2011 AL Macroeconomics Final Exam Review
There will be 10 multiple choice questions worth 3 points each.
There will be 5 FRQs at 14 points each.
Areas to Focus on:
• PPC
• AD/AS
• FOREX
• Phillips Curve
• Money Market
• Loanable Funds Market
• GDP vs GRP(R)
• The impact of interest rates on the financial decisions of consumers
• The Business Cycle
Be able to graph ALL of the above
You will have seen everything on the exam at some point during the semester.
Friday, December 9, 2011
Wednesday, November 30, 2011
Interesting Article
http://money.cnn.com/2011/11/30/news/economy/fed_ecb_dollar_liquidity/index.htm?hpt=hp_t1
NEW YORK (CNNMoney) -- Europe's hurting for cash, and central banks around the world are stepping in to give it a boost.
The Federal Reserve, along with five other central banks, acted Wednesday to make it cheaper for banks around the world to borrow U.S. dollars.
The Fed -- along with central banks of the eurozone, England, Japan, Switzerland and Canada -- announced a coordinated plan to lower prices on dollar liquidity swaps beginning on Dec. 5, and extending these swap arrangements to Feb. 1, 2013.
A swap takes place when the Fed provides U.S. dollars to a foreign central bank in exchange for the equivalent amount of foreign currency from that central bank.
Overall, these efforts are meant to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Federal Reserve said in a press release.
World stock markets surged on the news, pushing the Dow (INDU) back into positive territory for the year.
Velshi: Banks help Europe buy time
Together, the six central banks also created a temporary mechanism, making it easier for them to exchange their foreign currencies -- not just U.S. dollars. That tool gives any of these central banks easier access to euros, Japanese yen, British pounds, Swiss francs and Canadian dollars should they need those currencies to assist their region's banks in the event of a crisis.
These liquidity facilities could come in handy if Europe's debt crisis, for example, escalates to the point that foreign banks need the funds to continue normal business transactions.
"These swap lines are being implemented as a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions," the Federal Reserve said in a Q&A about the plan.
Since May, the cost for European banks to borrow dollars from other European banks has skyrocketed. Through central bank auctions announced in September, these banks can borrow dollars at reduced interest rates, for periods of three months.
This is meant to lower the cost of short-term borrowing for troubled European banks, as well as give them immediate access to dollars. Today's actions continue that plan and further reduce borrowing costs.
The European Central Bank is the one actually making the loans, so the Fed is not on the hook if a European bank fails, said Paul Ashworth, chief U.S. economist with Capital Economics.
China starts easing
In its statement Wednesday, the Fed stressed that the move is designed to offer help to foreign banks, and that U.S banks are not in need of liquidity, at least for now.
"U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets," the central bank said. "However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions."
Meanwhile, the People's Bank of China also announced a plan to increase liquidity Wednesday by lowering its reserve requirement ratio for financial institutions by half a percentage point. To top of page
NEW YORK (CNNMoney) -- Europe's hurting for cash, and central banks around the world are stepping in to give it a boost.
The Federal Reserve, along with five other central banks, acted Wednesday to make it cheaper for banks around the world to borrow U.S. dollars.
The Fed -- along with central banks of the eurozone, England, Japan, Switzerland and Canada -- announced a coordinated plan to lower prices on dollar liquidity swaps beginning on Dec. 5, and extending these swap arrangements to Feb. 1, 2013.
A swap takes place when the Fed provides U.S. dollars to a foreign central bank in exchange for the equivalent amount of foreign currency from that central bank.
Overall, these efforts are meant to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Federal Reserve said in a press release.
World stock markets surged on the news, pushing the Dow (INDU) back into positive territory for the year.
Velshi: Banks help Europe buy time
Together, the six central banks also created a temporary mechanism, making it easier for them to exchange their foreign currencies -- not just U.S. dollars. That tool gives any of these central banks easier access to euros, Japanese yen, British pounds, Swiss francs and Canadian dollars should they need those currencies to assist their region's banks in the event of a crisis.
These liquidity facilities could come in handy if Europe's debt crisis, for example, escalates to the point that foreign banks need the funds to continue normal business transactions.
"These swap lines are being implemented as a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions," the Federal Reserve said in a Q&A about the plan.
Since May, the cost for European banks to borrow dollars from other European banks has skyrocketed. Through central bank auctions announced in September, these banks can borrow dollars at reduced interest rates, for periods of three months.
This is meant to lower the cost of short-term borrowing for troubled European banks, as well as give them immediate access to dollars. Today's actions continue that plan and further reduce borrowing costs.
The European Central Bank is the one actually making the loans, so the Fed is not on the hook if a European bank fails, said Paul Ashworth, chief U.S. economist with Capital Economics.
China starts easing
In its statement Wednesday, the Fed stressed that the move is designed to offer help to foreign banks, and that U.S banks are not in need of liquidity, at least for now.
"U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets," the central bank said. "However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions."
Meanwhile, the People's Bank of China also announced a plan to increase liquidity Wednesday by lowering its reserve requirement ratio for financial institutions by half a percentage point. To top of page
Tuesday, November 29, 2011
Monday, November 28, 2011
Fiscal Policy 11-28-11
THE CAR ANALOGY
The economy is like a car
• You can drive 120mph but it is not sustainable
• Like extremely low unemployment
• You could drive a car at 20mph
• such at high unemployment
• But 70mph is sustainable and is what its designed for
• Such as full unemployment 4-6%
• The engine (technology) of gas milage (productivity)
How does the government stabilize the economy?
THe government has two different tools to use
0. Fiscal policy
1. Monetary policy
Fiscal policy is actions by congress to stabilize the economy
Monetary policy is actions by the federal reserve to stabilize the economy.
Two different types of fiscal policy
DISCRETIONARY FISCAL POLICY
• Congress creates a new bill that is designed to change Ad through government
spending or taxation
• Problem is time lags due to bureaucracy
• takes time for congress to act
• ex. In a recession congress increases spending
NON DISCRETIONARY FISCAL POLICY
• AKA. Automatic stabilizers
• Permanent spending taxation laws enacted to work counter cyclically to stabilize the
economy
• ex. Welfare, unemployment, min. wage etc.
• When there is high unemployment what are ways government can stimulate
economy?
CONTRACTIONARY FISCAL POLICY (THE BRAKE)
Laws that reduce inflation, decrease GDP
• Decrease government spending
• Tax increases
• Combinations of the two
EXPANSIONARY FISCAL POLICY (THE GAS)
LAWs that reduce unemployment and increase GDP (Close a recessionary Gap)
• Increased government spending
• decrease taxes on consumers
• combinations of the two
How much should the government spend?
THE MULTIPLIER EFFECT
Why do cities want the Superbowl in their stadium?
An initial change in spending will set off a spending chain that is magnified in the
economy.
Example?
Bobby spends $100 on Jason's product
• jason now has more income so he buys $100 of nancy's
• Nancy now has more income so she buys $100 of Tiffany's product
• The result is at least $300 increase in consumer spending
EFFECTS OF GOVERNMENT SPENDING
If the government spends $5million will AD increase by the same amount?
• No, AD will increase even more as spending becomes income for consumers.
• Consumers will take that money and spend thus increasing AD
How much will AD increase
• It depends on how much of the new income consumers save
• If they save a lot spending and AD will increase less
• If they save less, then spending and AD will increase a lot.
MARGINAL PROPENSITY TO CONSUME
Marginal Propensity to consume (MPC)
• How much people consumer rather than save
• It is always expressed as a fraction
MPC = Change in consumption
Change in income
MARGINAL PROPENSITY TO SAVE (MPS)
• How much people save rather then consume when there is a change in income
• It is also expressed as a fraction
MPS = Change in savings
Change in income
MPS = 1 - MPC
Why is this true?
Because people can either save or consume
HOW IS SPENDING MULTIPLIED?
Assume the MPC is .5 for everyone?
• Assume the Superbowl comes to town and there is an increase of $100 in ashley's
rester aunt
• Ashley now has $100 more income
• She now saves $50 and spends $50 at Karl's Salon
• Karl now has $50 more income
• $25 and spends $25 at Dans Fruit stand
• Dan now has $25 more income
• This continues until every penny is either saved or spend
**Total Change in GDP = multiplier x initial change in spending
CALCULATING THE SPENDING MULTIPLIER
If MPC is .5, how much is the multiplier?
spending multiplier
1
Or
1
MPS
1 - MPC
• if the multiplier is 4 how much will an initial increase of $5 in government spending
increase the GDP?
• How much will a decrease in $3 in spending decrease GDP?
Lets practice the spending multiplier
2. If MPC is .9 what is multiplier?
3. if MPC is .8 what is the multiplier?
4. If MPC is .5 and consumption increased $2 million, how much will GDP increase?
Conclusion: as the marginal propensity to consume falls, the multiplier effect is less.
WHAT ABOUT TAXING?
• The multiplier effect also applies when the government cuts or increases taxes
• But chaining taxes has less of an effect then government spending. Why?
EXPANSIONARY POLICY (CUTTING TAXES)
• Assume the MPC is .75 so the multiplier is 4 if the government cuts taxes by $4 million
how will consumer spending increase?
• When they get the tax cut, consumers will save $1 million and spending $3 million
• The $3 million amount will be magnified in the economy.
The economy is like a car
• You can drive 120mph but it is not sustainable
• Like extremely low unemployment
• You could drive a car at 20mph
• such at high unemployment
• But 70mph is sustainable and is what its designed for
• Such as full unemployment 4-6%
• The engine (technology) of gas milage (productivity)
How does the government stabilize the economy?
THe government has two different tools to use
0. Fiscal policy
1. Monetary policy
Fiscal policy is actions by congress to stabilize the economy
Monetary policy is actions by the federal reserve to stabilize the economy.
Two different types of fiscal policy
DISCRETIONARY FISCAL POLICY
• Congress creates a new bill that is designed to change Ad through government
spending or taxation
• Problem is time lags due to bureaucracy
• takes time for congress to act
• ex. In a recession congress increases spending
NON DISCRETIONARY FISCAL POLICY
• AKA. Automatic stabilizers
• Permanent spending taxation laws enacted to work counter cyclically to stabilize the
economy
• ex. Welfare, unemployment, min. wage etc.
• When there is high unemployment what are ways government can stimulate
economy?
CONTRACTIONARY FISCAL POLICY (THE BRAKE)
Laws that reduce inflation, decrease GDP
• Decrease government spending
• Tax increases
• Combinations of the two
EXPANSIONARY FISCAL POLICY (THE GAS)
LAWs that reduce unemployment and increase GDP (Close a recessionary Gap)
• Increased government spending
• decrease taxes on consumers
• combinations of the two
How much should the government spend?
THE MULTIPLIER EFFECT
Why do cities want the Superbowl in their stadium?
An initial change in spending will set off a spending chain that is magnified in the
economy.
Example?
Bobby spends $100 on Jason's product
• jason now has more income so he buys $100 of nancy's
• Nancy now has more income so she buys $100 of Tiffany's product
• The result is at least $300 increase in consumer spending
EFFECTS OF GOVERNMENT SPENDING
If the government spends $5million will AD increase by the same amount?
• No, AD will increase even more as spending becomes income for consumers.
• Consumers will take that money and spend thus increasing AD
How much will AD increase
• It depends on how much of the new income consumers save
• If they save a lot spending and AD will increase less
• If they save less, then spending and AD will increase a lot.
MARGINAL PROPENSITY TO CONSUME
Marginal Propensity to consume (MPC)
• How much people consumer rather than save
• It is always expressed as a fraction
MPC = Change in consumption
Change in income
MARGINAL PROPENSITY TO SAVE (MPS)
• How much people save rather then consume when there is a change in income
• It is also expressed as a fraction
MPS = Change in savings
Change in income
MPS = 1 - MPC
Why is this true?
Because people can either save or consume
HOW IS SPENDING MULTIPLIED?
Assume the MPC is .5 for everyone?
• Assume the Superbowl comes to town and there is an increase of $100 in ashley's
rester aunt
• Ashley now has $100 more income
• She now saves $50 and spends $50 at Karl's Salon
• Karl now has $50 more income
• $25 and spends $25 at Dans Fruit stand
• Dan now has $25 more income
• This continues until every penny is either saved or spend
**Total Change in GDP = multiplier x initial change in spending
CALCULATING THE SPENDING MULTIPLIER
If MPC is .5, how much is the multiplier?
spending multiplier
1
Or
1
MPS
1 - MPC
• if the multiplier is 4 how much will an initial increase of $5 in government spending
increase the GDP?
• How much will a decrease in $3 in spending decrease GDP?
Lets practice the spending multiplier
2. If MPC is .9 what is multiplier?
3. if MPC is .8 what is the multiplier?
4. If MPC is .5 and consumption increased $2 million, how much will GDP increase?
Conclusion: as the marginal propensity to consume falls, the multiplier effect is less.
WHAT ABOUT TAXING?
• The multiplier effect also applies when the government cuts or increases taxes
• But chaining taxes has less of an effect then government spending. Why?
EXPANSIONARY POLICY (CUTTING TAXES)
• Assume the MPC is .75 so the multiplier is 4 if the government cuts taxes by $4 million
how will consumer spending increase?
• When they get the tax cut, consumers will save $1 million and spending $3 million
• The $3 million amount will be magnified in the economy.
Tuesday, November 22, 2011
World record Broken by Emily Krenek and Taylor Lahey!
The Belton High School World Record Club made history today by eclipsing a Guiness World Record. Belton High School seniors Emily Krenek and Taylor Lahey completed the "Fastest Time to Duct Tape a Person to a Wall" challenge in 51.4657 seconds.
Here's the link to the YouTube video: http://youtu.be/ULV5joDtpmA
The criteria for breaking the record is as follows:
• Only 1 person taping
• Person being taped must weigh over 110 pounds
• Person being taped has to remain attached to the wall for at least 1 minute.
