Econ 1002 Units 1-4

Economy

The structure of economic activity in a community, region, country, group of countries, or around the world.

Gross Domestic Product (GDP)

The market value of all final goods and services produced in a Nation during a particular period, usually a year.

Gross World Product

The market value of all final goods and services produced in the world during a given period, usually a year.

Flow Variable

A measure of something per period of time, such as your spending per week.

Stock Variable

A measure of something at a point in time, such as the amount of money you have right now.

Mercantilism

The incorrect theory that a nation’s economic objective should be to accumulate precious metals in the public treasury.

Expansion

A period during which the economy grows as reflected by rising output, employment, income, and other aggregate measures.

Contraction

A period during which the economy declines as reflected by falling output, employment, income, and other aggregate measures.

Depression

A severe and prolonged reduction in economic activity, as occurred during the 1930s. Ex. The Great Depression

Recession

A period of decline in economic activity lasting more than a few months, typically declared after three months. Can officially be declared in 3 months but typically take 6 months (due to different circumstances such as weather)

Inflation

An increase in the economy’s average price level.

Leading Economic Indicators

Variables that predict, or lead to, a recession or recovery, such as consumer confidence and stock market prices.

Coincident Economic Indicators

Variables that reflect peaks and troughs in economic activity as they occur, like employment and personal income.

Lagging Economic Indicators

Variables that follow, or trail, changes in overall economic activity, including interest rates and unemployment duration.

Aggregate Output

A composite measure of all final goods and services produced in an economy during a given period; real GDP.

Aggregate Demand

The relationship between the economy’s price level and aggregate output demanded with other things constant.

Price Level

A composite measure reflecting the prices of all goods and services in the economy relative to prices in a base year.

Real Gross Domestic Product (Real GDP)

The economy’s aggregate output measure in dollars of constant purchasing power.

Aggregate Demand Curve

A curve representing the relationship between the economy’s price level and real GDP demanded per period.

Aggregate Supply Curve

A curve representing the relationship between the economy’s price level and real GDP supplied per period.

Higher level of GDP

Indicates more goods and services in the economy and likely greater employment.

The Great Depression and Before

1873-79 – Hard Times, Railroads/Steel

1890s – Depression – 18% unemployment

1907 – Knickerbocker Trust

1929 – Stock Market Crash

1930s (into WW2) Great Depression, A leftward shift of the aggregate demand curve

Prior to the Great Depression, Adam Smith’s Laissez-faire ruled

The Age of John Maynard Keynes: Post WW2-Early 1970s

The General Theory of Employment, Interest and Money 1936

Spoke of Business pessimism; instability of aggregate demand

Investment had dropped 80% between 1929-1933

Government intervention necessary: gov’t must increase aggregate demand

The government needed to shock the economy out of depression. Enter WW2

Federal Budget Deficit

A flow variable that measures the amount by which federal government outlays exceed revenues in a specific period.

Demand-Side Economics

Macroeconomic policy that focuses on shifting the aggregate demand curve to promote full employment and price stability.

Fiscal Policies

Government Spending policies determined by the President and Congress.

Monetary Policies

Should be used to influence the interest rates in a way the that provided for full employment ie. the FED

World Economic Boom

1960s – Golden Age of Keynesian Economics

The Great Stagflation: 1973-198

Inflation, Crop Failures 1971-1972, Oil, Costs of War

Rising prices and unemployment and rising interest rates by the FED

Stagflation

A contraction, stagnation of a nation’s output accompanied by inflation in the price level

Experience Since 1980s

Both the 1980 and 1981-82 recessions were triggered by tight monetary policy in an effort to fight mounting inflation

Supply-Side Economics

Macroeconomic policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other incentives.

President Reagan

Initiated Tax cuts to stimulate economy (23% over three years) Before tax cuts went into effect, another recession 1981-82; then, the longest peacetime expansion of the economy on record to that date took place. Federal Deficit persisted

President Bush

1986-1996 – The S&L Crisis
Costs to Taxpayers: $123.8 billion
Recession in 1990-91 (8 months); “Jobless recovery.”

President Clinton

Republican Congress: Cut Federal Spending 1998: Federal Budget Surplus
Raised Taxes

Tech Boom/Bull Market

1999 – Alan Greenspan (FED Chair)

The economy continued to grow, and in February 2000 it broke the record for the longest uninterrupted economic expansion in US History

The Economy up to 2000, reconsidered

Globalism, Technology, Stock Market (NASDAQ, March 2000/ dot.com bubble)

Jobless recovery

An economic recovery following a recession where employment does not return to prior levels.

John Maynard Keynes Wrote

General Theory

Productivity

The ratio of a specific measure of output, such as real GDP, to a specific measure of input, such as labor; measures real GDP per hour of labor.

Labor Productivity

Output per unit of labor, measured as real GDP divided by the hours of labor employed to produce that output.

Industrial Market Countries

Economically advanced capitalist countries of Western Europe, North America, and industrialized Asian economies like Taiwan, South Korea, Hong Kong, and Singapore.

Developing Countries

Countries with a lower living standard due to less human and physical capital per worker.

Basic Research

The search for knowledge without regard to how that knowledge will be used.

Applied Research

Research that seeks answers to specific questions or applies scientific discoveries to develop particular products.

Industrial Policy

The view that government should nurture industries and technologies of the future using taxes, subsidies, and regulations.

Production and Growth

1.      GDP per person

2.      Role of productivity (amount of good/services produced for each hour of work)

3.      The link between productivity and the economic policies a nation pursues

Productivity

the quantity of goods and services produced from each unit of labor input

How Productivity is Determined

Physical capital, human capital, natural resources, and technical knowledge.

