1. Principles of Macroeconomics
Welcome to Night 3
Principles of Macroeconomics

2. What we did last class: 1) List of things that move demand
What we did last class: 1) List of things that move demand. 2) List of things that move supply. 3) How moving a curve changes the equilibrium. 4) How to model price controls.

3. Let’s talk about wages. WH
Quantity Labor (number of workers)

4. As before, things that move the demand and supply curve will change the equilibrium wage. On the supply side this could be things like immigration and the black death.

5. It could be a government regulation that hair dressers have 300 hours of training in Tennessee. Who do you think most likely favors such strict rules about being a hair dresser?

6. On the demand side, the demand for labor is a “derived demand,” this means people demand for the item is derived from their demand for something else. Buying donuts versus buying flour.

7. A business owner’s demand for labor is derived from his desire to produce his product. He demands workers who make the product for less than the price he will sell it for.

8. Worker’s who are “priced out” of hiring will be worth it when they are more valuable to him. When would this be? 1) They can produce more. 2) What they produce can be sold for a higher price.

9. Cookies sell for $3. 00 box. Workers cost $100. N. Q
Cookies sell for $3.00 box. Workers cost $ N Q Revenue from hiring $ $ $ Hire 2 workers and stop.

10. Cookies sell for $3. 00 box. Workers cost $100
Cookies sell for $3.00 box. Workers cost $100. Technological progress doubles production N Q Revenue from hiring ind. Work $ $ $ Hire 3 workers (and maybe more).

11. Technological progress increasing demand for labor and wages.$
$150 SL
$120
DL2
$90
$60
DL1 Q

12. Your good becomes the Christmas thing and you can raise your price
Your good becomes the Christmas thing and you can raise your price. Hire more workers and demand curve for labor moves to the right.

13. Let’s tell a long-term story of men, women, and technology
Let’s tell a long-term story of men, women, and technology. In the old days (say 1017), we know that men and women had different rights and responsibilities. By our standards, it was an unequal society. Why?

14. What percentage of the jobs depending at least partly on physical strength to do the job well?

15. (Almost) everyone is poor, what is your retirement plan?

16. Given your retirement plan, and given that half your kids are going to die before adulthood, how many kids do you want to have?

17. How many jobs depend heavily on physical strength now? Why?

18. What caused this?

19. In the logic of this chapter, technology has made the productivity, and thus the labor demand and wages for men and women equal. And this has had great social consequences.

20. What matters now is what you know, not how big a rock you can lift.

21. And here is what is coming in the near(?) future.

22. Here is the supply and demand diagram for the credit market, where money is borrowed and loaned.
Interest rate
Supply (savings) iE
Demand (borrowing) QE
Loanable Funds

23. We want our economy to produe what we want and to be able to adjust to changes in the world. Will a market economy do that? How does a business make money? Producing a lot of what people want the most and selling it.

24. The better a business correctly estimates what its customers value, and makes a lot of those things, the higher its profit. And of course, we want the economy to be able to adjust to changing circumstances. Will a market economy do that?

25. Rainy Winter Increases DemandQ1 Q2

26. Can a command economy do this
Can a command economy do this? The incentive problem and the information problem.

27. The Incentive Problem What does an umbrella businessman get if he gets umbrellas quickly out to a rainy area? What does the 2nd undersecretary of umbrellas in Washington get if he gets umbrellas quickly out to a rainy area?

28. The Information Problem How does the 2nd Undersecretary of Umbrellas know we need more umbrellas in Bakersfield? How do private business owners of umbrella companies know?

29. Every time you go shopping, it is a transfer of information fest!!!

30. You are letting sellers know what you want
You are letting sellers know what you want. Sellers are letting you know what they can make at what cost.

31. The Invisible Hand Adam Smith – The Wealth of Nations Because trades are voluntary, in helping yourself, you help others also.

32. The way for the businessman to make money is to most effectively serve his customers. In doing what is best for him, he is being lead, as if by an “invisible hand” to help society.

33. Incentive Problem – The problem of getting people to do things that help other people in the society. Information Problem – The problem of knowing what other people want me to do to help them. Invisible Hand – Business owners being lead to do the things most beneficial to others in their own pursuit of profit.

34. What we did before the break: 1) Supply and demand in the labor and financial markets. 2) The incentive and information problems. 3) The invisible hand. Homework 1) Read chapter 4.

35. Principles of Macroeconomics
Night 3 Break Time
Principles of Macroeconomics

36. What we did before the break: 1) Supply and demand in the labor and financial markets. 2) The incentive and information problems. 3) The invisible hand

37. Now we are ready to start macroeconomics, the study of why the “entire” economy goes good or bad at the same time.

38. Before we can understand why the economy goes bad, we have to know what going bad is. What do you want out of the American economy?

