. Alternative Measures of P
    • GDP Deflator
    • Consumer Price Index
    • Producer Price Index
    • Inflation vs. the Price Level
  • 14. U = (unemployed/LF) x 100%
    • LF
    • Actively looking
    • Discouraged workers
    • “ Unemployed but with a job”
    • Age
    • Paid work
  • 15.
    • GDP Gap = Y p - Y
    • Spending components of GDP C (70%)
    • I (17%)
    • G (19%)
    • (X-M) (-6%)
  • 16. The Federal Reserve System
    • Board of Governors
      • Chairman
    • District Banks
    • FOMC (12) = 7 + 5
    • Lender of Last Resort
    • Targeting of Federal Funds Rate
  • 17. Money Supply Definitions
    • Monetary Base
    • M1
    • M2
  • 18. The Money Supply: Central Bank Impacts
    • Open Market Operations
    • Discount Rate
    • Reserve Requirements
  • 19. The Money Supply: Private Impacts
    • Currency/Deposit Ratio
    • Excess Reserves
    • Account Shifting
  • 20. CLASSICAL MACROECONOMICS VS. MERCANTILISM
    • Real Assets vs. Money
    • Openness vs. Balance of Trade
    • Free Markets/Free Trade vs. Barriers, Subsidies
    Adam Smith
  • 21. COMPETITIVENESS
    • 1. USA
    • 2. Switzerland
    • 3. Denmark
    • 4. Sweden
    • 5. Germany
  • 22. Advantages of Backwardness
    • Copy existing technology
    • Small absolute gains constitute big percentages (1 2 = 100%)
  • 23. Competitiveness: Main Factors
    • Openness
    • Role of Govt
      • Tax Rates
      • Regulation
    • Labor
    • Financial Sector
  • 24.  
  • 25. Classical View of Production (y)
    • Background
    • y = F(K,N)
    • N: N D & N S
    • K = K
    y N Slope =  y/  N = MPN
  • 26. MPN N Rule: Proceed as long as MR > MC Here: MR = P x MPN MC = W N VMP = P x MPN W 0 N D STOP View of Employment (N)
  • 27. What if W Changes? W, VMP N W 0 W 0 ’ N D N D ’ VMP
  • 28. At N D ...
    • W = P x MPN = VMP
    • W/P = MPN
    • Real Wages Around the World
  • 29. N S : Labor Supply
    • Upward Slope Not a Straightforward Matter
    • Immigration
    • LFP: The Changing Nature of Household Production
    • Leisure Time in the US
    N W N S
  • 30. Labor Market Equilibrium W N N S N D (P x MPN) W E N E Full Employment?
  • 31. Overall Equilibrium for y, N y N W N y N S N D y E N E
  • 32. What if P Rises?
    • Labor Demand Shifts Right
    • Labor Supply Shifts Left
    • ‘ N’ is Unaffected
    • So ‘y’ Is Also Unaffected
    y P y s P 0 P 1 y A B
  • 33. Key Classical Assumptions
    • Wages Adjust Flexibly to Equilibrium
      • Contracts?
      • Incomplete Information--Inertia?
    • Workers Understand Their Real Wage and Base Their Labor Supply Decisions on It
  • 34. View of Inflation
    • Equation of Exchange
      • MV = PT
      • MV = Py
    • Quantity Theory of Money
  • 35. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000
  • 36. Classical View of y d P y y d Monetary vs. Nonmonetary Factors
  • 37. The Classical Theory of Interest Rates R NPS, I E R E NPS Key Factors: 1) Net Private Saving 2) Gross Investment I
  • 38. Suppliers and Demanders of Loanable Funds
    • Households
    • Businesses
    • Government
    • Foreigners
  • 39. The Impact of the Government’s Budget R R B R A A B S (NPS) D (I + PSBR) I LF I A I B
  • 40. Budget Surplus NPS S (NPS + SURPLUS ) R I R A R B A B LF I A I B
  • 41.  
  • 42. Role of R: Classical View
    • Coordinate Present vs. Future
    • Prevent Nonmonetary Events from Affecting V, Total Spending, y D
    • y D = c + i + g; suppose deficit spending
      • “ Crowding Out”
  • 43. J.M. Keynes (1883-1946)
    • View of Capitalism
    • W E ? R E ?
    • S = I (ex ante)
    • Uncertainty, herd mentality, animal spirits, instability
  • 44. Keynesian View (cont’d.)
    • Quantity Adjustment vs. Price Adjustment
    • Y = E (Keynesian equilibrium)
    • E = C + I + G
    • Y = C + I + G
    • Fiscal Policy vs. Monetary Policy
  • 45. Simple Keynesian Multipliers: No Crowding Out k E = 1/1-b k T = -b/1-b k BB = 1 Closing the GDP Gap
  • 46. Housing Bubble 1975 1995 2005 HOUSING CONSUMER GOODS
  • 47. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P
  • 48. What if P Rises?
