Macroeconomics 1002 -Notes Prof Malca latest update

▪ Economically Trump became president because of 1) big corporations overseas. Taxes are more expensive here. 2) Certain groups get most advantages ((comparative advantages in reality) ▪ Trade, people at factories lost their jobs in Middle America. All coporations in east and west have done well. He won because people were angry this would continue. ▪ Average family income has no moved, went down. ▪ Comparative advantage- big thrust (TPP, NAFTA) Elasticity of Demand- how much demand is affected by changing the price. Price decreases, Demand increases To make a product as inelastic as possible  monopoly. (to price at what you want) - Advertising – differentiate product, more inelastic e.g.) Apple iPhone is inelastic. - Inelastic – better product Sunk cost- cost that cannot be recovered e.g.) You buy $400 tickets to see singer. Your friend comes to see you from London at the same time. $400 is already spent, it is not a significant variable to your choice. Allocation/distribution of scarce resources – how to distribute resources in society. 1) Factors of product 2) Externalities -negative externalities (e.g. factory dumped waster near river) -positive externalities -full benefit is not received by the person paying for it. Efficient Productivity- output labor Inflation- general increase in prices from one period to another Deflation- prices go down Federal Reserve fears deflation – it can lead to recession. We like a little deflation. Problem with inflation (prices go up)—if prices double, you buy less. Labor- inflation goes up, interests rate goes up. 2/7/17 Current Events: ▪ Unemployment rate went up 4.7% to 4.8%. ▪ Unemployed means not working and looking for job ▪ Participation grade- working or unemployed and looking for a job. Percent of adults 16+ that are working or unemployed looking for a job. ▪ Participation grade went up since 70’s because women started working. ▪ Less people participate, unemployment rate goes up. ▪ Earned income tax credit- people who need money are helped in least costly way. Supply and Demand If you demand something, then you 1) want it. 2) can afford it. 3) made plan to buy it. Six factors that change demand are: 1. Prices of related goods 2. Expected future prices 3. Income 4. Expected future income/credit 5. Population 6. Preferences Price of related goods Substitute- good can be used in place of another Complement- good used in conjunction with another good More substitute there is, more elasticity Less substitute, more inelastic Price of substitute ↑, Demand ↑ Price of complements ↓, Demand ↑ Normal good- income ↑, demand ↑ Inferior good- income ↓, demand ↑ Supply Cost of production- labor, taxes If prices go up, supply goes up Market power- business/industry can control price e.g.) McDonalds has lost some market power. Oil has greatest market power. Law of demand- the lower the price of a good, the larger the quantity demanded. Why? – Substitution and income effect. Six main factors that change supply: 1. The prices of factors of production 2. The prices of related goods produced 3. Expected future prices 4. Number of suppliers 5. Technology 6. State of nature 2/14/17 Current Events: The Great recession/depression All major banks predicted Immediate decline in stock market after trump Great depression in 30’s, invisible hand- economy generates itself – equilibrium GDP- gross domestic product Macro is equivalent to accountant- summize who area into one number What was produced? How did it happen? Chapter 4: Spending, Income, and GDP GDP- total market value of final goods and services produced in one country in a period of time (e.g. one year) Market value- aggregate measure of quantities produced Final goods and services are consumed by the ultimate user Depends on how you use it e.g. if I buy tires for my car, I am the ultimate user if Toyota buys the same tires—it is not a final good or service because that would be part of the cost e.g. If I buy a t-shirt for myself, it is a final good or service Intermediate goods and services are used up in the production of final goods e.g. A barber’s assistant earns $2 per haircut for providing services such as shampooing, Barber charges $10 per haircut. Haircut’s contribution to GDP is $10. Goods can be final and intermediate e.g.) milk can be sold as final product or used as intermediate good milk sold to restaurants, milk in the store Capital good- long lived good used in the production of other goods and services When can a stock be an economic investment? IPO GDP has to be new? Y= C + I + G + X-M GDP= consumption expenditure + investment+ government purchases + net exports Consumer spending is by far the largest item in U.S.- 70% Investment We want to increase GDP. Consumption goes up when income goes up. Government can do their job to help economy. Federal Reserve- Fiscal Policy- spend money by executive branch in congress to help economy. They began to spend more money to make up for what consumers cannot spend. = Consumption + government spending Then government would be spending more than what they take in (income) – deficit Recession- easier to reduce taxes and increase spending, but harder to pay back what was borrowed. (Bush) Reducing taxes would make economy better, but forgot to reduce spending leading to deficit. (Clinton) bounced the economy, surplus (Bush) started war, cut taxes, doubled national debt in 8 years (Obama) doubled deficit the way the government spends money will affect us. e.g.) if you buy 50k car, that would add 50k to GDP. 2/16/17 Current Events Federal reserve- Stock market has been going up in leaps – historic highs, 10-15% in last 5-10 weeks. Important in economics because everyone’s wealth goes up, worth more 90% of economy went up by over trillions of dollars- Total assets went up significantly in short period of time. Reasons why people spend money- income and wealth, assets of tension funds Stock market—leading economic indicator, tends to tell you what may happen in the future (not past). Market does not care about “noise” (things that happen randomly, what’s important is that you get to that point; random events with no significance) – taxes are reduced, people spend more money, they make more money GDP= C + I + G + N-X -keep unemployment as low as possible -increase GDP by increasing consumer spending because it is about 70% of whole GDP by 1. increasing income 2. increasing wealth (tend to spend more) 3. expectations (pushes stock market) Fiscal policy- when government and Congress agree to help by reducing taxes Lowering taxes one year vs. lowering taxes permanently—the way people spend it. Permanently- people spend more (like a free gift from govt.) Good fiscal policy is to lower taxes permanently, ended after 2010 GDP went down in real terms 2 years in a row—big recession. Federal Reserve saved – our central bank. They could increase/decrease interest rates. They buy treasury (govt.) bonds with a check. Quantitative Easy- buy bonds on the open market. Lower interest rates and increase money supply. (monetary policy) If anyone buys anything it is an exchange of money, product, service. Supply of money did not change. Different with govt. bonds. Federal reserve buy from Buffet, Buffet gets $100M, and govt has the 100M bonds. Govt money supply goes up by $100M. QE- Federal reserve bought bonds to increase wealth (stock market), increase price of real estate. They couldn’t directly increase GDP. Federal reserve surplus is given back to Federal government. Federal reserve buys bonds and federal govt benefits. Investments- investors try to use fiscal policies on investments. (e.g. new cars, new machine, computer help the business) Mor