1. Llad Phillips1 Macro Review: Concepts Circular Flow Circular Flow Measure the Size of the Economy Measure the Size of the Economy Business Cycles Business Cycles Growth Growth Inflation Inflation Money Supply & Inflation Money Supply & Inflation Financial Crises Financial Crises Monetary Policy Monetary Policy

2. Llad Phillips2 Circular Flow Identifies actors: consumers & firms Identifies actors: consumers & firms

3. Llad Phillips3 Expenditure Perspective: Open Firms Households Supply Goods Demand Goods Households: Consumption of Goods and Services Firms: Investment in Plant and Equipment Government: Purchase of Goods and Services All Three: Exports - Imports = Net Exports Imports (puchases) Exports (Sales) Government

4. Llad Phillips4 Size of the Economy Expenditures Perspective: GDP & Components Expenditures Perspective: GDP & Components  consumption  gross investment  government expenditures  net exports

5. Llad Phillips5 Business Cycles Worry: Underutilized Resources Worry: Underutilized Resources  unemployment Cause: Not enough spending Cause: Not enough spending  consumer fear: lack of confidence in economy  business owners fear: lack of consumer demand

6. Llad Phillips6 Consumption, C Investment, I GDP Income, Y Less than Full Employment Equilibrium C = C 0 + mpc* Y I GDP = C + I 45 0 GDP = Y Y FE Full Employment Income

7. Llad Phillips7 Growth in Size of the Economy Welfare increases with output per worker Welfare increases with output per worker output per worker increases with: output per worker increases with:  capital deepening  technological progress

8. Llad Phillips8 Inflation percentage rate of increase in prices (index) percentage rate of increase in prices (index) price index for a market basket of goods, relative to a base year price index for a market basket of goods, relative to a base year  cost of basket in 1998/cost in 1990(base year)

9. Llad Phillips9 Cause of Inflation Too much money chasing too few goods Too much money chasing too few goods Quantity Theory of Money Quantity Theory of Money  money supply*velocity = price index*real GDP

10. Llad Phillips10 Financial Crises Liquidity Crisis: run on the banks Liquidity Crisis: run on the banks Solvency Crisis: bad bank loans Solvency Crisis: bad bank loans

11. Llad Phillips11 Monetary Policy Goals Goals  full employment  price stability  interest rate stability Tools or instruments Tools or instruments  open market operations  discount rate  reserve requirement

12. Llad Phillips12 Introduction to Economics Microeconomics The US Economy

13. Llad Phillips13 Outline: Lecture Sixteen The Distribution of National Income by Input Factor Shares The Distribution of National Income by Input Factor Shares The Distribution of Personal Income The Distribution of Personal Income Trends in US Income Inequality Trends in US Income Inequality Poverty Poverty

14. source: Lecture Six

15. Llad Phillips15 Employee Compensation Proprietor’s Income Corporate Profits Net Interest Rent to Persons  2/3 capital, land, entrepreneurship  1/3

16. Llad Phillips16 If workers are paid a real wage equal to their marginal product of labor, If workers are paid a real wage equal to their marginal product of labor, and other factors of production are paid their marginal product of production, and other factors of production are paid their marginal product of production, does not everybody get their just desserts? does not everybody get their just desserts?

17. Llad Phillips17 Defense of the Status Quo If the economy has constant returns to scale, If the economy has constant returns to scale, If labor is paid its marginal product, If labor is paid its marginal product, If capital receives its marginal product, If capital receives its marginal product, Income paid to labor & capital = output Income paid to labor & capital = output Everybody is paid what the are worth and there is no exploitation Everybody is paid what the are worth and there is no exploitation MERITOCRACY MERITOCRACY

18. Llad Phillips18 Variation of Personal Income The Distribution of Income The Distribution of Income  California Income 1993  Number of tax returns by adjusted gross income (AGI) class  US Income

