1. From Markets to Macro Lecture 7
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
September 12, 2017 1

2. Announcements: MACRO Fall 2017
MEL Stuff:
Second graded MEL quiz was due this morning!
Exam Stuff:
Sign up Registration for Prelim 1 Cornell created evening prelim conflicts is up on Blackboard. See LHS. Will post one for Prelim 2 soon.
Make-Up Final Exam will be on Monday December 11 at 2pm. It will only be for people who qualify under Cornell’s guidelines OR for people who come and see me in person with extremely compelling reasons. Note that I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them. Cornell expects you to be able to take 2 exams on the same day. But not, “more than two exams in twenty-four hours”.
See:
Now that we’re starting macro… Very Interesting Read - Many Thanks Jose!
Here is an article that talks about the rise of unemployment in the US.
Jobs report misses, unemployment rate climbs

3. 3 Classic Government Interventions
Price Floors
Price Ceilings
Quantity Quotas
Ambrogio Lorenzetti, The Effects of Good Government in the city, Siena Italy, circa 1338

4. Price Floors Government established minimum selling price.
Floor must be above P* to be binding.
Why? Government usually thinks the market price is too low for some reason.
Usually end up with….
Surpluses!
And all the problems they create.
Examples:
supported milk prices
minimum wage laws

5. Price Floors & Market Surplus
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pfloor = $25.
Supply
At the artificially high price of $25, sellers want to sell 31.
Surplus = 16 25 15 31 17 23
But buyers only want to buy 15.
There is a surplus of 16.
Quantity

6. Price Ceilings Government established maximum selling price.
Must be below P* to be binding.
Why? Government usually thinks the market price is too high for some reason.
Usually end up with….
Shortages!
And all the problems they generate.
Examples:
Gas price ceilings
Apartment rent control

7. Price Ceilings & Market Shortage
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pceiling=$10.
Supply
At the artificially low price of $10, buyers want to buy 30. 17 23
But sellers only want to sell 16. 10 16
Shortage = 14 30
There is a shortage of 14.
Quantity

8. Quantity Quotas Government established maximum number of units sold.
Qmax must be below Q* to be binding.
Why? Government thinks too many units are being traded.
Example: import restrictions
Usually end up with...
Higher prices and more.

9. Quantity Quotas D P P S D S Q Q 9

10. Final Comments

11. The Roots of Macroeconomics
The Great Depression
a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s.
Classical economists applied microeconomic models, or “market clearing” models, to economy-wide problems.
However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression.
This provided the impetus for the development of macroeconomics.

12. The Roots of Macroeconomics
In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money.
Keynes believed governments could intervene in the economy and affect the level of output and employment.
During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession.
Fiscal policy
Monetary policy
For nice short bio, see
John Maynard Keynes

13. A Very Brief Macroeconomic History
F.D.R. and The New Deal
WWII and its aftermath
Keynesian “success” into the 60’s
Fine-tuning was the phrase used by Walter Heller in the 60’s to refer to the government’s role in regulating inflation and unemployment.
Keynesian “disillusionment”
The use of Keynesian policy to fine-tune the economy in the 1960s, led to disillusionment in the 1970s and early 1980s.
Inflation and Stagflation
Inflation occurs when there an increase in the overall price level.
Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).
Supply Side and “Reaganomics” in the 80’s
Micro-foundations of macroeconomics
Keynesian “renaissance?”
What next?

14. Major Macroeconomic Concerns
Output/Production, Income & Growth
Employment/Unemployment
Price Levels/Interest Rates
Global Trade

15. Output & Growth: Short & Long Run
The business cycle is the cycle of short-term ups and downs in the economy.
Growth looks at what happens to output (inter alia) over long periods of time.
The main measure of how an economy is doing is aggregate output.
Aggregate output is the total quantity of goods and services produced in an economy in a given period.
Note: In order to add up all the different things an economy produces, one uses a currency value.
For example, in the U.S., we use the dollar value of the total quantity of goods and services produced in the U.S. in a given period.
This is basically what we call “Gross Domestic Product” or GDP.

16. Output & Growth: Short & Long Run
A recession is a period during which aggregate output declines. Two consecutive quarters of decrease in output (as measured by real GDP) signal a recession.
A prolonged and deep recession becomes a depression.
Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.
“It's official: U.S. is in recession Economy began shrinking in December 2007, panel declares” (on 12/1/2008)
“Diagnosing depression: What is the difference between a recession and a depression?”

17. The Business Cycle
An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.
A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.
A positive trend line indicates long run growth.
MACRO QUESTIONS

18. Macroeconomic Data – Real Output Growth
FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2014
The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output.

19. FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2014 IV
Aggregate output in the United States since 1970 has risen overall, but there have been five recessionary periods: 1974 I–1975 I, 1980 II–1982 IV, 1990 III–1991 I, 2001 I–2001 III, and 2008 I2009 II.