Taylor was able to tape Emily to the wall in 51.4657 seconds and she remained there for 2 mimutes and 25 seconds. They were assisted in their attempt by: Randy Hale, Hadley Young, Levi Jordan, Kaylee Krenek, and Shannon Rice. Elizabeth McMurtry, Matt Blackburn, and I are the Club Sponsors.
These students are also looking at breaking a handful of other records throughout their senior year. Their next target is the World's Largest Knockout Basketball Game. They are looking to challenge this record at some point before or after the Christmas Break.
If you see any of these students, please congratulate them on their achievement.
Thursday, November 17, 2011
Phillips Curve PPT on Google Docs
https://docs.google.com/present/edit?id=0AbxQN7GyomHPZGNzdHpkY3FfMjA4ZHM2ano5Z3c
Wednesday, November 16, 2011
Today's Powerpoint-AG S&D/Fiscal Policy
https://docs.google.com/present/edit?id=0AbxQN7GyomHPZGNzdHpkY3FfMTMxY2R3dmJzZDk
Monday, November 14, 2011
Thursday, November 3, 2011
11-3-11
• Savers and borrowers care about the real interest rate because tat is what they earn or pay interest after inflation.
• Real interest rate = interest rate - expected inflation
• If expected inflation is 0%; then real rate = nominal rate.
• But its also true that if expected inflation is constant and any change in the nominal rate will be reflected in an identical change in the real rate.
• This is why the graphs in the text are labeled "nominal interest rate for a given expected future inflation rate"
EQUILIBRIUM IN THE LOANABLE FUNDS MARKET
• Demand is downward sloping for one very intuitive reason.
• Firms borrow tot pay for capital investment projects.
• If the project has an expected rate of return that exceeds the real interest rate, the investment will be profitable, and the funds will be demanded.
• Rate of return (%) =
(100(Revenue form project) - (cost of project))-(cost of project)
• As the real rate falls more projects become profitable, so the quantity of funds demanded will increase.
• Supply is upward sloping
• Savers can lend their money to borrowers but in doing so must forgo consumption
• In order to compensate for the forgone consumption, savers must receive interest income and as the real interest rate rises, the opportunity to earn more income rises so more dollars will be saved.
• As the real Rate rises, the quantity of funds supplied will increase.
• Changes in Perceived business opportunities
- A change in the beliefs about the rate of return on investment spending can
increase or reduce the amount of desired spending at any given interest rate.
• Changes in the Government's Borrowing.
• Changes in the government's borrowing
- Budget deficits are major sources of the demand for loanable funds
- Treasury must borrow funds and acquire more debt. This increases the demand
for lovable funds in the market.
- In a budget surplus, less debt would be acquired and the demand for loanable
funds would decrease.
• Changes in private savings behavior
- If households decide to consume more and save less, The supply of loanable funds will shift to the left,
• Changes in capital inflows
- If a nation is perceived to have a stable government, a strong economy and is a
good place to save money, foreign money will flow into that nation's financial
markets, increasing the supply of loanable funds.
INFLATION AND INTEREST RATES
• Anything that shifts either the supply of loanable funds curve or the demand for the loanable funds curve, changes the interest rate.
• We have seen in previous modules that unexpected inflation creates winners and losers, particularly in borrowers and lenders.
• Economists are going to capture the effects of inflation on borrowers and lenders by distinguishing between the nominal interest rate and the real interest rate where the difference is as follows
Real interest rate = Nominal interest rate - Inflation rate
• For borrowers, the true cost of borrowing is the real interest rate, not the nominal interest rate.
• For lenders, the true payoff to lending is the real interest rate, not the nominal interest rate.
• Real interest rate = interest rate - expected inflation
• If expected inflation is 0%; then real rate = nominal rate.
• But its also true that if expected inflation is constant and any change in the nominal rate will be reflected in an identical change in the real rate.
• This is why the graphs in the text are labeled "nominal interest rate for a given expected future inflation rate"
EQUILIBRIUM IN THE LOANABLE FUNDS MARKET
• Demand is downward sloping for one very intuitive reason.
• Firms borrow tot pay for capital investment projects.
• If the project has an expected rate of return that exceeds the real interest rate, the investment will be profitable, and the funds will be demanded.
• Rate of return (%) =
(100(Revenue form project) - (cost of project))-(cost of project)
• As the real rate falls more projects become profitable, so the quantity of funds demanded will increase.
• Supply is upward sloping
• Savers can lend their money to borrowers but in doing so must forgo consumption
• In order to compensate for the forgone consumption, savers must receive interest income and as the real interest rate rises, the opportunity to earn more income rises so more dollars will be saved.
• As the real Rate rises, the quantity of funds supplied will increase.
• Changes in Perceived business opportunities
- A change in the beliefs about the rate of return on investment spending can
increase or reduce the amount of desired spending at any given interest rate.
• Changes in the Government's Borrowing.
• Changes in the government's borrowing
- Budget deficits are major sources of the demand for loanable funds
- Treasury must borrow funds and acquire more debt. This increases the demand
for lovable funds in the market.
- In a budget surplus, less debt would be acquired and the demand for loanable
funds would decrease.
• Changes in private savings behavior
- If households decide to consume more and save less, The supply of loanable funds will shift to the left,
• Changes in capital inflows
- If a nation is perceived to have a stable government, a strong economy and is a
good place to save money, foreign money will flow into that nation's financial
markets, increasing the supply of loanable funds.
INFLATION AND INTEREST RATES
• Anything that shifts either the supply of loanable funds curve or the demand for the loanable funds curve, changes the interest rate.
• We have seen in previous modules that unexpected inflation creates winners and losers, particularly in borrowers and lenders.
• Economists are going to capture the effects of inflation on borrowers and lenders by distinguishing between the nominal interest rate and the real interest rate where the difference is as follows
Real interest rate = Nominal interest rate - Inflation rate
• For borrowers, the true cost of borrowing is the real interest rate, not the nominal interest rate.
• For lenders, the true payoff to lending is the real interest rate, not the nominal interest rate.
Wednesday, November 2, 2011
November 1, 2011 Modules 22-25
MODULE 22-29 Notes
OBJECTIVES
• You will learn the following
- Relationship between savings and investment spending
- Purpose of the four principal types of financial assets
•Stocks
•Bonds
•Loans
•Bank deposits
- How investors achieve diversity
MATCHING UP SAVINGS AND INVESTMENTS
• Physical capital
- Factories, shopping malls, large pieces of machinery, etc.
• Usually paid for by borrowing
• Where does this funding come from?
• Savings = Spending
- Savings - investments spending identity
• In a simple economy (No government intervention)
- All money spent by a person or firm ends up pockets of others as income
• Total income = Total spending = C + I
• So... C + S = C + I
Lets add Government activity
• The government spends on goods services, and transfers and collects tax revenues
• If the budget is balanced...
- Tax revenue = Government spending + transfer payment
- Budget balance (BB) = Tax revenue - G - Transfers
- If BB is > 0, there is a surplus and government is saving money
- If BB is < 0, there is a deficit and the government is borrowing money.
THE FINANCIAL SYSTEM
• Financial markets is where households invest their current savings and their current savings and their accumulated savings (WEALTH) by purchasing financial assets
• FINANCIAL ASSET
- Paper claim that entitles the buyer to the future income from the seller.
THREE TASKS OF THE FINANCIAL SYSTEM
0. Reducing transaction cost
1. Reducing risk
- Financial Risk
- Diversification
3. Providing Liquidity
- Liquid assets
- Illiquid Assets
WHAT IS MONEY?
• Money
- Something that you can turn into a good or service
• Three roles of money
- Medium of exchange
• Gimmie a dollar for a pack of gum
- Store of value
• Retains its value over short periods of time
- Unit of account
• A way of evaluating the "measurements" of goods and services
MEDIUM OF EXCHANGE
• Your employer exchanges dollars for an hour of your labor
• Your exchange those dollars for a grocers pound of apples
• The grocer exchanges those dollars for an orchards apples crop, and on and on
STORE OF VALUE
• So long as prices are not rapidly increasing, money is a decent way to store value. You can put money under your mattress or in a checking account and still useful, with essentially the same value a week or month later
• If i were the town cheese maker, I must quickly get rid of my cheese because if I wait long, moldy cheese loses value quickly.
UNIT OF ACCOUNT
• Units of currency (Dollars, Euro yen...) Measures the relative worth of goods and services just as inches and meters measure distance
• In the barter system all goods are measured in terms of other goods
• Prices in a barter economy: A Ib of cheese dozen eggs = beer or something
• With money the value of cheese and all other goods and services is measured in terms of a monetary unit.
TYPES OF MONEY
• Commodity money
- Something used as money, normally gold of silver, that has intrinsic value to
others
• Commodity backed money
- Medium of exchange with no intrinsic value guaranteed by a promise that it
could be converted into valuable goods on demand
• Fiat money
- Money whose value derives entirely from its official status as a means of
exchange.
MEASURES THE MONEY SUPPLY
• How much money is out there?
• Two different measures on the amount of money supply. M1 and M2
- M1 = Currency and coin in circulation+checking deposits+Travelers checks
- M2 = M1 + Savings accounts + Short term CD, money market accounts.
Notes 11-1-11
BANKING AND MONEY CREATION AND THE FEDERAL RESERVE
MODULE 25
MONETARY ROLE OF BANKS
• More than half of the M1 is currency
• The rest is in demand deposits
- How do you figure M1
• If a large part of (about half) of the money supply is accounted for by checking deposits into banks, the banks must pay a crucial role in the supply of money in the economy.
M1 = currency + coin + traveler's checks + Checking deposits
WHAT BANKS DO
• Banks offer a safe place for depositors to put money and they offer lending services to borrowers who need money.
• A saver is paid interest on his or her savings, and a borrower is charged interest on his or her borrowing.
• Another way of thinking about it is that banks take liquid assets (Savings) to finance the investment of illiquid assets (Homes and capital equipment).
BANK RUNS
• Depositors put their money in banks to earn interest and to keep it safe. But when the public begins to fear that the bank itself might fold, or if they fear for the stability for the entire financial system, they may want to withdraw their money.
• If everyone goes to the bank to withdraw their deposits, it creates a bank run.
• The bank keeps only a small percentage of the total deposits on reserve, so a bank run can lead to a self-fulfilling prophesy of the bank's failure.
• This can be very damaging to communities and it can spread across the economy
• This is one of the primary reasons for regulating banks.
BANK REGULATIONS
2. Deposit insurance(FDIC)
3. Capital requirements
4. Reserve Requirements
5. Discount window
DEPOSIT INSURANCE
• The US Government created the FEDERAL DEPOSIT INSURANCE Corporation. The FDIC provides DEPOSIT INSURANCE, a guarantee that depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account. Currently the FDIC guarantees the first $250,000 of each account.
CAPITAL REQUIREMENTS
• To reduce the incentive for excessive risk-taking, regulators require that the owners of banks hold substantially more assets then the value of bank deposits
• That way, the bank will still have assets longer than its deposits even if some of its loans go bad, and losses will accrue against the bank owners' assets not the government
• Bank's capital = assets - liabilities
• For example, main Street Bank has capital of $200,000, equal to 9% of the total value of its assets. In proactive, banks' capital is required to equal at least 7% of the value of their assets.
RESERVE REQUIREMENT
• The Federal Reserve establishes the required reserve ratio for banks. This policy insures that the banks will have a certain fraction of all deposits on hand in the even that customers wish to withdraw money.
• In the unites States the required reserve ratio for checkable bank deposits is 10%
THE DISCOUNT WINDOW
• The Federal Reserve stands ready to loan money to banks in an arrangement known as the DISCOUNT WINDOW.
• This helps a bank that finds itself in a short-term punch because many depositors might be withdrawing their cash in a short period of time.
MODULE 26
History and structure of the Federal Reserve System
FEDERAL RESERVE
• The Federal Reserve is a central bank--An institution that oversees and regulates the banking system, and controls the monetary base.
• The creation of the federal Reserve System in 1913 marked the beginning of the modern era of American Banking
• Though banks were federally regulated since 1964, there were still fundamental problems delivering money from large banks in big cities to smaller banks in rural communities. If a rural bank in Indiana was low on reserves, the bank may fail before money could be delivered to the bank. This bank failure could spark run on several banks, devastating local communities.
END OF THE NATIONAL BANKING SYSTEM
• In 1913 the national banking system was eliminated and the Federal Reserve System was created as a way to compel all deposit--taking institutions to hold adequate reserves and to open their accounts to inspection of regulators
• The panic of 1907 convinced many that the time for centralized control of bank reserves had come.
• In additions, the Federal Reserve was given the sole right to us sue currency in order to make the money supply sufficiently responsive to satisfy economic conditions around the country.
• The creation of the Fed didn't stop bank runs and didn't stop the Great Depression. A series of economic downturns and damaging bank and instigated new laws from Congress that attempted to stabilize the banking industry and provide safeguards for the public and their deposits.
• However when the Great Depression became a distant became a distant memory and bank runs became much less common, Congress let some of the regulations of the 1930's lapse
• Some of these legal lapses created problems of the 1980s and in 2008.
OBJECTIVES
• You will learn the following
- Relationship between savings and investment spending
- Purpose of the four principal types of financial assets
•Stocks
•Bonds
•Loans
•Bank deposits
- How investors achieve diversity
MATCHING UP SAVINGS AND INVESTMENTS
• Physical capital
- Factories, shopping malls, large pieces of machinery, etc.
• Usually paid for by borrowing
• Where does this funding come from?
• Savings = Spending
- Savings - investments spending identity
• In a simple economy (No government intervention)
- All money spent by a person or firm ends up pockets of others as income
• Total income = Total spending = C + I
• So... C + S = C + I
Lets add Government activity
• The government spends on goods services, and transfers and collects tax revenues
• If the budget is balanced...