    • Labor Demand Shifts Right
    • Labor Supply Shifts Left
    • ‘ N’ is Unaffected
    • So ‘y’ Is Also Unaffected
    y P y s P 0 P 1 y A B
  • 49. Classical, but with W = W P y y s P 0 P 1 y 0 y 1
  • 50. The Liquidity Preference Theory of Interest Rates R M M S M D = L(R,Y) R E E Note Bond Market and LF
  • 51. The Federal Reserve: June 2004 R M M D M S M S’ E E’ 1.00% 1.25%
  • 52. y D -y S Analysis
    • y S slope*
    • y D shifts (IS-LM events)*
    • y S shifts
    • y D slope
  • 53. What if P Rises?
    • Labor Demand Shifts Right
    • Labor Supply Shifts Left
    • ‘ N’ is Unaffected
    • So ‘y’ Is Also Unaffected
    y P y s P 0 P 1 y A B
  • 54. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P
  • 55. Classical, but with W = W P y y s P 0 P 1 y 0 y 1
  • 56. y S Shifts: Note Production Costs
    • Transition from SR to LR
      • Wage adjustment
      • Disappearance of money illusion (P e )
    • Supply shocks (energy, strikes, etc.)
    • Supply-side economics? (tr, regulation)
    • VLR: K, population, tech.
  • 57. Restrictive Monetary Policy y D y D’ y S SR y S’ SR y S LR P y A B C
  • 58. Stimulative Monetary Policy P y y D y D’ y S SR y S’ SR y S LR A B C
  • 59. Monetarism
    • M S -->Y SR and LR
    • M S -->y SR
    • M S -->P LR
    • Fiscal Policy?
      • y D ? (Note slopes)
      • LR y S (role of govt)
    Milton Friedman (1912- )
  • 60. Name That Economist
    • Classical
    • Keynesian
    • Neo-Keynesian
    • Supply-Sider
    • Monetarist
    Robert Mundell Supply-Sider
  • 61. The Phillips Curve
  • 62. Phillips Meets Friedman PC SR U P The Natural Rate of Unemployment PC LR Why Increased Inflation Can Only Temporarily Reduce Unemployment . A B C
  • 63. Phillips Curve Movements
  • 64. Types of Unemployment
    • Natural
      • Frictional
      • Structural
        • Skills
        • Location
        • Labor Market Restrictions
    • Cyclical
  • 65. P, U: Long Run Policies
    • Target Low Inflation
    • Caution on Labor Market Restrictions, Welfare
    • Education & Training; Lifelong Learning
    .
  • 66. Austrian Business Cycle Theory
    • Nonneutral Injections of Money, Misdirection
    • i: Capital Goods vs. Consumption Goods
    • Later Reversal in Relative Prices and Resource Allocation
    • Frictions, Unemployment
    Friedrich Hayek
  • 67. Austrian Business Cycle Theory R NPS, I NPS NPS +  M S I I 0 I 1 Natural Market PV & Duration; Misdirection E E’
  • 68. A Metaphor: Pour in Honey P K P C
  • 69. Share Prices: Japan vs. US CPI-Japan
  • 70. Updating the Theory
    • Responsiveness of C to R
      • Durable Goods, Housing
      • Proceeds from Refi’s
    • Wealth Effects on C
    • Duration of High-Tech Company Investments (dot.com cash flows)
    • “ R” vs. “Cost of Capital”
  • 71. Housing Price Bubble? 1975 1995 2005 HOUSING CONSUMER GOODS
  • 72. Long Run Growth
    • System
    • Culture
    • Saving (K)
    • Education (Human K)
    • Technology
    $40000 5000 1500 $500
  • 73. Competitiveness: Main Factors
    • Openness
    • Role of Govt
      • Tax Rates
      • Regulation
    • Labor
    • Financial Sector
  • 74.  
  • 75. BALANCE OF PAYMENTS
    • CREDITS (+) DEBITS (-)
    • CURRENT ACCOUNT:
      • Exports Imports
      • Investment Income Investment Income Received Paid
      • Transfer Income Transfer Income Received Paid
    • CAPITAL ACCOUNT:
      • Capital Inflow Capital Outflow
  • 76. Flexible ER, Trade Deficit , BP = 0 foreign currency/$ $ Q (Q + CO ) (S) E ER E X (X + CI ) (D) (X-Q)<0 ER (X-Q=0)
  • 77. Flexible ER, Trade Surplus, BP=0 X (X + CI) (D) foreign currency/¥ E ER E Q (Q + CO ) (S) ER (X-Q)=0 ¥
  • 78. PURCHASING POWER PARITY?
    • The Big Mac Test
    • Short Run
    • Long Run? Role of Inflation
    • Barriers
    • Sustained Capital Flows?
  • 79. Major Reasons for Currency Movements
    • Short-term: Expected IRRs, Central Bank intervention Long-term:
      • PPP?
      • Reversal of Current Account Balance?
        • Recent US
    $

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