20. Employment/Unemployment
The unemployment rate is the percentage of the labor force that is unemployed.
The unemployment rate is a key indicator of the economy’s health.
The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium.
Why do labor markets not clear when other markets do?

21. FIGURE 5.5 Unemployment Rate, 1970 I–2014 IV
The U.S. unemployment rate since 1970 shows wide variations.
The five recessionary reference periods show increases in the unemployment rate.

22. Inflation and Deflation
Inflation is an increase in the overall price level.
Hyperinflation is a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation.
Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.
Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).

23. FIGURE 5.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average), 1970 I–2014 IV
Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and 1979 I–1981 IV.
Inflation between 1983 and 1992 was moderate.
Since 1992, it has been fairly low.

25. Some Government Policy Options
Main policies that the government considers to influence the economy:
Fiscal policy: government policies concerning taxes and spending.
Monetary policy: tools used by the Federal Reserve to control the quantity of money in the economy.
Growth or supply-side policies: government policies that focus on stimulating aggregate supply instead of aggregate demand; includes both fiscal and monetary as well as other policies (e.g., regulatory, industrial, antitrust...)
Short term vs. Long term
Counter-the-cycle vs. Growth

26. National Income & Product Accounts
National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy.
The U.S. Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of economic activity.
Arguably the most well known of these is GDP.

27. GDP: Gross Domestic Product
Gross Domestic Product (GDP) is the total “dollar” market value of all final goods and services currently produced within a given period by factors of production located within a country.
About how big was it in the U.S. in 2016?
Current GDP: Billions of Dollars, Not Seasonally Adjusted
Real GDP: Billions of Chained 2009 Dollars, Not Seasonally Adjusted
A = $18,566.9 billion
B = $16,660.0 billion
C = BOTH!

28. The Circular Flow & National Income Accounting

29. i>clicker questions
A piano is produced in 2014 and valued at $8,000. It does not sell until So the $8,000 gets recorded in GDP for 2015 since that is when it sells.
A. True
B. False
On Feb 18, 2015 Joe buys some IBM stock from Fred and pays Fred $10,000 for it. There are no transaction fees or broker fees. It’s just a transaction between these two guys. When calculating GDP for 2015 you include this $10,000.
A. True
B. False
In 2015 Mikko, A Finnish citizen residing in Ithaca, NY sells $5,000 worth of financial advice to clients. Half of these clients also reside in the U.S. The other half do not. Therefore, only $2,500 of Mikko’s financial advice gets counted in 2015 U.S. GDP.
A. True
B. False

30. Important GDP Notes
Gross Domestic Product (GDP) is the total “dollar” market value of all final goods & services currently produced within a given period by factors of production located within a country.
Market value...
Final goods and services...
The term final goods and services in GDP refers to goods and services produced for final use.
Intermediate goods are goods produced by one firm for use in further processing (i.e., transformation) by another.
Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales.
Currently produced stuff...
Done this period
Something created
Located within, i.e., stuff produced HERE...
Output produced by a country’s citizens, regardless of where the output is produced, is measured by Gross National Product (GNP).
It’s gross...
Refers to investment purchases of newly produced capital like housing, plants, equipment, and inventory.

31. GDP Observations & Limitations
Population matters...
Leisure matters...
Quality matters...
Home production matters...
Illegal markets matter...
Distribution matters...
Social Benefits/Costs matter...
What’s produced matters...
Depreciation matters...
So what do we do?
Try the best we can.
Look at various indicators and scale them or compare them in meaningful ways.
How Happy Is America?

32. Interesting Read How Society Pays When Women’s Work Is Unpaid

33. Interesting Numbers United States 2008
GDP per capita, PPP (current international $)
46,715
GDP, PPP (millions of current international $)
14,204,322
Source: World Development Indicators database
Pop in US: 304,060,000
China
2008
GDP per capita, PPP (current international $)
5,961
GDP, PPP (millions of current international $)
7,903,235
Source: World Development Indicators database
Pop in China: 1,325,640,000

34. Interesting Numbers United States 2015
GDP per capita, PPP (current international $)
56,116
GDP, PPP (current international $)
trillion
Source: World Development Indicators database
Pop in US: 321,418,820
China
2015
GDP per capita, PPP (current international $)
8,029
GDP, PPP (current international $)
trillion
Source: World Development Indicators database
Pop in China: 1,371,000,000

36. Touchstones For GDP Questions
Did it go through a legal market?
Omit “under the table” illegal stuff.
Omit “home” production.
Omit “unmarketed” externalities.
Was it currently produced?
Omit transactions in which money or goods changes hands but in which no new goods and services are produced.
Omit capital gains on resale of assets (but include the value of currently rendered services or currently produced items that were a part of the transaction).
Omit transfer payments – nothing produced.
Are we making sure we’re only calculating “final” values?
Omit double counting intermediate goods (but you can use these IF you are using value added summed up all along the way, rather than final good sales).
Include gross investment.
Include currently produced inventory.
Was it produced within the borders of the country?
Omit output produced by citizens working abroad.