It’s The Economy, Stupid

Economic Expansion We are now in the 8th year of an economic recovery. It is one of the longest economic recoveries on record without falling into a recession, but is also one of the weakest ones. In fact the current recovery has underperformed every previous economic recovery in American history. Last year the IMF cut its estimate of the US’s potential growth rate to less than 2%. Long term this can create huge problems for our country- stagnating standard of living; lower tax revenues; debt loads are more burdensome.

2 Articles I have given you two articles from the Wall St Journal. One is from Monday October 2nd (The Link Between Economic Growth and Tax Cuts is Tenuous) and the second is from Friday September 29th (U.S. Second Quarter GDP Rose 3.1%). Please read these two articles over the next few minutes. Spencer and Campbell will then lead a discussion of what economies need to grow. General questions to focus on can be found on the next slide.

Growth Questions 1. What problems do we have that has lead the IMF and other people to conclude that that US will see much slower growth in the future? 2. What factors will lead to the growth of an economy? 3. How can you tell if we are improving or not? What factors/statistics would you examine? 4. What can the government do about this?

Problems What problems do we face? Increasing income inequality Stagnating wages High national debt levels Divided government Lack of job growth Little population growth outside of immigration Falling participation in the job market Increasing education costs

How Can I Tell If the Economy is Getting Better? What factors would you examine in order to determine if the economy is getting better or worse? Which are the most important? What would you say about the factors you select to help the American people feel better about their economic situation? GDP Unemployment/Employment Income Per Capita Purchasing Power Debt level of the country

How Do We Fix This? Look at the determinants of demand and of supply. What can the government do to change them so that our economy will improve?

Determinants Demand* Supply** Consumer preferences Number of buyers Income Prices of related goods Expected prices * What do we want demand to do so that the economy will improve? Resource prices Technology Taxes and subsidies Prices of other goods Expected prices Number of sellers What do we want supply to do so that the economy will improve?

Unit Objective Our objective this unit is to be able to understand the causes of economic growth and contraction and to be able to develop strategies that can help an economy to grow at a sustainable rate. This unit will examine the tools that the Federal Government has to impact the economy.

Government Tools Fiscal Policy (Taxes and Government Spending) Regulations Monetary Policy (Next Unit)

GDP Gross Domestic Product: MARKET VALUE of all of the FINAL goods and services PRODUCED within the United States. Final versus Intermediate Monetary Measure

GDP Calculation Expenditure Method- adds up spending by different groups Income Method- Modifies National Income

GDP: Expenditure Approach GDP=C+I+G+X This is simply a way for us to count up all that was spent to buy total output in a certain year.

Personal Consumption Expenditures All expenditures for: Durable Goods Nondurable Goods Services This is money spent by consumers

Gross Private Domestic Investment I (This is the expenditures business makes) Final purchases of machinery, equipment and tools; Construction; Changes in Business Inventory

These are not included in I and thus not in GDP NonInvestment Paper transactions (stocks and bonds) Resale of assets (cars, homes) These are not included in I and thus not in GDP

Not payments to households Government Purchases G Spending on items government consumes Spending on Social Capital, such as schools and roads Not payments to households

Net Exports X Add exports Subtract Imports Why does this make sense?

Income Approach This presumes that all spending starts with income- National Income. National Income= Total income earned by resource suppliers (households) plus taxes on production and imports. This is equal to all wages and salaries, rent, interest, corporate profit and income from all unincorporated businesses (partnerships and proprietorships).

Definitions Taxes on Production and Imports will include any general sales taxes, excise taxes, business property taxes, license fees and custom duties. Corporate Profits will include corporate income taxes, dividends and undistributed corporate profits

Income Approach Formula GDP= NI + Depreciation- Subsidies + Net Income of Foreigners Depreciation= decline in value of capital over time Subsidy= payments made by the government Net Income of Foreigners= Add income of foreigners in the US and subtract income of US citizens abroad

Why Measure GDP? Make Comparisons: Year to year (or other time periods) Country to Country What difficulties do you see in making comparisons?

Nominal versus Real Nominal GDP-not adjusted for changes in price Real GDP-adjusted for price changes

Business Cycle Alternating rises and falls of economy Expansion: period of economic growth; typically see increase in GDP, Personal income, and employment. Recession: period of economic decline; typically see decrease in GDP, personal income and employment

The Business Cycle The Business Cycle has 4 identifiable phases. Alternating periods of economic growth and contraction, which can be measured by changes in real GDP. Trend Line Time Real GDP Peak One Business Cycle Recession The Business Cycle has 4 identifiable phases. Expansion Trough

Depth- Decline in Real Output Recessions Period Duration in Months Depth- Decline in Real Output 1953-54 10 -3.75% 1957-58 8 -3.9% 1960-61 -1.6% 1969-70 11 -1.0% 1973-75 16 -4.9% 1980 6 -2.3% 1981-82 -3.3% Period Duration in Months

Depth-Decline in Real Output Recessions Continued Period Duration in Months Depth-Decline in Real Output 1990-91 8 -1.8% 2001 -0.5% 2008-09 10 -2.7%

GDP http://www.bea.gov/newsreleases/national/gdp /gdpnewsrelease.htm Go to Tables and then Table 3

Why Do We Want Growth? In general growing economies lead to: Higher employment Higher standard of living Higher Prices

Unemployment Unemployed Labor Force Frictional: search and wait Structural: change in demand and technology Cyclical: change in total spending (decline in economy)

Unemployment Frictional and Structural are both unavoidable; Thus, unemployment will always be greater than 0 Thus the economy is at full employment when there is only frictional and structural unemployment.

Natural Rate Natural Rate of Unemployment is when there is no cyclical unemployment. At this point, the economy would be producing its potential output. This is also called the Full- Employment Rate of Unemployment.

Economic Cost of Unemployment In looking at the PPC, where are we operating if there is cyclical unemployment? GDP Gap: Basically the cost of unemployment is forgone output. GDP Gap= actual GDP- potential GDP

Okun’s Law Okun’s Law: For every 1% that unemployment is above the natural rate, there is a negative GDP Gap of 2%.

Productivity How does Productivity impact GDP and growth? http://www.ted.com/talks/yves_morieux_ho w_too_many_rules_at_work_keep_you_from _getting_things_done#t-969798