Principles of Macroeconomics Economics 51. Have you ever wondered why?

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1 Principles of Macroeconomics Economics 51 Linus Yamane Spring 214 Have you ever wondered why? Why 1.4 million people are unemployed? Why diamonds are so expensive? And water is so cheap? Why doctors are rich? And professors are not? Why Pitzer tuition is so high? And if it is worth it? Why apartments are so hard to find in Santa Monica? Why wages are lower in Nigeria, Pakistan, and Mexico? Why income inequality has been rising? 1

2 Have you ever wondered? How New York City with 8.3 million people Produces no food and no cars But they all eat and get stuck in traffic jams Why we care about Janet Yellen? Why there is so much air pollution in Los Angeles Long Beach Riverside? What caused the Great Recession of 27 9? Why the stock market goes up? Or down? Why some airlines operate even when they are losing money? Have you ever wondered? Why prices rise more quickly in some countries than in others? Why popcorn is so expensive in movie theaters? Why we pay farmers to leave land uncultivated, but not hotel owners to keep rooms vacant? Why banks have marble floors and Greek columns? Why hot dogs come in packages of 1, but buns come in packages of 8? 2

3 Not business What is Economics? How to help firms make increase their profits Not finance How to allocate money into different assets Not home economics how to make proper place settings But knowledge of economics is vital if you want to understand these Economics is a Social Science Goal is to understand something about our society Study of how people and society are organized to produce, distribute, and consume a multitude of goods and services What? How? and For Whom? questions Study of choice under conditions of scarcity 3

4 Law of Scarcity Goods are limited relative to wants If resources were unlimited if goods were costless Or if human wants were fully satiated at low levels Then there would be no economizing to do And there would be no economic problem So society needs to make choices Example Choices under conditions of scarcity We offer thousands of classes here in Claremont, but you can only take about 32 classes during your four years here. How do you make these choices? Consider the costs and benefits of taking an economics class 4

5 Costs of Economics Material may be hard, and you don t like math You might not get a good grade Economics grades are lower than in the humanities and other social sciences Top 3% As, middle 5% Bs, bottom 2% C,D,Fs May not find the material interesting Could take Spanish or Studio Art where the average grade is much higher Benefits of Economics Learn interesting and important material Better understand local, state, national, and international affairs Become an informed citizen Learn to think clearly about the world And recognize when politicians say nonsense Improve your job market prospects 5

6 Goals of Studying Economics Learn to think like an economist Cost/benefit analysis Become a more astute participant in the economy Need to make many economic decisions in life Have a better understanding of the potentials and limits of economic policy What is the best way to protect the environment? Relevance of Economics Economics is everywhere You can not understand the newspaper without an understanding of economics Newspapers report what happens, but you need to understand economics in order to understand why Future of our society depends on informed citizens. We need to understand economics in order to help our society make better choices. 6

7 Course Requirements Five problem sets (5% each) Two midterm exams (18% each) One essay assignment (7%) One final exam (32%) Textbook Case, Fair, & Oster, Principles of Macroeconomics, 11 th edition, Pearson Publishing, 214 Information Name College Major Phone number Home town Hobbies/Interests Have you taken Econ 52 Principles of Microeconomics? Have you taken any math at Pitzer/Claremont? 7

8 Linus Yamane Office: Fletcher 216 Phone: Office hours: Wed 8:3 1:am Thur 8:3 1:am and by appointment Economics Lunch: Fridays 12 noon 1pm in McConnell Dining Hall (usually East Wing) What is Macroeconomics? Microeconomics study of individual consumers and households, individual firms and industries Microeconomists: people who are wrong about specific things Macroeconomics study of the entire economy, overall aggregates Macroeconomists: people who are wrong about things in general 8

9 Microeconomics Price of a car Pitzer tuition Ice cream production Steel production Imports of red Bordeaux wine Exports of blue jeans Prospects for a Pitzer BA Economic costs Macroeconomics Overall price level Inflation National Output GDP Balance of Trade Balance of Payments Unemployment Rate Budget Deficits Recent Economic History Gross Domestic Product GDP per capita Unemployment Rate Interest Rates Inflation Trade Deficit Exchange Rates Savings Rates Money Supply Budget Deficits Stock Market Housing Prices 9

10 16 Real GDP Real 29 Dollars (Billions) GDP Growth Rate Percent Annual Growth

11 55, Per Capita GDP 5, 45, Real 29 Dollars 4, 35, 3, 25, 2, 8 7 Per Capita GDP Growth Annual Growth Rate