- Tax revenue = Government spending + transfer payment
- Budget balance (BB) = Tax revenue - G - Transfers
- If BB is > 0, there is a surplus and government is saving money
- If BB is < 0, there is a deficit and the government is borrowing money.
THE FINANCIAL SYSTEM
• Financial markets is where households invest their current savings and their current savings and their accumulated savings (WEALTH) by purchasing financial assets
• FINANCIAL ASSET
- Paper claim that entitles the buyer to the future income from the seller.
THREE TASKS OF THE FINANCIAL SYSTEM
0. Reducing transaction cost
1. Reducing risk
- Financial Risk
- Diversification
3. Providing Liquidity
- Liquid assets
- Illiquid Assets
WHAT IS MONEY?
• Money
- Something that you can turn into a good or service
• Three roles of money
- Medium of exchange
• Gimmie a dollar for a pack of gum
- Store of value
• Retains its value over short periods of time
- Unit of account
• A way of evaluating the "measurements" of goods and services
MEDIUM OF EXCHANGE
• Your employer exchanges dollars for an hour of your labor
• Your exchange those dollars for a grocers pound of apples
• The grocer exchanges those dollars for an orchards apples crop, and on and on
STORE OF VALUE
• So long as prices are not rapidly increasing, money is a decent way to store value. You can put money under your mattress or in a checking account and still useful, with essentially the same value a week or month later
• If i were the town cheese maker, I must quickly get rid of my cheese because if I wait long, moldy cheese loses value quickly.
UNIT OF ACCOUNT
• Units of currency (Dollars, Euro yen...) Measures the relative worth of goods and services just as inches and meters measure distance
• In the barter system all goods are measured in terms of other goods
• Prices in a barter economy: A Ib of cheese dozen eggs = beer or something
• With money the value of cheese and all other goods and services is measured in terms of a monetary unit.
TYPES OF MONEY
• Commodity money
- Something used as money, normally gold of silver, that has intrinsic value to
others
• Commodity backed money
- Medium of exchange with no intrinsic value guaranteed by a promise that it
could be converted into valuable goods on demand
• Fiat money
- Money whose value derives entirely from its official status as a means of
exchange.
MEASURES THE MONEY SUPPLY
• How much money is out there?
• Two different measures on the amount of money supply. M1 and M2
- M1 = Currency and coin in circulation+checking deposits+Travelers checks
- M2 = M1 + Savings accounts + Short term CD, money market accounts.
Notes 11-1-11
BANKING AND MONEY CREATION AND THE FEDERAL RESERVE
MODULE 25
MONETARY ROLE OF BANKS
• More than half of the M1 is currency
• The rest is in demand deposits
- How do you figure M1
• If a large part of (about half) of the money supply is accounted for by checking deposits into banks, the banks must pay a crucial role in the supply of money in the economy.
M1 = currency + coin + traveler's checks + Checking deposits
WHAT BANKS DO
• Banks offer a safe place for depositors to put money and they offer lending services to borrowers who need money.
• A saver is paid interest on his or her savings, and a borrower is charged interest on his or her borrowing.
• Another way of thinking about it is that banks take liquid assets (Savings) to finance the investment of illiquid assets (Homes and capital equipment).
BANK RUNS
• Depositors put their money in banks to earn interest and to keep it safe. But when the public begins to fear that the bank itself might fold, or if they fear for the stability for the entire financial system, they may want to withdraw their money.
• If everyone goes to the bank to withdraw their deposits, it creates a bank run.
• The bank keeps only a small percentage of the total deposits on reserve, so a bank run can lead to a self-fulfilling prophesy of the bank's failure.
• This can be very damaging to communities and it can spread across the economy
• This is one of the primary reasons for regulating banks.
BANK REGULATIONS
2. Deposit insurance(FDIC)
3. Capital requirements
4. Reserve Requirements
5. Discount window
DEPOSIT INSURANCE
• The US Government created the FEDERAL DEPOSIT INSURANCE Corporation. The FDIC provides DEPOSIT INSURANCE, a guarantee that depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account. Currently the FDIC guarantees the first $250,000 of each account.
CAPITAL REQUIREMENTS
• To reduce the incentive for excessive risk-taking, regulators require that the owners of banks hold substantially more assets then the value of bank deposits
• That way, the bank will still have assets longer than its deposits even if some of its loans go bad, and losses will accrue against the bank owners' assets not the government
• Bank's capital = assets - liabilities
• For example, main Street Bank has capital of $200,000, equal to 9% of the total value of its assets. In proactive, banks' capital is required to equal at least 7% of the value of their assets.
RESERVE REQUIREMENT
• The Federal Reserve establishes the required reserve ratio for banks. This policy insures that the banks will have a certain fraction of all deposits on hand in the even that customers wish to withdraw money.
• In the unites States the required reserve ratio for checkable bank deposits is 10%
THE DISCOUNT WINDOW
• The Federal Reserve stands ready to loan money to banks in an arrangement known as the DISCOUNT WINDOW.
• This helps a bank that finds itself in a short-term punch because many depositors might be withdrawing their cash in a short period of time.
MODULE 26
History and structure of the Federal Reserve System
FEDERAL RESERVE
• The Federal Reserve is a central bank--An institution that oversees and regulates the banking system, and controls the monetary base.
• The creation of the federal Reserve System in 1913 marked the beginning of the modern era of American Banking
• Though banks were federally regulated since 1964, there were still fundamental problems delivering money from large banks in big cities to smaller banks in rural communities. If a rural bank in Indiana was low on reserves, the bank may fail before money could be delivered to the bank. This bank failure could spark run on several banks, devastating local communities.
END OF THE NATIONAL BANKING SYSTEM
• In 1913 the national banking system was eliminated and the Federal Reserve System was created as a way to compel all deposit--taking institutions to hold adequate reserves and to open their accounts to inspection of regulators
• The panic of 1907 convinced many that the time for centralized control of bank reserves had come.
• In additions, the Federal Reserve was given the sole right to us sue currency in order to make the money supply sufficiently responsive to satisfy economic conditions around the country.
• The creation of the Fed didn't stop bank runs and didn't stop the Great Depression. A series of economic downturns and damaging bank and instigated new laws from Congress that attempted to stabilize the banking industry and provide safeguards for the public and their deposits.
• However when the Great Depression became a distant became a distant memory and bank runs became much less common, Congress let some of the regulations of the 1930's lapse
• Some of these legal lapses created problems of the 1980s and in 2008.
November 2, 2011 Modules 28 & 29
MODULE 28 and 29 Notes
OPPORTUNITY COST OF HOLDING MONEY
• What is the O.C of holding money?
- You gain the convenience of being able to spend it easily
- You lose the ability to earn interest on it.
• The higher the short-term interest rate, the higher the opportunity cost of holding money. The lower the short-term interest, the lower the opportunity cost.
• Since we Demand money to make purchases in the short term, the opportunity cost of holding money is the short-term interest rate.
• We assume that in a short period of time, there will be virtually no inflation, so the nominal interest rate is equal to the real interest rate
• When the interest rate rises, the opportunity cost of holding money rises, so the quantity of money demanded will fall
• The money demand curve is downward sloping.
SHIFTS OF THE MONEY DEMAND CURVE
• Just like there are external factors that shift the demand curve for pomegranates, there are external factors that shift the demand for money
• The most important factors causing the money demand curve to shift are changes in the aggregate demand curve to shift are changes in REAL GDP, changes in Banking Technology and banking institutions.
CHANGES IN AGGREGATE PRICE LEVEL
• All else equal, higher prices will increase the demand for money (A rightward shift in the MD curve) and lower prices reduces the demand for money (A leftward shift of the MD Curve)
• We can actually be more specific than this: other things equal, the demand for money is proportional to the price level. That is, if the aggregate price level rises by 20% the quantity of money demanded at any given interest rate also rises by 20%
• Why? Because if the price of everything rise by 20% that it takes 20% more money to buy the same basket of goods and serves.
CHANGES IN REAL GDP
• As the economy gets stronger, real incomes and Real GDP Rise.
• The larger the quantity of goods and services we buy, the larger the quantity of money we will want to hold at any given interest rate.
• So an increase in real GDP--The total quantity of goods and services produced and sold in the economy--shifts the money demand curve downward
CHANGES IN TECHNOLOGY
• Changes in technology can affect the demand for money.
• In general, advances in information technology have tended to reduce the demand for money by making it easier for the public to make purchases without holding significant sums for money.
• If there was an ATM machine on every corner in every retail store and restaurant, there would be little need to hold money in your pocket.
CHANGES IN INSTITUTIONS
• Regulations that make it more attractive to keep money in banks will reduce the demand for money.
• If a nation's political and banking systems became dangerously unstable, it might increase the demand for money because people would rather hoard their money than store it in institutions that might be falling apart.
• The model of liquidity preference describes equilibrium in the money market. This model is a good foundation for learning a similar market in loanable funds that is also useful in describing how interest rates are determined and the impact of monetary policy
MODULE 29
MARKET FOR LOANABLE FUNDS
• It is through the financial markets by which the funds of the savers are borrowed by investors
• Economists use the model of a market for loanable funds to explain these interactions and determine the equilibrium real interest rate.
EQUILIBRIUM INTEREST RATE
• Economists work with a simplified model in which there is only one market where there is just one market which brings together those who want to lend money (savers) and those who want to borrow (Firms with investment spending projects)
• The hypothetical market is known as the loanable funds market. The price that is determined in the loanable funds market is the interest rate, denoted by 'r'.
OPPORTUNITY COST OF HOLDING MONEY
• What is the O.C of holding money?
- You gain the convenience of being able to spend it easily
- You lose the ability to earn interest on it.
• The higher the short-term interest rate, the higher the opportunity cost of holding money. The lower the short-term interest, the lower the opportunity cost.
• Since we Demand money to make purchases in the short term, the opportunity cost of holding money is the short-term interest rate.
• We assume that in a short period of time, there will be virtually no inflation, so the nominal interest rate is equal to the real interest rate
• When the interest rate rises, the opportunity cost of holding money rises, so the quantity of money demanded will fall
• The money demand curve is downward sloping.
SHIFTS OF THE MONEY DEMAND CURVE
• Just like there are external factors that shift the demand curve for pomegranates, there are external factors that shift the demand for money
• The most important factors causing the money demand curve to shift are changes in the aggregate demand curve to shift are changes in REAL GDP, changes in Banking Technology and banking institutions.
CHANGES IN AGGREGATE PRICE LEVEL
• All else equal, higher prices will increase the demand for money (A rightward shift in the MD curve) and lower prices reduces the demand for money (A leftward shift of the MD Curve)
• We can actually be more specific than this: other things equal, the demand for money is proportional to the price level. That is, if the aggregate price level rises by 20% the quantity of money demanded at any given interest rate also rises by 20%
• Why? Because if the price of everything rise by 20% that it takes 20% more money to buy the same basket of goods and serves.
CHANGES IN REAL GDP
• As the economy gets stronger, real incomes and Real GDP Rise.
• The larger the quantity of goods and services we buy, the larger the quantity of money we will want to hold at any given interest rate.
• So an increase in real GDP--The total quantity of goods and services produced and sold in the economy--shifts the money demand curve downward
CHANGES IN TECHNOLOGY
• Changes in technology can affect the demand for money.
• In general, advances in information technology have tended to reduce the demand for money by making it easier for the public to make purchases without holding significant sums for money.
• If there was an ATM machine on every corner in every retail store and restaurant, there would be little need to hold money in your pocket.
CHANGES IN INSTITUTIONS
• Regulations that make it more attractive to keep money in banks will reduce the demand for money.
• If a nation's political and banking systems became dangerously unstable, it might increase the demand for money because people would rather hoard their money than store it in institutions that might be falling apart.
• The model of liquidity preference describes equilibrium in the money market. This model is a good foundation for learning a similar market in loanable funds that is also useful in describing how interest rates are determined and the impact of monetary policy
MODULE 29
MARKET FOR LOANABLE FUNDS
• It is through the financial markets by which the funds of the savers are borrowed by investors
• Economists use the model of a market for loanable funds to explain these interactions and determine the equilibrium real interest rate.
EQUILIBRIUM INTEREST RATE
• Economists work with a simplified model in which there is only one market where there is just one market which brings together those who want to lend money (savers) and those who want to borrow (Firms with investment spending projects)
• The hypothetical market is known as the loanable funds market. The price that is determined in the loanable funds market is the interest rate, denoted by 'r'.
Monday, October 31, 2011
Module 22-24 Notes
MODULE 22-24 Notes
OBJECTIVES
• You will learn the following
- Relationship between savings and investment spending
- Purpose of the four principal types of financial assets
•Stocks
•Bonds
•Loans
•Bank deposits
- How investors achieve diversity
MATCHING UP SAVINGS AND INVESTMENTS
• Physical capital
- Factories, shopping malls, large pieces of machinery, etc.
• Usually paid for by borrowing
• Where does this funding come from?
• Savings = Spending
- Savings - investments spending identity
• In a simple economy (No government intervention)
- All money spent by a person or firm ends up pockets of others as income
• Total income = Total spending = C + I
• So... C + S = C + I
Lets add Government activity
• The government spends on goods services, and transfers and collects tax revenues
• If the budget is balanced...
- Tax revenue = Government spending + transfer payment
- Budget balance (BB) = Tax revenue - G - Transfers
- If BB is > 0, there is a surplus and government is saving money
- If BB is < 0, there is a deficit and the government is borrowing money.
THE FINANCIAL SYSTEM
• Financial markets is where households invest their current savings and their current savings and their accumulated savings (WEALTH) by purchasing financial assets
• FINANCIAL ASSET
- Paper claim that entitles the buyer to the future income from the seller.