19. Source: California Statsitical Abstract

20. Llad Phillips20

21. CA AGI, Frequency & Cumulative Frequency

22. Llad Phillips22

23. Llad Phillips23

24. Llad Phillips24 Measures of Income Inequality Lorenz Curve Lorenz Curve  What % of Population Has What % of Income  Gini Coefficient range: 0, meaning equal, to 1, meaning unequalrange: 0, meaning equal, to 1, meaning unequal Examples Examples  socialist ideal: equality  life as a crap shoot: any income is equally likely

25. $33000

26. Gini Coefficient = A/(A+B) A B

27. US Family Income, 1994 Source: US Statistical Abstract

29. Llad Phillips29

30. Llad Phillips30 Why is Income Distributed So Unevenly? Labor Income is Unevenly Distributed Labor Income is Unevenly Distributed Part-time work Part-time work  less than 50 weeks per year  less than 36 hours per week

31. Llad Phillips31 “A rising tide lifts all boats”, JFK Economic growth may make everbody better off Economic growth may make everbody better off  increases the size of the pie  but the rich may get a larger share of the bigger pie It is possible that the rich get richer and the poor get poorer It is possible that the rich get richer and the poor get poorer

32. Llad Phillips32 Income Distribution and GDP Per Capita Source: United Nations Development Programme, Human Development Report, 1993

33. Llad Phillips33

34. Llad Phillips34

35. Llad Phillips35

36. Llad Phillips36 Why has income become more unevenly distributed? Standardize on Male Full-Time Year- Around Workers Standardize on Male Full-Time Year- Around Workers Ability Premium Ability Premium  90 percentile: $70314 for 1995 males  50 percentile: $31497  10 percentile: $12920 Education Premium Education Premium  college grads gain relative to high school grads Experience Premium Experience Premium  older workers gain relative to younger workers

37. Llad Phillips37 Source: Economic Report of the President, 1997

38. Llad Phillips38 Ratio of Median Earnings, Males: College Grad to High School Grad Source: Economic Report of the President, 1997

39. Llad Phillips39 Ratio of Median Earnings, Males: Age 45-54 to 25-34 Source: Economic Report of the President, 1997

40. Llad Phillips40 Source: Economic Report of the President, 1997 Growing Wage Differentials Between the Less Skilled and More Skilled: Less Demand for Less Skilled and More Demand for the More Skilled

41. Llad Phillips41 Rich Are Getting Richer smart are getting richer smart are getting richer educated are getting richer educated are getting richer experienced are getting richer experienced are getting richer Should we worry about the dull, the ignorant, the young and inexperienced? Should we worry about the dull, the ignorant, the young and inexperienced?

42. Llad Phillips42 Poverty in the US US Government Definition of Poverty US Government Definition of Poverty  Subsistence wage: $15141 in 1994  a non-farm family of four  cost of inexpensive but nutritious food times 3 assume food is 1/3 of budgetassume food is 1/3 of budget Trends in Poverty Trends in Poverty Incidence of Poverty Incidence of Poverty  elderly  children/families headed by single women  rural

43. Llad Phillips43

44. Llad Phillips44 Incidence of Poverty Among the Aged and the Young Children: 14.9% in 1970 to 21.2% in 1994 Source: Economic Report of the President, 1997

45. Llad Phillips45

46. Llad Phillips46

47. Llad Phillips47

48. Llad Phillips48

49. Llad Phillips49

50. Llad Phillips50

51. Llad Phillips51 Summary-Vocabulary-Concepts input factor shares input factor shares distribution of personal income distribution of personal income distribution of family income distribution of family income frequency distribution of income frequency distribution of income cumulative distribution of income cumulative distribution of income Lorenz curve Lorenz curve Gini coefficient Gini coefficient median family income median family income part-time, part-year worker part-time, part-year worker full-time, full-year worker full-time, full-year worker within group variation in earnings within group variation in earnings ability differential ability differential between group variation in earnings between group variation in earnings education differential education differential experience differential experience differential definition of poverty definition of poverty