12 11 Unemployment Rate 1 9 Percent of the Labor Force Employment Thousands

13 18 17 Treasury Bill Interest Rates (3 Month) Interest Rate Federal Funds Rate Interest Rate

14 15 14 Inflation Percent Real Home Price Index Case Shiller Index adjusted for Inflation

15 8 7 Real Interest Rate (3MTB inflation) Percent Exports and Imports as a Percent of GDP Exports Imports

16 2 Net Exports as a Percent of GDP 1 1 Percent of GDP Trade Weighted Exchange Rate Index

17 18 Personal Savings Rate Percent Money Supply Growth Rates Annual Growth Rate M1 M

18 2 1 Federal Budget Surplus as a Percent of GDP Percent of GDP National Debt as a Percent of GDP Percent of GDP

19 18, Dow Jones Industrials 16, 14, 12, Dow Jones Index 1, 8, 6, 4, 2, 2, S&P 5 Index 1,8 1,6 1,4 1,2 Index 1,

20 1 Ln Dow Jones Industrials Index Ln Index Ln S&P 5 Index Ln Index

21 4, Real GDP Per Capita 35, 3, 25, Real 1996 Dollars 2, 15, 1, 5, Real Per Capita GDP Growth Rates 189s 1.4% 19s 1.49% 191s 1.2% 192s 1.23% 193s 1.92% 194s 4.4% 195s 1.72% 196s 2.82% 197s 2.12% 198s 2.2% 199s 1.93% 2s.7% 21s* 1.43% Secular Stagnation? Will sluggish growth and output, along with employment levels well below potential, coincide for some time to come with problematically low real interest rates? Think about this issue through the semester, and write an essay of 1 words on this question. 21

22 Normative vs Positive Positive Economics: what is, how things are, description of facts, circumstances and relationships If we raise the speed limit, highway deaths will rise Normative Economics: what ought to be, involves value judgments and ethics We should raise the speed limit Observation Economic Approaches Look at different policies, societies, time periods Theory Deductive approach If this, then that Econometrics Tools of probability and statistics Statistical analysis of raw data 22

Economic Models The world is very complicated We try to focus on the most important economic variables and the relationships between those variables We start with

23 Economic Models The world is very complicated We try to focus on the most important economic variables and the relationships between those variables We start with simple economic models to give us insights into how the world works Over time we make the models more and more complicated and realistic as our understanding grows 23

24 Production Function Inputs: factors of production, commodity or service used by firms in the production process Land: natural resources, minerals, oxygen, forests Labor: physical and mental talents, entrepreneurship Capital: equipment, plants, buildings, inventories Technology: recipe for combining the inputs Outputs: useful goods and services that are either consumed or used in the production process Production Possibility Frontier GUNS BUTTER

25 Production Possibility Frontier GUNS BUTTER Production Possibility Frontier Different combinations of goods and services that can be produced when the factors of production are utilized to their potential Law of scarcity No matter where you are, there is demand for more butter and more guns Efficiency Productive efficiency: no waste Allocative efficiency: produce the combination of goods people want 25

26 Production Possibility Frontier Opportunity Cost The value of the next best alternative Slope of the PPF Law of Increasing Opportunity Cost The more of something that is produced, the greater the opportunity cost of producing one more unit Economic Growth When countries grow, the PPF moves out What, How and For Whom? By instinct (ant colony, beehive society) By tradition or custom (Ancient Egypt) Command economy (military or communist society) Central government committee makes all decisions Market economy Firms produce goods which are profitable By means which are least costly For people who have money 26

Circular Flow Diagram Law of Demand Ceteris paribus (holding all other things constant) a decease in price is accompanied by an increase in quantity demanded

27 Circular Flow Diagram Law of Demand Ceteris paribus (holding all other things constant) a decease in price is accompanied by an increase in quantity demanded Quantity demanded the amount of a product that consumers would buy in a given period of time if they could buy all they wanted at the current price Alfred Marshall

28 Demand Schedule Amount of a good or service that consumers are willing to buy at different prices during a specified time period Downward sloping More people buy as price goes down All people buy more as price goes down Substitution effect Income effect 28

Section 1 Guided Reading and Practice: Basic Economic Concepts

Name AP ECONOMICS Section 1 Guided Reading and Practice: Basic Economic Concepts Module 1: The Study of Economics (pages 2-9) - Define 1. Terms: a. economics b. individual choice c. economy d. market economy