THREE TASKS OF THE FINANCIAL SYSTEM
0. Reducing transaction cost
1. Reducing risk
- Financial Risk
- Diversification
3. Providing Liquidity
- Liquid assets
- Illiquid Assets
WHAT IS MONEY?
• Money
- Something that you can turn into a good or service
• Three roles of money
- Medium of exchange
• Gimmie a dollar for a pack of gum
- Store of value
• Retains its value over short periods of time
- Unit of account
• A way of evaluating the "measurements" of goods and services
MEDIUM OF EXCHANGE
• Your employer exchanges dollars for an hour of your labor
• Your exchange those dollars for a grocers pound of apples
• The grocer exchanges those dollars for an orchards apples crop, and on and on
STORE OF VALUE
• So long as prices are not rapidly increasing, money is a decent way to store value. You can put money under your mattress or in a checking account and still useful, with essentially the same value a week or month later
• If i were the town cheese maker, I must quickly get rid of my cheese because if I wait long, moldy cheese loses value quickly.
UNIT OF ACCOUNT
• Units of currency (Dollars, Euro yen...) Measures the relative worth of goods and services just as inches and meters measure distance
• In the barter system all goods are measured in terms of other goods
• Prices in a barter economy: A Ib of cheese dozen eggs = beer or something
• With money the value of cheese and all other goods and services is measured in terms of a monetary unit.
TYPES OF MONEY
• Commodity money
- Something used as money, normally gold of silver, that has intrinsic value to
others
• Commodity backed money
- Medium of exchange with no intrinsic value guaranteed by a promise that it
could be converted into valuable goods on demand
• Fiat money
- Money whose value derives entirely from its official status as a means of
exchange.
MEASURES THE MONEY SUPPLY
• How much money is out there?
• Two different measures on the amount of money supply. M1 and M2
- M1 = Currency and coin in circulation+checking deposits+Travelers checks
- M2 = M1 + Savings accounts + Short term CD, money market accounts.
OBJECTIVES
• You will learn the following
- Relationship between savings and investment spending
- Purpose of the four principal types of financial assets
•Stocks
•Bonds
•Loans
•Bank deposits
- How investors achieve diversity
MATCHING UP SAVINGS AND INVESTMENTS
• Physical capital
- Factories, shopping malls, large pieces of machinery, etc.
• Usually paid for by borrowing
• Where does this funding come from?
• Savings = Spending
- Savings - investments spending identity
• In a simple economy (No government intervention)
- All money spent by a person or firm ends up pockets of others as income
• Total income = Total spending = C + I
• So... C + S = C + I
Lets add Government activity
• The government spends on goods services, and transfers and collects tax revenues
• If the budget is balanced...
- Tax revenue = Government spending + transfer payment
- Budget balance (BB) = Tax revenue - G - Transfers
- If BB is > 0, there is a surplus and government is saving money
- If BB is < 0, there is a deficit and the government is borrowing money.
THE FINANCIAL SYSTEM
• Financial markets is where households invest their current savings and their current savings and their accumulated savings (WEALTH) by purchasing financial assets
• FINANCIAL ASSET
- Paper claim that entitles the buyer to the future income from the seller.
THREE TASKS OF THE FINANCIAL SYSTEM
0. Reducing transaction cost
1. Reducing risk
- Financial Risk
- Diversification
3. Providing Liquidity
- Liquid assets
- Illiquid Assets
WHAT IS MONEY?
• Money
- Something that you can turn into a good or service
• Three roles of money
- Medium of exchange
• Gimmie a dollar for a pack of gum
- Store of value
• Retains its value over short periods of time
- Unit of account
• A way of evaluating the "measurements" of goods and services
MEDIUM OF EXCHANGE
• Your employer exchanges dollars for an hour of your labor
• Your exchange those dollars for a grocers pound of apples
• The grocer exchanges those dollars for an orchards apples crop, and on and on
STORE OF VALUE
• So long as prices are not rapidly increasing, money is a decent way to store value. You can put money under your mattress or in a checking account and still useful, with essentially the same value a week or month later
• If i were the town cheese maker, I must quickly get rid of my cheese because if I wait long, moldy cheese loses value quickly.
UNIT OF ACCOUNT
• Units of currency (Dollars, Euro yen...) Measures the relative worth of goods and services just as inches and meters measure distance
• In the barter system all goods are measured in terms of other goods
• Prices in a barter economy: A Ib of cheese dozen eggs = beer or something
• With money the value of cheese and all other goods and services is measured in terms of a monetary unit.
TYPES OF MONEY
• Commodity money
- Something used as money, normally gold of silver, that has intrinsic value to
others
• Commodity backed money
- Medium of exchange with no intrinsic value guaranteed by a promise that it
could be converted into valuable goods on demand
• Fiat money
- Money whose value derives entirely from its official status as a means of
exchange.
MEASURES THE MONEY SUPPLY
• How much money is out there?
• Two different measures on the amount of money supply. M1 and M2
- M1 = Currency and coin in circulation+checking deposits+Travelers checks
- M2 = M1 + Savings accounts + Short term CD, money market accounts.
Thursday, October 20, 2011
Review Videos
Understanding the Current Account
Understanding the Capital Account
Consumer Price Index
Business Cycle Rap
Understanding the Capital Account
Consumer Price Index
Business Cycle Rap
Wednesday, October 19, 2011
Exam Review
I know that there are more than a few of you will not be in class on Thursday. Here's the review for Friday's Exam.
Unit 3 Exam Review Sheet
If you master the following topics, you should have no trouble with Friday’s exam.
• Know what two subaccounts compose the Balance of Payments.
• Know the difference between the two subaccounts and examples that fall into each.
• Know what causes a currency to appreciate and to depreciate
• Know the factors that impact the CPI and how inflation is measured and how it is used to compare economic data from year to year.
• Be able to identify the different components of the business cycle.
• Know how to spot inflation on a graph and to be able to explain the characteristics of an economy during inflation.
• Know who counts in the labor force and the different types of unemployment.
• Know the different phases of the business cycle and the characteristics of each phase.
• Know the steps to go through to exchange one type of currency for another.
• What are the factors that shift the FOREX market and the factors that impact the supply and demand of currencies in the FOREX market-PRACTICE THE SCENARIOS FROM YOUR PACKET
Unit 3 Exam Review Sheet
If you master the following topics, you should have no trouble with Friday’s exam.
• Know what two subaccounts compose the Balance of Payments.
• Know the difference between the two subaccounts and examples that fall into each.
• Know what causes a currency to appreciate and to depreciate
• Know the factors that impact the CPI and how inflation is measured and how it is used to compare economic data from year to year.
• Be able to identify the different components of the business cycle.
• Know how to spot inflation on a graph and to be able to explain the characteristics of an economy during inflation.
• Know who counts in the labor force and the different types of unemployment.
• Know the different phases of the business cycle and the characteristics of each phase.
• Know the steps to go through to exchange one type of currency for another.
• What are the factors that shift the FOREX market and the factors that impact the supply and demand of currencies in the FOREX market-PRACTICE THE SCENARIOS FROM YOUR PACKET
Tuesday, October 18, 2011
Balance of Trade & Balance of Payments
BALANCE OF TRADE VS BALANCE OF PAYMENTS
• Net exports = Exports - imports
• Trade surplus = Exporting more than is imported.
• Trade deficit = Exporting less than is imported.
BALANCE OF PAYMENTS (BOP)
• Balance of trade includes only goods and services but balance of payments considers all international transactions
• Balance of payments is a broader measure of international trade.
Details
• The BOP summary is within a given year.
• Prepared in the domestic country's currency
• The balance of payments is made up of two accounts. The CURRENT ACCOUNT and the CAPITAL ACCOUNT.
Current account
• Made up of three parts
24. Trade goods and services
• Net exports- difference between a nation's exports of goods and services and
its imports of goods and services.
2. Investment income - Income from the factors of productions including payments
made to foreign investors
• Money earned by a Japanese car company in the US
3. Net Transfers - Money flows from the private or public sectors
• Donations, aids, and grants
CAPITAL ACCOUNT
The capital account measures the purchase and sales of financial assets abroad.
Purchases of things that stay in the foreign country
Examples:
- US company buys hotel in Russia
- A korean company sells a factory in Ohio
- Australian company buys the Temple Mall.
PRACTICE
25. U.S income increases relative to other countries. Does the balance of payments move towards a deficit or a surplus?
- Imports are cheaper
- Americans import more
- Net exports
- The current account balance decreases and moves toward a DEFICIT
FOREIGN EXCHANGE (FOREX)
Exchange rate = Relative price of currencies
EXPORTS AND IMPORTS
26. US sells cars to mexico
27. Mexico buys tractors from Canada
28. Canada sells syrup to the US
29. Japan buys fireworks from mexico
• For all these transactions, there are different national currencies
• Each country must be paid in their own currency
• The buyer (Importer) must exchange their currency for that of the sellers (exporter)
The turnover in forex markets is almost $4 trillion (USD) a day
EXCHANGE RATES
• In the FOREX market we only look at two countries currencies at a time
• Ex. US Dollars and british pounds
• We examine the price of one currency in terms of the other currency
• The Exchange Rate depends on which currency you are converting.
• The price of one US Dollar in terms of the pound is
- 1 Dollar = £1/$2 =£.5
What happens if you need more dollar to buy one pound (the price for a dollar pound to increases?)
• The US Dollar DEPRECIATES relative to the pound
Depreciation:
- The loss of value of a country's currency with respect to a foreign currency
- More units of Dollars are needed to buy a single unit of the other currency
- At this point the dollar is said to be weaker.
What happens if you need less dollars to buy one pound?
• The US Dollar APPRECIATES relative to the pound
Appreciation:
- The increase of value of a country's currency with respect tot the foreign currency
- Less units of dollars are needed to buy a single unit of the other currency
- The dollar is said to be "stronger"
FOREX supply and demand
Imagine a huge table with all the different currencies from another country
This is the foreign exchange market!
• just like the product market, you can't take things without paying
• If you demand one currency you must supply your currency.
FOREX SHIFTERS
30. Changes in Tastes
EX. British Tourists flock to the U>S
- Demand for U.S dollars increases (Shifts Right)
- Supply of British pounds increases (Shifts right)
Pound depreciates
Dollar appreciates
2. Changes in relative incomes
Ex. US growth increases US incomes
- US buys more imports
- US demand for pounds increases
- Supply for US dollars increases.
3. Changes in relative price level
Ex. US Increase relative to Britain
- US demand for cheaper imports increases
- US demand for pounds increases
Supply for US dollars increases
Pound Appreciates
Dollar Depreciates
4. Changes in relative interest rates
EX US has higher interest rate than Britain
- British people want to invest in US
- Capital flow increases towards the US
- British Demand for US Dollars increases
- British supply more pounds
Pound depreciates
Dollar appreciates
• Net exports = Exports - imports
• Trade surplus = Exporting more than is imported.
• Trade deficit = Exporting less than is imported.
BALANCE OF PAYMENTS (BOP)
• Balance of trade includes only goods and services but balance of payments considers all international transactions
• Balance of payments is a broader measure of international trade.
Details
• The BOP summary is within a given year.
• Prepared in the domestic country's currency
• The balance of payments is made up of two accounts. The CURRENT ACCOUNT and the CAPITAL ACCOUNT.
Current account
• Made up of three parts
24. Trade goods and services
• Net exports- difference between a nation's exports of goods and services and
its imports of goods and services.
2. Investment income - Income from the factors of productions including payments
made to foreign investors
• Money earned by a Japanese car company in the US
3. Net Transfers - Money flows from the private or public sectors
• Donations, aids, and grants
CAPITAL ACCOUNT
The capital account measures the purchase and sales of financial assets abroad.
Purchases of things that stay in the foreign country
Examples:
- US company buys hotel in Russia
- A korean company sells a factory in Ohio
- Australian company buys the Temple Mall.
PRACTICE
25. U.S income increases relative to other countries. Does the balance of payments move towards a deficit or a surplus?
- Imports are cheaper
- Americans import more
- Net exports
- The current account balance decreases and moves toward a DEFICIT
FOREIGN EXCHANGE (FOREX)
Exchange rate = Relative price of currencies
EXPORTS AND IMPORTS
26. US sells cars to mexico
27. Mexico buys tractors from Canada
28. Canada sells syrup to the US
29. Japan buys fireworks from mexico
• For all these transactions, there are different national currencies
• Each country must be paid in their own currency
• The buyer (Importer) must exchange their currency for that of the sellers (exporter)
The turnover in forex markets is almost $4 trillion (USD) a day
EXCHANGE RATES
• In the FOREX market we only look at two countries currencies at a time
• Ex. US Dollars and british pounds
• We examine the price of one currency in terms of the other currency
• The Exchange Rate depends on which currency you are converting.
• The price of one US Dollar in terms of the pound is
- 1 Dollar = £1/$2 =£.5
What happens if you need more dollar to buy one pound (the price for a dollar pound to increases?)
• The US Dollar DEPRECIATES relative to the pound
Depreciation:
- The loss of value of a country's currency with respect to a foreign currency
- More units of Dollars are needed to buy a single unit of the other currency
- At this point the dollar is said to be weaker.
What happens if you need less dollars to buy one pound?
• The US Dollar APPRECIATES relative to the pound
Appreciation:
- The increase of value of a country's currency with respect tot the foreign currency
- Less units of dollars are needed to buy a single unit of the other currency
- The dollar is said to be "stronger"
FOREX supply and demand
Imagine a huge table with all the different currencies from another country
This is the foreign exchange market!
• just like the product market, you can't take things without paying
• If you demand one currency you must supply your currency.
FOREX SHIFTERS
30. Changes in Tastes
EX. British Tourists flock to the U>S
- Demand for U.S dollars increases (Shifts Right)
- Supply of British pounds increases (Shifts right)
Pound depreciates
Dollar appreciates
2. Changes in relative incomes
Ex. US growth increases US incomes
- US buys more imports
- US demand for pounds increases
- Supply for US dollars increases.