Physical Capital

The stock of equipment and structures that are used to produce goods and services

Human Capital

The knowledge and skills that workers acquire through education, training ,and experience

Natural Resources

The inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

Technical Knowledge

Society’s understanding of the best ways to produce goods and services

World Bank

Human capital and Rule of Law constitute the largest share of wealth in virtually all countries (United Nations)

“Rule of Law”

index: explains 57% of a country’s intangible capital

Switzerland: 99%

United States: 91%

Nigeria: 5.8%

Sub-Saharan Africa: average 28%

World Bank: Good schools and the rule of law are the keys to successful development

Limits to Growth? Technological Innovation

Society’s Standard of Living

Depends on its ability to produce goods and services

Productivity depends on

physical capital per worker, human capital per worker, natural resources per worker and technological knowledge

Savings and Investment

Invest in capital goods! Emphasis on Capital over Consumption

Diminishing Returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

Catch-Up Effect

The property whereby countries that start off poor tend to grow more rapidly than wealthier nations.

1960-1990: South Korea

Investment from Abroad

Domestic savings are important; but investment from abroad is important as well

Foreign Direct Investment

A capital investment that is owned and operated by a foreign entity.

Foreign Portfolio Investment

An investment that is financed with foreign funds but operated by domestic residents.

Benefits…

Role of World Bank…

(World Bank and IMF (international Monetary Fund) set up after WW2; both share common goals)

Education

Investment in human capital is as important as investment in physical capital for a country’s long-run economic success

Education is a positive externality

Negative Aspect: Brain Drain

The emigration of highly educated workers to other countries, reducing the human capital stock.

Importance of Health and Nutrition for Productivity

Healthier workers are more productive, as improvements in nutrition correlate with increased productivity.

Body Mass Index..

Malnutrition; still a problem in developing nations

UN: 1/3 of population of Sub-Saharan Africa is undernourished

Robert Fogel

wrote a book about as nutrition improves, so does worker’s productivity

Property Rights and Political Stability

They help achieve economic growth by allowing people to exercise authority over resources they own.

Property rights

Peoples’ ability to exercise authority over the resources they own

Inward-Oriented Policies

Inward-Oriented Policies attempt to increase productivity within the country by avoiding interaction with the world

Hamilton

Outward-Oriented Policies

Outward-Oriented Policies promote international trade to improve citizens' economic well-being.

Argentina vs. South Korea, Singapore, and Taiwan

Landlocked countries have problems

Patent Systems

Encourages research as well (exclusive right to produce product for a number of years)

Thomas Malthus and his theory 1978

Thomas Malthus theorized that population grows geometrically while food supply grows arithmetically, leading to potential shortages, a view later challenged by results of technological innovation.No actual basis for these numbers

He painted a dismal picture for the future

He said there were two checks: Positive and Preventative

The Positive Check on Population said that the eventual lack of food would lead to war, famine, disease, and plague

The Preventative Check was postponing marriage (fewer children), abstinence, control of the passions. And… if you can afford children, you shouldn’t get marry and have any!

Malthus’ big failure

failure to realize that continued scientific and technological innovation would keep pace with the population

REALLY exposed by Frederich Engles (Marx’s co-author)

In the 1840s… where did Malthus get his numbers from?

Why hasn’t it happened?

Answer: he failed to take into account Science and Technology

John Stuart Mill

People believed Malthus’s theories until the 1860s when the economist

Labor Force

Those 16 years of age and older who are either working or looking for work.

Unemployment Rate

The number of unemployed as a percentage of the labor force.

Discouraged Workers

Those who drop out of the labor force in frustration because they can’t find work.

Labor Force Participation Rate

The labor force as a percentage of the adult population.

Long-Term Unemployment

Those looking for work for 27 weeks or longer.

Also could be longer than 6 months

Frictional Unemployment

Unemployment that occurs because job seekers and employers need time to find each other.

Seasonal Unemployment

Unemployment caused by seasonal changes in the demand for certain kinds of labor.

Structural Unemployment

Unemployment because of 1) the skills in demand do not match those of the unemployed, or 2) the unemployed do not live where the jobs are.

Cyclical Unemployment

Unemployment that fluctuates with the business cycle, increasing during contractions and decreasing during expansions.

Full Employment

Employment level when there is no cyclical unemployment.

Unemployment Benefits

Cash transfers for those who lose their jobs and actively seek employment.

Underemployment

Workers are overqualified for their jobs or work fewer hours than they would prefer.

Hyperinflation

A very high rate of inflation.

Deflation

A sustained decrease in the price level.

Disinflation

A reduction in the rate of inflation.

Demand-Pull Inflation

A sustained rise in the price level caused by a rightward shift of the aggregate demand curve.

Cost-Push Inflation

A sustained rise in the price level caused by a leftward shift of the aggregate supply curve.

Interest

The dollar amount paid by borrowers to lenders.

Interest Rate

Interest per year as a percentage of the amount loaned.

Nominal Interest Rate

The interest rate expressed in current dollars as a percentage of the amount loaned; the interest rate on the loan agreement.

Real Interest Rate

The interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate.

COLA (Cost-of-Living Adjustments)

The increase in a transfer payment or wage that reflects the increase in the price level.

Production

A process that transforms resources into goods and services.

Per-worker Production Function

The relationship between the amount of capital per worker in the economy and the average output per worker.

Rules of the Game

The laws, customs, manners, conventions, and other institutional elements that determine transaction costs and thereby affect people’s incentive to undertake production and exchange.

Expenditure Approach to GDP

Calculating GDP by adding up spending on all final goods and services produced in the nation during the year.