39. 1) A job. 2) Lots of material things. 3) Stable prices at the stores
1) A job. 2) Lots of material things. 3) Stable prices at the stores. The economy is going good when we get these things, and going bad when we don’t.

40. So to know if the economy is going good or bad, we need someway to measure these things. Welcome to everyone’s favorite topic – Economic Statistics.

41. This chapter is about measuring how much stuff we are making – the most basic macroeconomic measurement.

42. GDP is the market value of all final goods and services made within a country’s borders in a year.

43. GDP can be looked at from two sides: the buyers’ side and the sellers’ side. This is because the dollar value of what we buy is equal to the dollar value of what we sell. We are going to look at it from the buyers’ side.

44. How To Find Nominal GDP Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4
How To Find Nominal GDP Apples Oranges Q P Q P NGDP Y $ $ ? Y $ $3 ? Multiply the quantity of each thing made by its price and add them together.

45. Apples Oranges. Q. P Q P. NGDP Y1. 7 X $1 +. 5 X $4. $27 Y2. 6 X $2 +
Apples Oranges Q P Q P NGDP Y X $ X $4 $ Y X $ X $3 $36 Multiply the quantity of each thing made by its price and add them together.

46. Looking at it from the demand side, the customers we make our products for are usually divided into four groups: 1) Consumers 2) Business Investment 3) The Government 4) Exports

47. This leads to one of the 2 most famous equations in macroeconomics: GDP = C + I + G + (X-M) X-M = Net Exports

48. Are things that are not counted in GDP
Are things that are not counted in GDP? 1) Intermediate Goods – double counting.
Your parents give
you a $20,000 car
made from $12,000
steel, $4,000 rubber,
and $4,000 glass.
Are you $20,000 richer or $40,000 richer?

49. 2) Used Goods These do not represent new production in this year.

50. 3) Government Transfer Payments: Social Security, Welfare
3) Government Transfer Payments: Social Security, Welfare. 4) Non-Market Activities:

51. 5) Financial Transactions: Stock and Bonds 6) Illegal Goods: You can figure them out for yourself. We don’t leave them out because of ethics, just because the numbers are not reported to the government.

52. Here they are all together: 1) Intermediate Goods 2) Used Goods 3) Government transfer payments 4) Non-market activities 5) Financial transactions 6) Illegal goods

53. Circular Flow Diagram - Arrows represent money flows Can this be a working model?
Households
Households
Businesses
Goods Market

54. Factor Inputs
Households
Households
Businesses
Goods Market

55. Factor Inputs
Households
Households
Businesses
Goods Market

56. Factor Inputs
Government
Households
Households
Businesses
Goods Market

57. GDP = C + I + G + (X-M)

58. Now that we understand GDP, there is a problem with it
Now that we understand GDP, there is a problem with it. At least if we want to use it to measure the quantity of output.

59. Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1 10 $4
Apples Oranges Q P Q P NGDP Y $ $4 $ Y $ $4 ? Given that NGDP in year 1 is $27, what does the correct measurement for year 2 have to be?

60. Apples Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1 10 $4
Apples Oranges Q P Q P NGDP Y $ $4 $ Y $ $4 $ And what does the correct measurement for year 2* have to be? Y2* $ $ ?

61. Apples. Oranges. Q. P. Q P. NGDP Y1 7 $1. 5 $4. $27 Y2 14 $1. 10 $4
Apples Oranges Q P Q P NGDP Y $ $ $ Y $ $ $ Y2* $ $ $54 The quantity measurement is being thrown off by the price changes.

62. The solution is to not allow the prices to change
The solution is to not allow the prices to change. When we do this, we calculate Real GDP. Real GDP is GDP calculated using base year prices. The real value of any economic variable is the statistic after being adjusted for inflation.

63. Base year is year 1. Apples Oranges. Q. P. Q P. NGDP RGDP Y1
Base year is year Apples Oranges Q P Q P NGDP RGDP Y $ $ $ $ Y $ $ $ $ Which statistic is the better measurement of growth?

64. Now a more complicated problem. What is RGDP in years 1 and 2
Now a more complicated problem. What is RGDP in years 1 and 2? Assume year 1 is the base year Apples Oranges Q P Q P NGDP RGDP Y $ $4 $ ? Y $ $3 $ ?

65. Now a more complicated problem. What is RGDP in years 1 and 2
Now a more complicated problem. What is RGDP in years 1 and 2? Assume year 1 is the base year Apples Oranges Q P Q P NGDP RGDP Y $ $4 $27 $27 Y $ $3 $36 $38

66. Can I be sure here that RGDP is higher in year 2 rather than year 1 because we made more stuff rather than because prices are higher? Apples Oranges Q P Q P NGDP RGDP Y $ $4 $27 $27 Y $ $3 $36 $38

67. There is a measure of inflation called the GDP deflator
There is a measure of inflation called the GDP deflator. We will talk more about inflation later in the class, but for now, the GDP deflator is a price index that measures inflation. You can use it to convert nominal into real values.