3. Changes in relative price level
Ex. US Increase relative to Britain
- US demand for cheaper imports increases
- US demand for pounds increases
Supply for US dollars increases
Pound Appreciates
Dollar Depreciates
4. Changes in relative interest rates
EX US has higher interest rate than Britain
- British people want to invest in US
- Capital flow increases towards the US
- British Demand for US Dollars increases
- British supply more pounds
Pound depreciates
Dollar appreciates
Tuesday, October 11, 2011
CPI & GDP Deflator
CPI VS GDP DEFLATOR
The GDP Deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
GDP = Nomial GDP X 100
Deflator Real GDP
• An increase in the price of goods produced by government will show up in the GDP Deflator but not the CPI
• The GDP Deflator includes only those goods and services produced domestically. Since imported goods are not part of GDP they do not show up on the GDP deflator.
PROBLEMS OF THE CPI
Substitution biased
• As prices for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
- Result: CPI may be higher than what consumers are really paying.
New Products
• The CPI market basket may not include the newest consumer products.
-Result: CPI measures prices but not the increase in choices
Product Quality
• CPI ignores both improvements and decline in product quality
- RESULT: CPI may suggest that prices stay the same though economic well
being has improved significantly.
THREE CAUSES OF INFLATION
13. If everyone suddenly had a million dollars what would happen?
14. What two things cause prices to increase? Supply and demand
3 causes of inflation
15. The government prints too much money (The Quantity Theory)
• Governments that keep printing money to pay debts endue with hyperinflation
• There are more "rich" people but the same amount of products
• Result: banks refuse to lend and GDP falls
If the real GDP in a year is $400 billion but the amount of money in the economy is only $100 billion, how are we paying for things?
- The velocity of money is the average times a dollar is spent and re-spent in a
year.
• Quantity of money equation
(MONEY SUPPLY)*(VELOCITY) = (PRICE LEVEL)*(QUANTITY OF OUTPUT)
- Notice that P*Y is GDP
Why does printing money lead to inflation?
• Assume the velocity is relatively constant because people's spending habits are not quick to change
• Also assume that output (Y) is not affected by the amount of money because it is based on production, not the value of the stuff produced.
If the government increases the amount of money (M) what will happen to prices (P)
• EX. Assume money supply is $5 and it is being used to by 10 products with a price of $2 each.
• How much is the velocity of money?
• If the velocity and output stay the same, what will happen if the amount of money is increased to $10
- Notice doubling money doubles prices
CAUSES OF INFLATION
2. Demand - pull inflation
• Demand increases but supply stays the same. What is the result?
• A shortage driving prices up
• An over heated economy with excessive spending but the same amount of goods.
3. Cost - Push inflation
• Higher production costs increase prices
• A negative supply shock increases the costs of production and forces producers to
increase prices
- Hurricane Katrina destroyed oil refineries and caused gas prices to go up.
Companies therefore charged more for any good or service requiring gas in the
production.
WAGE PRICE SPIRAL
A Perpetual Process:
16. Workers demand raises
17. Owners increase prices to pay for raises
18. Higher prices cause workers to demand higher raises
19. Owners increase prices to pay for higher raises...
20. ....
21. ....
22. ....
23. ....
24. Stupid unions.
BALANCE OF TRADE VS BALANCE OF PAYMENTS
• Net exports = Exports - imports
• Trade surplus = Exporting more than is imported.
• Trade deficit = Exporting less than is imported.
BALANCE OF PAYMENTS (BOP)
• Balance of trade includes only goods and services but balance of payments considers all international transactions
• Balance of payments is a broader measure of international trade.
Details
• The BOP summary is within a given year.
• Prepared in the domestic country's currency
• The balance of payments is made up of two accounts. The CURRENT ACCOUNT and the CAPITAL ACCOUNT.
Current account
• Made up of three parts
25. Trade goods and services
• Net exports- difference between a nation's exports of goods and services and
its imports of goods and services.
2. Investment income - Income from the factors of productions including payments
made to foreign investors
• Money earned by a Japanese car company in the US
3. Net Transfers - Money flows from the private or public sectors
• Donations, aids, and grants
CAPITAL ACCOUNT
The capital account measures the purchase and sales of financial assets abroad.
Purchases of things that stay in the foreign country
Examples:
- US company buys hotel in Russia
- A korean company sells a factory in Ohio
- Australian company buys the Temple Mall.
The GDP Deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
GDP = Nomial GDP X 100
Deflator Real GDP
• An increase in the price of goods produced by government will show up in the GDP Deflator but not the CPI
• The GDP Deflator includes only those goods and services produced domestically. Since imported goods are not part of GDP they do not show up on the GDP deflator.
PROBLEMS OF THE CPI
Substitution biased
• As prices for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
- Result: CPI may be higher than what consumers are really paying.
New Products
• The CPI market basket may not include the newest consumer products.
-Result: CPI measures prices but not the increase in choices
Product Quality
• CPI ignores both improvements and decline in product quality
- RESULT: CPI may suggest that prices stay the same though economic well
being has improved significantly.
THREE CAUSES OF INFLATION
13. If everyone suddenly had a million dollars what would happen?
14. What two things cause prices to increase? Supply and demand
3 causes of inflation
15. The government prints too much money (The Quantity Theory)
• Governments that keep printing money to pay debts endue with hyperinflation
• There are more "rich" people but the same amount of products
• Result: banks refuse to lend and GDP falls
If the real GDP in a year is $400 billion but the amount of money in the economy is only $100 billion, how are we paying for things?
- The velocity of money is the average times a dollar is spent and re-spent in a
year.
• Quantity of money equation
(MONEY SUPPLY)*(VELOCITY) = (PRICE LEVEL)*(QUANTITY OF OUTPUT)
- Notice that P*Y is GDP
Why does printing money lead to inflation?
• Assume the velocity is relatively constant because people's spending habits are not quick to change
• Also assume that output (Y) is not affected by the amount of money because it is based on production, not the value of the stuff produced.
If the government increases the amount of money (M) what will happen to prices (P)
• EX. Assume money supply is $5 and it is being used to by 10 products with a price of $2 each.
• How much is the velocity of money?
• If the velocity and output stay the same, what will happen if the amount of money is increased to $10
- Notice doubling money doubles prices
CAUSES OF INFLATION
2. Demand - pull inflation
• Demand increases but supply stays the same. What is the result?
• A shortage driving prices up
• An over heated economy with excessive spending but the same amount of goods.
3. Cost - Push inflation
• Higher production costs increase prices
• A negative supply shock increases the costs of production and forces producers to
increase prices
- Hurricane Katrina destroyed oil refineries and caused gas prices to go up.
Companies therefore charged more for any good or service requiring gas in the
production.
WAGE PRICE SPIRAL
A Perpetual Process:
16. Workers demand raises
17. Owners increase prices to pay for raises
18. Higher prices cause workers to demand higher raises
19. Owners increase prices to pay for higher raises...
20. ....
21. ....
22. ....
23. ....
24. Stupid unions.
BALANCE OF TRADE VS BALANCE OF PAYMENTS
• Net exports = Exports - imports
• Trade surplus = Exporting more than is imported.
• Trade deficit = Exporting less than is imported.
BALANCE OF PAYMENTS (BOP)
• Balance of trade includes only goods and services but balance of payments considers all international transactions
• Balance of payments is a broader measure of international trade.
Details
• The BOP summary is within a given year.
• Prepared in the domestic country's currency
• The balance of payments is made up of two accounts. The CURRENT ACCOUNT and the CAPITAL ACCOUNT.
Current account
• Made up of three parts
25. Trade goods and services
• Net exports- difference between a nation's exports of goods and services and
its imports of goods and services.
2. Investment income - Income from the factors of productions including payments
made to foreign investors
• Money earned by a Japanese car company in the US
3. Net Transfers - Money flows from the private or public sectors
• Donations, aids, and grants
CAPITAL ACCOUNT
The capital account measures the purchase and sales of financial assets abroad.
Purchases of things that stay in the foreign country
Examples:
- US company buys hotel in Russia
- A korean company sells a factory in Ohio
- Australian company buys the Temple Mall.
Friday, October 7, 2011
5 Effective Study Habits for AP Students
5. Memorize key facts.
There’s much information that AP classes cover that do not find themselves into the tests. AP tests cover very specific takeaway facts, ones judged by the AP committees to be the most important general facts that students should know and understand from the classes. The best way to figure out what key facts the APs test is to go over practice tests from past years. You will begin to notice trends indicating areas of concentration. Focus on these areas of concentration rather than attempting to know everything. The AP tests not only require analytic thinking, but also strategy on the part of the test taker to sift through the wealth of knowledge to find the most pertinent information.
4. Muscle memory.
It’s important to concentrate during test-taking, but it’s also important to train your body to take tests on auto-pilot to make the critical thinking easier. For instance, the AP tests are timed. You can train your body to instinctively keep track of time by taking timed practice tests, so you memorize approximately how long you should spend on each section. This really works. Have you ever found out that, by waking up at the same time each morning, your body begins to naturally wake up at that time, even without aid from an alarm clock? Your muscles can do the same thing during test-taking. If you take practice tests, your body starts to register what it’s doing. The test itself no longer comes as a surprise. You can significantly raise your score by taking away the novelty value of taking the AP test. By becoming familiar with the tests, and by utilizing muscle memory, you can become a more efficient and effective test-taker.
3. Don’t freak out about what you don’t know.
Freaking out during a test wastes precious time. So don’t freak out. Teach yourself effective stress management techniques. There are three important ones to remember. First, if you don’t know a question, skip it. Stalling will only waste you time and no amount of waiting around will magically send a right answer into your brain if it isn’t already there. Second, use your powers of deduction if you believe that you know the answer. Cross out answers you know are not correct and focus on the ones that you are half and half on. Finally, take your test one question at a time. Think of it as climging a set of stairs. Don’t worry about getting to the top of the staircase; focus on each step along the way.
2. It’s only a test — no one is going to die if you don’t get a 5.
Knowing that the AP test is only a test really helps you put things in perspective. High school students beat themselves up over test scores and stress themselves out until they’re experiencing gray hairs and baldness at the age of 17, and that is definitely not healthy. Really, it’s only a test. And by putting things in perspective, you really will score higher, because you’ll be in a calm and centered state where you can perform better by quelling your negative energy and your stress. Why do you think philosophers like Sun Tzu advised meditation and zen before warfare? Because performance really does increase significantly if you put yourself in a balanced mental state.
1. Test yourself.
Practice practice practice. Take practice tests, take after school classes, quiz yourself with study cards and group study sessions. I know I sound like I’m repeating myself, but you can never get enough practice, which is why testing yourself beforehand is the numer one general study skill that will raise your AP score.
There’s much information that AP classes cover that do not find themselves into the tests. AP tests cover very specific takeaway facts, ones judged by the AP committees to be the most important general facts that students should know and understand from the classes. The best way to figure out what key facts the APs test is to go over practice tests from past years. You will begin to notice trends indicating areas of concentration. Focus on these areas of concentration rather than attempting to know everything. The AP tests not only require analytic thinking, but also strategy on the part of the test taker to sift through the wealth of knowledge to find the most pertinent information.
4. Muscle memory.
It’s important to concentrate during test-taking, but it’s also important to train your body to take tests on auto-pilot to make the critical thinking easier. For instance, the AP tests are timed. You can train your body to instinctively keep track of time by taking timed practice tests, so you memorize approximately how long you should spend on each section. This really works. Have you ever found out that, by waking up at the same time each morning, your body begins to naturally wake up at that time, even without aid from an alarm clock? Your muscles can do the same thing during test-taking. If you take practice tests, your body starts to register what it’s doing. The test itself no longer comes as a surprise. You can significantly raise your score by taking away the novelty value of taking the AP test. By becoming familiar with the tests, and by utilizing muscle memory, you can become a more efficient and effective test-taker.
3. Don’t freak out about what you don’t know.
Freaking out during a test wastes precious time. So don’t freak out. Teach yourself effective stress management techniques. There are three important ones to remember. First, if you don’t know a question, skip it. Stalling will only waste you time and no amount of waiting around will magically send a right answer into your brain if it isn’t already there. Second, use your powers of deduction if you believe that you know the answer. Cross out answers you know are not correct and focus on the ones that you are half and half on. Finally, take your test one question at a time. Think of it as climging a set of stairs. Don’t worry about getting to the top of the staircase; focus on each step along the way.
2. It’s only a test — no one is going to die if you don’t get a 5.
Knowing that the AP test is only a test really helps you put things in perspective. High school students beat themselves up over test scores and stress themselves out until they’re experiencing gray hairs and baldness at the age of 17, and that is definitely not healthy. Really, it’s only a test. And by putting things in perspective, you really will score higher, because you’ll be in a calm and centered state where you can perform better by quelling your negative energy and your stress. Why do you think philosophers like Sun Tzu advised meditation and zen before warfare? Because performance really does increase significantly if you put yourself in a balanced mental state.
1. Test yourself.
Practice practice practice. Take practice tests, take after school classes, quiz yourself with study cards and group study sessions. I know I sound like I’m repeating myself, but you can never get enough practice, which is why testing yourself beforehand is the numer one general study skill that will raise your AP score.
Thursday, October 6, 2011
CPI, Inflation, Unemployment - The Big Picture
THE BIG PICTURE OF MACROECONOMICS
• Can the whole of something be greater than the sum of its parts?
- In macroeconomics, YES
GOVERNMENT INTERVENTION
• Government intervention is necessary-even though it causes inefficiency.
• Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]
ECONOMIC AGGREGATES
• Measures that summarize data across different markets for goods, services, workers, and assets.
• Macroeconomics will focus on aggregates because they represent the big picture.
For all countries there are three major economic goals:
0. Promote economic growth
1. Limit unemployment
2. Keep prices stable (Limit inflation)
How do we know how well the economy is doing?
• National income accounting
- Economists collect statistics on production, income, investment and savings.
The most important measure of growth is GDP
• Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.
- Dollar value-GDP is measured in dollars
- Final goods-GDP does not include the value of intermediate goods.
Intermediate goods are goods used in the production of final goods and
services.
- One year-GDP measures annual economic performance.
WHAT DOES GDP TELL US?
• Just like calculating your own income, GDP measures how well the U.S is doing financially.
• HOW DO WE USE GDP?
1. Compare previous years, (Is there growth?)
2. Compare policy changes (did a new policy work?)
3. Compare to other countries (Are we better off?)
HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?
% Change in GDP = ((year 2 - year1)/Year 1) X 100
Mordor's GDP in 2007 was $4,000
Mordor's GDP in 2008 was $5,000
What is the percent change in GDP?
What is NOT included in GDP?
3. Intermediate goods.
• No multiple counting, only FINAL goods.
- EX. Price of finished car, not the radio, tires...
2. Non-production transactions
• Financial transactions
- EX. Stocks bonds, real estate
• Used goods
- EX. Old cars, used clothes
3. Non market (Illegal) activities
- EX. Illegal drugs, unpaid work.
CALCULATING GDP
Two ways of calculating GDP:
4. Expenditures approach-Add up all the spending on final goods and services in that given year.
5. Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.
Both ways generate the same amount since every dollar spent is a dollar of income.
EXPENDITURES APPROACH
Four components of GDP:
6. Consumer spending
-EX. $6.01 little Caesar's Pizza
2. Investment - When business put money back into their own business
- Machinery or tools
3. Government spending
Ex. Bombs and tanks NOT social security
4. Net exports - Exports (X) – Imports (M)
- EX. Value of 3 Ford Focuses minus to Hondas
GDP = C + I + G + X
NOMINAL GDP - REAL GDP
How can you figure out which is the most popular movie of all time?\
THE PROBLEM WITH GDP
If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?
• Did the country produce 25% more products?
• Something about apples and not increasing production so no.
Reave V.s Nominal GDP
• Nominal GDP
- GDP measured in current prices. It does not account for inflation year to year.
• Real GDP
- Adjusts for inflation and is a better comparison for economic growth.
Real GDP "deflates" nominal GDP by adjusting for inflation in terms of a base year prices.
Does GDP accurately measure standard or living.
• Standard of living (or quality of life) can be measured in part by the economy by how well the economy is doing.
- But it needs to be adjusted to reflect the size of the nation's population
• Real GDP per capita
- Real GDP divided by the total population. It identifies on average how many
products each person makes
• Real GDP per capita is the best way to measure a nation's standard of living.
PRODUCTIVITY (TECHNOLOGY)
7. Technology
8. Economic system
EX. #1: Capitalist countries have historically had more economic growth.
- Capital (Like robots) can produce more products than people
- Counties with more capital, can produce more products than countries without.
3. Capital machinery, and man-made resources, and tools
Ex 1. India has over a billion people but relatively few capital resources and there
fore
4. Human Capital
5. Natural resources
- Syria has a lower because its a big freaking' desert.
BUSINESS CYCLE
The national economy fluctuates resulting in periods of boom and bust.
• A recession is 6 months drop
• A depression is something that lasts longer than that.
Who cares?
• Macroeconomics measures these fluctuations and guides policies to keep economy stable
• The Government has a responsibility to
- Promote long term growth
- Prevent unemployment (resulting from a bust)
- Prevent inflation
• why does the economy fluctuate?
• Retailer and producers send misleading information about their consumer demand
• Advances in technology, productivity or resources
• Outside influences (Wars, supply shocks, panic)
Characteristics of Expansions and Recession
Expansion
• Less unemployment
• Increase in real GDP
• Rapid job growth
• Increasing prices
• Fewer Social problems (Alcoholism, Suicides Theft...)
Recession
• More unemployment
• Decrease in real GDP
• Decreasing prices
• More Social prices (Alcoholism, Suicides)
WHAT IS ECONOMIC GROWTH?
• An increase in REAL GDP over time
• An increase in real GDP per capita over time (Usually used to determine standard of living)
WHY IS ECONOMIC GROWTH THE GOAL OF EVERY SOCIETY?
• Provides better goods and services
• Increases wages and standard of living
• Allows more leisure time
• Economy can better meet wants.
GOAL #2: Limit unemployment
WHAT IS UNEMPLOYMENT?
• The unemployment rate
-The percent of people in the labor force who WANT a JOB but are not working.
(Unemployment rate = #Unemployed/#in labor force X 100)
LABOR FORCE
• Who is in the labor force?
- Anyone above 16 years old.
- Able and willing to work
- Not institutionalized (Jails hospitals
- Not full time student
- Not retired.
THREE TYPES OF UNEMPLOYMENT
9. Frictional unemployment
• "Temporarily Unemployed" or being between jobs
• Individuals are qualified workers with transferable skills but aren't working.
• High school or college graduates looking for jobs
• Individuals that are fired or are looking for another job.
2. Seasonal unemployment
• This is a specific type of frictional unemployment which is due to the time of
year and the nature of the job,
• These jobs will come back but don't go year 'round.
EX. Lifeguards
3. Structural unemployment
• Changes in the structure of the labor force to make some skills obsolete.
• Workers DO NOT have transferable skills and these jobs will never come back.
• Workers must learn new skills to get a job.
• The permanent loss of these jobs is called "creative destruction"
Technological unemployment
• Type of unemployment where automation and machinery replace workers causing unemployment.
• Auto assemblers in Toyota factories that are replaced with robots.
CYCLICAL UNEMPLOYMENT
• Unemployment that results from economic downturns (recessions)
• As demand for a good or service falls, demand for the labors falls and workers are fired.
NATURAL RATE AND FULL EMPLOYMENT
• Two types of the 3 types of unemployment are guaranteed to happen.
- Frictional
- Structural.
• Together they make up the natural rate of unemployment (NRU)
• We are at full employment if we have only the natural rate of unemployment.
• This is the normal amount of unemployment we SHOULD have
- The number of job seekers = the number of job vacancies.
• Full unemployment = No cyclical unemployment
• Economists generally agree that an unemployment rate should be around 4 and 6% which equals full employment
CRITICISMS OF THE UNEMPLOYMENT RATE
What is wrong with the unemployment rate?
• It misdiagnose the actual unemployment rate because of the following.
•Discourages job seekers
- Some people are not longer looking for a job because the have given up.
•Part time workers
- Someone who wants more shifts but can't get them is still considered
employed.
• Race and age inequalities
- Hispanics - 5.6% in january
- Black - 8.9% for january
- Teenagers - 15.3% in January
• Illegal labor
- Many people work under the table.
GOAL #3 LIMIT INFLATION
Country and Time-
Zimbabwe, 2008
Prices rose at 76,000,000,000%
What is inflation?
• Inflation is rising general level of prices.
• Inflation reduces the purchasing power of money.
• Ex. It takes $2 ti buy what is $1 back in 1982.
• When inflation occurs, each dollar of income will buy fewer goods than before.
HOW IS INFLATION MEASURED?
The government tracks the prices of the same goods and services each year.
• This "MARKET BASKET" is made up of about 300 commonly purchased goods
• Inflation Rate % changes in prices in 1 year.
• They also compare changes in prices to a given base year. (Usually 1982)
• Prices of subsequent years are then expressed as a percentage of the base year.
• Ex.
- 2005 inflation rate was 5.4%
- U.S. Prices have increased 98.3% since 1982
- In bolivia the percentage was 50,000 percent
• This is called hyper inflation
INFLATION: GOOD OR BAD?
Helped or hurt by inflation?
10. A man who lent out $500 dollars to a friend in 1960 and is still waiting to get paid back.
11. A tenant who gets charged $850 a month
12. An elderly couple living offa fixed retirement of $2000 a month
Make a T-Chart
Hurt by Inflation Helped by Inflation
Lenders - people who lend money Debters - people who borrow money
People with fixed incomes A business where the price of the product increases faster than price of resources.
Savers
CONSUMER PRICE INDEX
The most commonly used measurement of inflation for consumers
How it works:
• The base year is given an index of 100
• To compare, each year is given the index # as well.
CPI = Price of market basket X 100
Price of market basket in base year
Market Basket Base year 2009 Base Year 2010 Base Year 2011
2009 $40 $100 $80 $40
2010 $50 $125 $100 $50
2011 $100 $250 $200 $100
• 1997 Market basket:
• Movie is $6 and Pizza is $14
- Total: $20
CPI VS GDP DEFLATOR
The GDP Deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
GDP = Nomial GDP X 100
Deflator Real GDP
• An increase in the price of goods produced by government will show up in the GDP Deflator but not the CPI
• The GDP Deflator includes only those goods and services produced domestically. Since imported goods are not part of GDP they do not show up on the GDP deflator.
RPOBLEMS OF THE CPI
Substitution biased
• As prices for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
- Result: CPI may be higher than what consumers are really paying.
New Products
• The CPI market basket may not include the newest consumer products.
-Result: CPI measures prices but n
• Can the whole of something be greater than the sum of its parts?
- In macroeconomics, YES
GOVERNMENT INTERVENTION
• Government intervention is necessary-even though it causes inefficiency.
• Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]
ECONOMIC AGGREGATES
• Measures that summarize data across different markets for goods, services, workers, and assets.
• Macroeconomics will focus on aggregates because they represent the big picture.
For all countries there are three major economic goals:
0. Promote economic growth
1. Limit unemployment
2. Keep prices stable (Limit inflation)
How do we know how well the economy is doing?
• National income accounting
- Economists collect statistics on production, income, investment and savings.
The most important measure of growth is GDP
• Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.
- Dollar value-GDP is measured in dollars
- Final goods-GDP does not include the value of intermediate goods.
Intermediate goods are goods used in the production of final goods and
services.
- One year-GDP measures annual economic performance.
WHAT DOES GDP TELL US?
• Just like calculating your own income, GDP measures how well the U.S is doing financially.
• HOW DO WE USE GDP?
1. Compare previous years, (Is there growth?)
2. Compare policy changes (did a new policy work?)
3. Compare to other countries (Are we better off?)
HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?
% Change in GDP = ((year 2 - year1)/Year 1) X 100
Mordor's GDP in 2007 was $4,000
Mordor's GDP in 2008 was $5,000
What is the percent change in GDP?
What is NOT included in GDP?
3. Intermediate goods.
• No multiple counting, only FINAL goods.
- EX. Price of finished car, not the radio, tires...
2. Non-production transactions
• Financial transactions
- EX. Stocks bonds, real estate
• Used goods
- EX. Old cars, used clothes
3. Non market (Illegal) activities
- EX. Illegal drugs, unpaid work.
CALCULATING GDP
Two ways of calculating GDP:
4. Expenditures approach-Add up all the spending on final goods and services in that given year.
5. Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.
Both ways generate the same amount since every dollar spent is a dollar of income.
EXPENDITURES APPROACH
Four components of GDP:
6. Consumer spending
-EX. $6.01 little Caesar's Pizza
2. Investment - When business put money back into their own business
- Machinery or tools
3. Government spending
Ex. Bombs and tanks NOT social security
4. Net exports - Exports (X) – Imports (M)
- EX. Value of 3 Ford Focuses minus to Hondas
GDP = C + I + G + X
NOMINAL GDP - REAL GDP
How can you figure out which is the most popular movie of all time?\
THE PROBLEM WITH GDP
If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?
• Did the country produce 25% more products?
• Something about apples and not increasing production so no.
Reave V.s Nominal GDP
• Nominal GDP
- GDP measured in current prices. It does not account for inflation year to year.
• Real GDP
- Adjusts for inflation and is a better comparison for economic growth.
Real GDP "deflates" nominal GDP by adjusting for inflation in terms of a base year prices.
Does GDP accurately measure standard or living.
• Standard of living (or quality of life) can be measured in part by the economy by how well the economy is doing.
- But it needs to be adjusted to reflect the size of the nation's population
• Real GDP per capita
- Real GDP divided by the total population. It identifies on average how many
products each person makes
• Real GDP per capita is the best way to measure a nation's standard of living.
PRODUCTIVITY (TECHNOLOGY)
7. Technology
8. Economic system
EX. #1: Capitalist countries have historically had more economic growth.
- Capital (Like robots) can produce more products than people
- Counties with more capital, can produce more products than countries without.
3. Capital machinery, and man-made resources, and tools
Ex 1. India has over a billion people but relatively few capital resources and there
fore
4. Human Capital
5. Natural resources
- Syria has a lower because its a big freaking' desert.
BUSINESS CYCLE
The national economy fluctuates resulting in periods of boom and bust.
• A recession is 6 months drop
• A depression is something that lasts longer than that.
Who cares?
• Macroeconomics measures these fluctuations and guides policies to keep economy stable
• The Government has a responsibility to
- Promote long term growth
- Prevent unemployment (resulting from a bust)
- Prevent inflation
• why does the economy fluctuate?
• Retailer and producers send misleading information about their consumer demand
• Advances in technology, productivity or resources
• Outside influences (Wars, supply shocks, panic)
Characteristics of Expansions and Recession
Expansion
• Less unemployment
• Increase in real GDP
• Rapid job growth
• Increasing prices
• Fewer Social problems (Alcoholism, Suicides Theft...)
Recession
• More unemployment
• Decrease in real GDP
• Decreasing prices
• More Social prices (Alcoholism, Suicides)
WHAT IS ECONOMIC GROWTH?
• An increase in REAL GDP over time
• An increase in real GDP per capita over time (Usually used to determine standard of living)
WHY IS ECONOMIC GROWTH THE GOAL OF EVERY SOCIETY?
• Provides better goods and services
• Increases wages and standard of living
• Allows more leisure time
• Economy can better meet wants.
GOAL #2: Limit unemployment
WHAT IS UNEMPLOYMENT?