68. What cost $48.30 to buy in 1980, cost $110.00 in 2010.
Year
Nominal GDP (billions of dollars)
GDP Deflator (2005 = 100)
1960
543.3
19.0
1965
743.7
20.3
1970
1,075.9
24.8
1975
1,688.9
34.1
1980
2,862.5
48.3
1985
4,346.7
62.3
1990
5,979.6
72.7
1995
7,664.0
81.7
2000
10,289.7
89.0
2005
13,095.4
100.0
2010
14,958.3
110.0
What cost $48.30 to buy in 1980, cost $ in 2010.

69. In 1980, California’s minimum wage $3. 10/hour. In 2010, it was $8
In 1980, California’s minimum wage $3.10/hour. In 2010, it was $8.00 an hour. In real terms, was it higher or lower in 2010 than 1980? 110/48.3 = 2.28 Things in 2010 are 2.28 times more expensive than

70. $3.10/hour x 2.28 = $7.07/hour So yes, the minimum wage worker of 2010 could buy more. How much more? $0.93/$7.07 = 13% increase

71. Do the same thing to convert nominal GDP to real GDP.
Year
Nominal GDP (billions of dollars)
GDP Deflator (2005 = 100)
Calculations
Real GDP (billions of 2005 dollars)
1980
2862.5
48.3
2,862.5 / (48.3/100)
5926.5
1985
4346.7
62.3
4,346.7 / (62.3/100)
6977.0
1990
5979.6
72.7
5,979.6 / (72.7/100)
8225.0
1995
7664.0
82.0
 7,664 / (82.0/100)
9346.3
2000
89.0
10,289.7 / (89.0/100)
2005
100.0
13,095.4 / (100.0/100)
2010
110.0
14,958.3 / (110.0/100)

72. Is the 2016 mountain necessarily bigger?
2016 mountain of goods worth $ trillion.
2015 mountain
Of goods worth
$ trillion.
Is the 2016 mountain necessarily bigger?
What if I tell you that GDP deflator was
in 2015 and in 2016?

73. Two last things to note. 1) The nominal and the real GDP will always be the same in the base year. 2) The nominal GDP measurement becomes more shaky as more time passes. What was the price of smart phones in 1980?

74. What we did after the break: 1) Criteria for judging the macroeconomy
What we did after the break: 1) Criteria for judging the macroeconomy. 2) What nominal GDP is and what is not in it. 3) How to draw a circular flow diagram. 4) What real GDP is. 5) How to use the GDP deflator to convert nominal variables to real ones. Your homework: 1) Read chapter 6 (through 6.2) 2) Do Homework assignment #3 3) Prepare for quiz #3 on Tuesday.

75. Principles of Macroeconomics
Welcome to Night 4
Principles of Macroeconomics

76. What we did last class: 1) Criteria for judging the macroeconomy
What we did last class: 1) Criteria for judging the macroeconomy. 2) What nominal GDP is and what is not in it. 3) How to draw a circular flow diagram. 4) What real GDP is. 5) How to use the GDP deflator to convert nominal variables to real ones. Start of class today: 1) Hand in homework assignment #3. 3) Take quiz #3.

77. At this scale, we can see the largest recessions, especially the Great Depression and the Great Recession, and World War II.

78. The St. Louis Federal Reserve Bank runs a web page with all the macroeconomics statistics you could ever want.

79. Notice the economy can still be bad even
Notice the economy can still be bad even
in a recovery, especially a slow one.

81. GDP per capita = GDP per person =
NGDP/Population

82. Exchange rates for the U.S. dollar

83. Country A Country B Country C Produced Produced Produced $40,000
Country A Country B Country C Produced Produced Produced $40,000 $20, $40, Hours Wrk. Hours Wrk. Hours Wrk

84. U.S. hours worked per year 1,789 France hours worked per week 1,473 Are U.S. workers actually richer?

85. Given the things that are left out (leisure, nonmarket activities, illegal goods), Why are comparisons for the same country across a short number of years more accurate than across countries for the same year?

86. What we did before the break: 1) The phases of the business cycle 2) GDP comparisons across countries. 3) GDP comparisons over time.

87. Principles of Macroeconomics
Night 4 Break Time
Principles of Macroeconomics

88. What we did before the break: 1) The phases of the business cycle 2) GDP comparisons across countries. 3) GDP comparisons over time.

89. Test Prep

90. Principles of Macroeconomics
Welcome to Night 5
Principles of Macroeconomics

91. Test Day