• The unemployment rate
-The percent of people in the labor force who WANT a JOB but are not working.
(Unemployment rate = #Unemployed/#in labor force X 100)
LABOR FORCE
• Who is in the labor force?
- Anyone above 16 years old.
- Able and willing to work
- Not institutionalized (Jails hospitals
- Not full time student
- Not retired.
THREE TYPES OF UNEMPLOYMENT
9. Frictional unemployment
• "Temporarily Unemployed" or being between jobs
• Individuals are qualified workers with transferable skills but aren't working.
• High school or college graduates looking for jobs
• Individuals that are fired or are looking for another job.
2. Seasonal unemployment
• This is a specific type of frictional unemployment which is due to the time of
year and the nature of the job,
• These jobs will come back but don't go year 'round.
EX. Lifeguards
3. Structural unemployment
• Changes in the structure of the labor force to make some skills obsolete.
• Workers DO NOT have transferable skills and these jobs will never come back.
• Workers must learn new skills to get a job.
• The permanent loss of these jobs is called "creative destruction"
Technological unemployment
• Type of unemployment where automation and machinery replace workers causing unemployment.
• Auto assemblers in Toyota factories that are replaced with robots.
CYCLICAL UNEMPLOYMENT
• Unemployment that results from economic downturns (recessions)
• As demand for a good or service falls, demand for the labors falls and workers are fired.
NATURAL RATE AND FULL EMPLOYMENT
• Two types of the 3 types of unemployment are guaranteed to happen.
- Frictional
- Structural.
• Together they make up the natural rate of unemployment (NRU)
• We are at full employment if we have only the natural rate of unemployment.
• This is the normal amount of unemployment we SHOULD have
- The number of job seekers = the number of job vacancies.
• Full unemployment = No cyclical unemployment
• Economists generally agree that an unemployment rate should be around 4 and 6% which equals full employment
CRITICISMS OF THE UNEMPLOYMENT RATE
What is wrong with the unemployment rate?
• It misdiagnose the actual unemployment rate because of the following.
•Discourages job seekers
- Some people are not longer looking for a job because the have given up.
•Part time workers
- Someone who wants more shifts but can't get them is still considered
employed.
• Race and age inequalities
- Hispanics - 5.6% in january
- Black - 8.9% for january
- Teenagers - 15.3% in January
• Illegal labor
- Many people work under the table.
GOAL #3 LIMIT INFLATION
Country and Time-
Zimbabwe, 2008
Prices rose at 76,000,000,000%
What is inflation?
• Inflation is rising general level of prices.
• Inflation reduces the purchasing power of money.
• Ex. It takes $2 ti buy what is $1 back in 1982.
• When inflation occurs, each dollar of income will buy fewer goods than before.
HOW IS INFLATION MEASURED?
The government tracks the prices of the same goods and services each year.
• This "MARKET BASKET" is made up of about 300 commonly purchased goods
• Inflation Rate % changes in prices in 1 year.
• They also compare changes in prices to a given base year. (Usually 1982)
• Prices of subsequent years are then expressed as a percentage of the base year.
• Ex.
- 2005 inflation rate was 5.4%
- U.S. Prices have increased 98.3% since 1982
- In bolivia the percentage was 50,000 percent
• This is called hyper inflation
INFLATION: GOOD OR BAD?
Helped or hurt by inflation?
10. A man who lent out $500 dollars to a friend in 1960 and is still waiting to get paid back.
11. A tenant who gets charged $850 a month
12. An elderly couple living offa fixed retirement of $2000 a month
Make a T-Chart
Hurt by Inflation Helped by Inflation
Lenders - people who lend money Debters - people who borrow money
People with fixed incomes A business where the price of the product increases faster than price of resources.
Savers
CONSUMER PRICE INDEX
The most commonly used measurement of inflation for consumers
How it works:
• The base year is given an index of 100
• To compare, each year is given the index # as well.
CPI = Price of market basket X 100
Price of market basket in base year
Market Basket Base year 2009 Base Year 2010 Base Year 2011
2009 $40 $100 $80 $40
2010 $50 $125 $100 $50
2011 $100 $250 $200 $100
• 1997 Market basket:
• Movie is $6 and Pizza is $14
- Total: $20
CPI VS GDP DEFLATOR
The GDP Deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
GDP = Nomial GDP X 100
Deflator Real GDP
• An increase in the price of goods produced by government will show up in the GDP Deflator but not the CPI
• The GDP Deflator includes only those goods and services produced domestically. Since imported goods are not part of GDP they do not show up on the GDP deflator.
RPOBLEMS OF THE CPI
Substitution biased
• As prices for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
- Result: CPI may be higher than what consumers are really paying.
New Products
• The CPI market basket may not include the newest consumer products.
-Result: CPI measures prices but n
Tuesday, October 4, 2011
Friday, September 30, 2011
The Big Picture of Macroeconomics (Day 1)
THE BIG PICTURE OF MACROECONOMICS
•Can the whole of something be greater than the sum of its parts?
- In macroeconomics, YES
GOVERNMENT INTERVENTION
•Government intervention is necessary-even though it causes inefficiency.
•Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]
ECONOMIC AGGREGATES
•Measures that summarize data across different markets for goods, services, workers, and assets.
•Macroeconomics will focus on aggregates because they represent the big picture.
For all countries there are three major economic goals:
1.Promote economic growth
2.Limit unemployment
3.Keep prices stable (Limit inflation)
How do we know how well the economy is doing?
•National income accounting
- Economists collect statistics on production, income, investment and savings.
The most important measure of growth is GDP
•Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.
- Dollar value-GDP is measured in dollars
- Final goods-GDP does not include the value of intermediate goods.
Intermediate goods are goods used in the production of final goods and
services.
- One year-GDP measures annual economic performance.
WHAT DOES GDP TELL US?
•Just like calculating your own income, GDP measures how well the U.S is doing financially.
•HOW DO WE USE GDP?
1. Compare previous years, (Is there growth?)
2. Compare policy changes (did a new policy work?)
3. Compare to other countries (Are we better off?)
HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?
% Change in GDP = ((year 2 - year1)/Year 1) X 100
Mordor's GDP in 2007 was $4,000
Mordor's GDP in 2008 was $5,000
What is the percent change in GDP?
What is NOT included in GDP?
1.Intermediate goods.
• No multiple counting, only FINAL goods.
- EX. Price of finished car, not the radio, tires...
2. Non-production transactions
• Financial transactions
- EX. Stocks bonds, real estate
• Used goods
- EX. Old cars, used clothes
3. Non market (Illegal) activities
- EX. Illegal drugs, unpaid work.
CALCULATING GDP
Two ways of calculating GDP:
1.Expenditures approach-Add up all the spending on final goods and services in that given year.
2.Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.
Both ways generate the same amount since every dollar spent is a dollar of income.
EXPENDITURES APPROACH
Four components of GDP:
1.Consumer spending
-EX. $6.01 little Ceasar's Pizza
2. Investment - When business put money back into their own business
- Machinery or tools
3. Governement spending
Ex. Bombs and tanks NOT social security
4. Net exports - Exports (X) – Imports (M)
- EX. Value of 3 Ford Focuses minus to Hondas
GDP = C + I + G + X
NOMINAL GDP - REAL GDP
How can you figure out which is the most popular movie of all time?\
THE PROBLEM WITH GDP
If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?
•Did the country produce 25% more products?
•Something about apples and not increasing production so no.
Real GDP vs. Nominal GDP
•Nominal GDP
- GDP measured in current prices. It does not account for inflation year to year.
•Real GDP
- Adjusts for inflation and is a better comparison for economic growth.
•Can the whole of something be greater than the sum of its parts?
- In macroeconomics, YES
GOVERNMENT INTERVENTION
•Government intervention is necessary-even though it causes inefficiency.
•Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]
ECONOMIC AGGREGATES
•Measures that summarize data across different markets for goods, services, workers, and assets.
•Macroeconomics will focus on aggregates because they represent the big picture.
For all countries there are three major economic goals:
1.Promote economic growth
2.Limit unemployment
3.Keep prices stable (Limit inflation)
How do we know how well the economy is doing?
•National income accounting
- Economists collect statistics on production, income, investment and savings.
The most important measure of growth is GDP
•Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.
- Dollar value-GDP is measured in dollars
- Final goods-GDP does not include the value of intermediate goods.
Intermediate goods are goods used in the production of final goods and
services.
- One year-GDP measures annual economic performance.
WHAT DOES GDP TELL US?
•Just like calculating your own income, GDP measures how well the U.S is doing financially.
•HOW DO WE USE GDP?
1. Compare previous years, (Is there growth?)
2. Compare policy changes (did a new policy work?)
3. Compare to other countries (Are we better off?)
HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?
% Change in GDP = ((year 2 - year1)/Year 1) X 100
Mordor's GDP in 2007 was $4,000
Mordor's GDP in 2008 was $5,000
What is the percent change in GDP?
What is NOT included in GDP?
1.Intermediate goods.
• No multiple counting, only FINAL goods.
- EX. Price of finished car, not the radio, tires...
2. Non-production transactions
• Financial transactions
- EX. Stocks bonds, real estate
• Used goods
- EX. Old cars, used clothes
3. Non market (Illegal) activities
- EX. Illegal drugs, unpaid work.
CALCULATING GDP
Two ways of calculating GDP:
1.Expenditures approach-Add up all the spending on final goods and services in that given year.
2.Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.
Both ways generate the same amount since every dollar spent is a dollar of income.
EXPENDITURES APPROACH
Four components of GDP:
1.Consumer spending
-EX. $6.01 little Ceasar's Pizza
2. Investment - When business put money back into their own business
- Machinery or tools
3. Governement spending
Ex. Bombs and tanks NOT social security
4. Net exports - Exports (X) – Imports (M)
- EX. Value of 3 Ford Focuses minus to Hondas
GDP = C + I + G + X
NOMINAL GDP - REAL GDP
How can you figure out which is the most popular movie of all time?\
THE PROBLEM WITH GDP
If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?
•Did the country produce 25% more products?
•Something about apples and not increasing production so no.
Real GDP vs. Nominal GDP
•Nominal GDP
- GDP measured in current prices. It does not account for inflation year to year.
•Real GDP
- Adjusts for inflation and is a better comparison for economic growth.
Friday, September 23, 2011
Thursday, September 22, 2011
Elasticity Notes (9/15/2011)
Elasticity Fall 2011 AP Macroeconomics
Elasticity Defined
a measure of responsiveness of a dependent variable to an independent variable.
Three kinds:
Elastic Demand
Inelastic Demand
Unit Elastic Demand
Elasticity
Demand Elasticity
Demand Elasticity
Demand Elasticity
Expenditures
Payment of cash or cash-equivalent for goods or services
Total Expenditures
is a measure of the money customers are willing to spend on a product at a particular price.
Multiply the number demanded by the price to get total expenditures.
Total Expenditures Test: Price * Quantity= Total Expenditures
Determinates of Demand Elasticity
Can the purchase be delayed?
Are adequate substitutes available?
Does the purchase require a large portion of income?
YES = ELASTIC
NO = INELASTIC Best 2/3
Examples of Demand Elasticity
Supply Elasticity
a measure of the way in which the quantity supplied responds to a change in price.
Three Kinds
Elastic Supply
Inelastic Supply
Unit Elastic Supply
Determinates of Supply Elasticity
3 ?s to Remember- Elasticity
1) Can the purchase be delayed?
2) Are adequate substitutions available?
3) Does the purchase require a large portion of income?
Predicting the Market using supply, demand, and elasticity.
Effect of Elasticity on Oil Prices:
In the short-run…
Supply and demand are inelastic. Neither can respond quickly to a change in price.
Prices are volatile.
In the long run…
Supply and demand are elastic. Both can respond slowly to a change in price.
Prices are stable.
Inelastic Demand for illegal drugs
If you reduce the supply of illegal drugs in the US…
Prices will increase, but the quantity sold will not be altered significantly.
If you reduce the demand for illegal drugs in the US…
You more effectively reduce the quantity of drugs sold.
Government Intervention and Teaxes
GOVERNMENT INTERVENTION
WHY WOULD THE GOVERNMENT WANT TO CONTROL PRICES?
• Equity
-An attempt to make things fair or equal.
• Quality of life
• A fair chance for everyone.
SOCIAL GOALS VS. MARKET EFFICIENCY
• People's economic goals often come into conflict with each other. The governmentserves a role of regulating the economy to provide equality and security. The government in effect distorts the Market to achieve social goals
PRICE CEILINGS
• The maximum legal price that can be charged for a product.
• Lead to inefficiency:
-Inefficient allocation to consumers
-Wasted resources
-Inefficiently low quality
-Black markets
PRICE FLOOR
• The lowest legal price that can be paid for a good or service.
• Minimum wage is a price floor.
• Also lead to inefficiency
-Inefficient allocation of sales among sellers
-Wasted resources
-Inefficiently high quality
-Illegal Activity.
THE EFFECTS OF TAXES
• Tax incidence
• Excise tax -specific taxes on specific goods or services
• Excess Burden or "deadweight loss" -cost of the loss in efficiency due to taxhow do taxes cause inefficiently?
TAXES
• Tax revenues exceeded $3.3 Trillion last year
• $11,800 average for each citizen
• Government revenues have grown over 800% since 1940 even when adjusted forinflation.
TAX EXAMPLES
• Federal income tax (0-35%) Progressive tax, largest form of federal income.
• Social Security tax (FICA; 6.2%) Second largest form of federal income
• Medicare tax; (1.45% no cap)
• Corporate income tax (15 -39%) 2nd largest source of federal income
• Excise Tax, 4th largest source of federal income.
• Luxury Tax. Mostly paid on veblin--prices increase with demand.
• Transfer Tax. Tax on an item that changes ownership. 2% of revenue
-Gift tax, taxation on large goods or gifts.
-Estate tax, taxation of a persons assets upon transfer upon their death.
• State and local taxes
-Property taxes
-Permits
-Fees
EFFECTIVE TAXES
• To be effective, they must be:
-Equitable
-Simple
-Efficient
TAXATION PRINCIPLES
• Benefit principle
• Ability to pay principle
SYSTEMS OF TAX INCIDENCE
• Proportional
-Everyone pays the same percentage --flat
• Progressive
-Pay more as you increase your income
• Regressive
-Higher rate of taxation the lower you income you make.
Wednesday, September 14, 2011
Supply & Demand Notes (Alec Soard)
SUPPLY AND DEMAND
DEMAND
•The desire, ability and willingness to buy a product.
•All three must be present.
Demand curve
Individuals demand
Market Demand Curve
Individual + all others in market's demand.
LAW OF DEMAND
As price goes up - quantity goes down.
Quantity demanded of a good or service varies inversely with its price.
•Utility- usefulness or satisfaction a person derives from a product.
•Do you buy things that have no use or provide no satisfaction.
MARGINAL UTILITY
•The extra benefit or usefulness a person will get form acquiring one more unit of a product.
•DIMINISHING MARGINAL UTILITY UTILITY: States that the extra satisfaction we get from using additional quantities of a product will diminish as more are added. This explains the downward slope of the demand curve. Larry will not pay as much for three CDs as he will for one.
CHANGES IN QUANTITY DEMANDED
•is a response to a change in price.
CHANGE IN DEMAND
•Means people are now willing to buy different amount of something without a change in price.
DEFINITION OF SUPPLY
•The amount of a product that will be offered for sale at all possible prices.
•Suppliers will normally offer more of an item at high prices and less at lower prices.
CHANGES IN QUANTITY SUPPLIED
•Response to change in price.
•Increase in quantity supplied when prices increase and show a decrease in quantity supply when prices decrease.
•A change in supply curves when suppliers offer different amounts of products for sale at all possible prices.
PRICE
•Monetary value of a product established by supply and demand.
•Link between producers and consumers to determine the three questions of what to produce, how to produce and who is it for.
•Signal to make economic decisions.
•"If you're going to do something dumb, be smart about."
•Prices do not favor sellers or buyers.
•Prices are the result of competition and represent a compromise that both sides can live with.
•Prices are also flexible. capable of adjusting to unseen events and can accommodate change.
•Prices are free...
•Prices are familiar, they are easy to understand.
•Allocation without prices is rationing.
•Rationing is a system where the government decides everyone's fair share.
•Rationing isn't fair.
COMBINING SUPPLY AND DEMAND TO EQUILIBRIUM
•Situation in which the supply of goods and services is equal to the quantity demanded.
•Where the two curves intersect is your market equilibrium.
DEMAND
•The desire, ability and willingness to buy a product.
•All three must be present.
Demand curve
Individuals demand
Market Demand Curve
Individual + all others in market's demand.
LAW OF DEMAND
As price goes up - quantity goes down.
Quantity demanded of a good or service varies inversely with its price.
•Utility- usefulness or satisfaction a person derives from a product.
•Do you buy things that have no use or provide no satisfaction.
MARGINAL UTILITY
•The extra benefit or usefulness a person will get form acquiring one more unit of a product.
•DIMINISHING MARGINAL UTILITY UTILITY: States that the extra satisfaction we get from using additional quantities of a product will diminish as more are added. This explains the downward slope of the demand curve. Larry will not pay as much for three CDs as he will for one.
CHANGES IN QUANTITY DEMANDED
•is a response to a change in price.
CHANGE IN DEMAND
•Means people are now willing to buy different amount of something without a change in price.
DEFINITION OF SUPPLY
•The amount of a product that will be offered for sale at all possible prices.
•Suppliers will normally offer more of an item at high prices and less at lower prices.
CHANGES IN QUANTITY SUPPLIED
•Response to change in price.
•Increase in quantity supplied when prices increase and show a decrease in quantity supply when prices decrease.
•A change in supply curves when suppliers offer different amounts of products for sale at all possible prices.
PRICE
•Monetary value of a product established by supply and demand.
•Link between producers and consumers to determine the three questions of what to produce, how to produce and who is it for.
•Signal to make economic decisions.
•"If you're going to do something dumb, be smart about."
•Prices do not favor sellers or buyers.
•Prices are the result of competition and represent a compromise that both sides can live with.
•Prices are also flexible. capable of adjusting to unseen events and can accommodate change.
•Prices are free...
•Prices are familiar, they are easy to understand.
•Allocation without prices is rationing.
•Rationing is a system where the government decides everyone's fair share.
•Rationing isn't fair.
COMBINING SUPPLY AND DEMAND TO EQUILIBRIUM
•Situation in which the supply of goods and services is equal to the quantity demanded.
•Where the two curves intersect is your market equilibrium.
Tuesday, September 13, 2011
Supply and Demand Powerpoint on Google Docs
https://docs.google.com/present/edit?id=0AbxQN7GyomHPZGNzdHpkY3FfNjlyNzU3Nzlmdw&hl=en_US
Click or copy & Paste the link above to see today's powerpoint in case you missed anything.
Click or copy & Paste the link above to see today's powerpoint in case you missed anything.
Monday, September 12, 2011
9/11: A Day That Changed The World
Here's a link to the rest of the video we watched about Mayor Giuliani, President Bush and his cabinet members' first-person accounts of 9/11. It's a free download.
http://itunes.apple.com/us/tv-season/9-11-day-that-changed-the-world/id458405290?i=460003910
http://itunes.apple.com/us/tv-season/9-11-day-that-changed-the-world/id458405290?i=460003910
Friday, September 9, 2011
Business Organization Notes (From Alec Soard)
BUSINESS ORGANIZATIONS
TYPES OF BUSINESSES
0. Sole proprietorship
1. Partnerships
2. Corporations
3. Non-profit
SOLE PROPRIETORSHIPS
•When only one person owns a business
•Advantages
* Easy to start and manage
*No profit sharing
*Tax benefits
•Disadvantages
*Liability, hard to raise money, experience
PARTNERSHIPS
• A business jointly owned by multiple people
• Two kinds of partnerships
•General partnerships
* All partners are responsible for the management and financial obligations for
the business
•limited partnerships
* At least one partner is not active in the daily running of the business
• Advantages
* Easy to start and manage
* More stable-better able to attract talented and easier to gain financing
• Disadvantages
* Liability-each parter is fully responsible for the other
* Potential for conflict
* Lifespan of the business
CORPORATIONS
• Form of a business organization recognized by law as a separate legal entity and has
all the rights and responsibilities of an individual
•
Buy and sell property, sue and be sued
• Have to apply for a charter. Charters contain name and address of company purpose
of business and number of shares to be sold
STOCKS
• Common stock
- Represents basic ownership of a corporation
- You get on vote for each share they own
- Vote is used to elect the board of directors
* Board of directors are who control the policies and goals of a corporation
* They hire the management that runs the company
- Common stock doesn't pay as much in the way of dividends by has potential for large
profit for yourself.
• Preferred stock
- Non-voting ownership of a corporation
- No say in board of directors
- You are paid dividends before the common stock holders
- Usually pays regular guaranteed dividends
CORPORATE ADVANTAGES
• Ease of raising financial capital
- Need more money? Sell more stock or corporate bonds
• Professionalism
- Board of Directors will hire experienced people to run the company
• Limited liability
- As an investor, you are not liability for a company's actions
• Can buy or sell your stocks as you please
CORPORATE DISADVANTAGES
• Difficult and expensive to apply and obtain a charter
- Court fees, lawyers etc.
• Control
- Shareholders have little input over the operations of the company
• Double taxation
- Corp is taxed on its earnings and stockholders pay taxes on dividends
• Highly regulated by government
NON-PROFIT ORGANIZATIONS
• Operate in a business-like manner to promote interests of its members
• Operate similar to corporations:
- Have a charter and Board of Directors
- Don't issue stock or pay dividends
- Don't pay taxes
• Examples
- Churches, Schools, Co-ops
COOPERATIVES
• Consumer Cooperative
- People band together to purchase items in bulk to reduce the price
• Service Cooperative
- People band together to provide a service at a lower cost
• Producer Cooperative
- People band together to promote their products at a lower price.
TYPES OF BUSINESSES
0. Sole proprietorship
1. Partnerships
2. Corporations
3. Non-profit
SOLE PROPRIETORSHIPS
•When only one person owns a business
•Advantages
* Easy to start and manage
*No profit sharing
*Tax benefits
•Disadvantages
*Liability, hard to raise money, experience
PARTNERSHIPS
• A business jointly owned by multiple people
• Two kinds of partnerships
•General partnerships
* All partners are responsible for the management and financial obligations for
the business
•limited partnerships
* At least one partner is not active in the daily running of the business
• Advantages
* Easy to start and manage
* More stable-better able to attract talented and easier to gain financing
• Disadvantages
* Liability-each parter is fully responsible for the other
* Potential for conflict
* Lifespan of the business
CORPORATIONS
• Form of a business organization recognized by law as a separate legal entity and has
all the rights and responsibilities of an individual
•
Buy and sell property, sue and be sued
• Have to apply for a charter. Charters contain name and address of company purpose
of business and number of shares to be sold
STOCKS
• Common stock
- Represents basic ownership of a corporation
- You get on vote for each share they own
- Vote is used to elect the board of directors
* Board of directors are who control the policies and goals of a corporation
* They hire the management that runs the company
- Common stock doesn't pay as much in the way of dividends by has potential for large
profit for yourself.
• Preferred stock
- Non-voting ownership of a corporation
- No say in board of directors
- You are paid dividends before the common stock holders
- Usually pays regular guaranteed dividends
CORPORATE ADVANTAGES
• Ease of raising financial capital
- Need more money? Sell more stock or corporate bonds
• Professionalism
- Board of Directors will hire experienced people to run the company
• Limited liability
- As an investor, you are not liability for a company's actions
• Can buy or sell your stocks as you please
CORPORATE DISADVANTAGES
• Difficult and expensive to apply and obtain a charter
- Court fees, lawyers etc.
• Control
- Shareholders have little input over the operations of the company
• Double taxation
- Corp is taxed on its earnings and stockholders pay taxes on dividends
• Highly regulated by government
NON-PROFIT ORGANIZATIONS
• Operate in a business-like manner to promote interests of its members
• Operate similar to corporations:
- Have a charter and Board of Directors
- Don't issue stock or pay dividends
- Don't pay taxes
• Examples
- Churches, Schools, Co-ops
COOPERATIVES
• Consumer Cooperative
- People band together to purchase items in bulk to reduce the price
• Service Cooperative
- People band together to provide a service at a lower cost
• Producer Cooperative
- People band together to promote their products at a lower price.
Thursday, September 1, 2011
Link to Bill Gates TED Talk on Eliminating Carbon Emissions
Remember to post your response to the prompt in Edmodo!
Tuesday, August 30, 2011
Today's Powerpoint on Production Possibilities Curve and Circular Flow
https://docs.google.com/present/edit?id=0AbxQN7GyomHPZGNzdHpkY3FfNTd2ZzhkYmZ4&hl=en_US
Monday, August 29, 2011
Free Exam Prep Website: SHMOOP!
Register for a Shmoop Account! The school district has allowed us access to a great AP Macroeconomics test preparation website.
It will be especially helpful for you first semester students that do not take the test until May.
www.shmoop.com/signup/belton
password is BELTONISDRULES (has to be in all caps!)
Thanks to Belton Independent School District you get free access to:
It will be especially helpful for you first semester students that do not take the test until May.
www.shmoop.com/signup/belton
password is BELTONISDRULES (has to be in all caps!)
Thanks to Belton Independent School District you get free access to:
- AP Macroeconomics Exam Prep
- AP Microeconomics Exam Prep
- AP Psychology Exam Prep
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Friday, August 26, 2011
Link to the TED talk we watched and discussed in class today
http://www.ted.com/talks/lang/eng/tim_jackson_s_economic_reality_check.html
Make sure you to chime in on Edmodo and share your response to the three discussion prompts.
Have a good weekend!
Make sure to have Chp 2 read by Tuesday!
Make sure you to chime in on Edmodo and share your response to the three discussion prompts.
Have a good weekend!
Make sure to have Chp 2 read by Tuesday!
Thursday, August 25, 2011
8/25 Notes: Think Like An Economist (from Dallas Jordan and Billi Farr)
25.8.11 Dallas Jordan AP Economics
Economics Defined
-The social science that studies the production, distribution, and consumption of resources.
-Resources: anything that has value, e.g. Gas, water, coal
Impact of Economics
-Like it or not, economics impacts every aspect of your life.
-Most of the ideologies of the modern world (even religion) are shaped by economics.
-The study of resources and how we use them forms the foundations for most philosophical disciplines.
Economic Awareness
-It is vital that you understand economics so that you can be a well-informed, productive member of society. You need to understand economic issues- such as healthcare, taxes, wages, unemployment- and make the right decisions when voting.
Economic Application
-As a consumer, you need to understand economics to make wise choices in purchasing.
-You need to understand marginal cost and benefit as well as opportunity costs to
to make the right decisions.
How do we study economics?
-Descriptive or Empircal Economics
-Concerned with gathering facts to form theories about economic problems.
-Economists form theories and principles and then generalize about economic behaviour.
Induction vs. Deduction
-Induction
-Creating principles from facts
-Deduction
- Hypothetical method
-You make a generalization and try to prove it.
-I&D aren't opposing techniques of investigation-they actually compliment each other. Economists use both.
Economic Policies
-Talk about the general knowledge of economic behaviour
- Policies are potential solutions to problems. It isn't a given solution, but a potential solution, because you have tried it yet. Make the policy based on deduction, see if it works, then take the data and use induction to revise your policy.
Generalizations
-Economic principles are generalizations.
-They apply to the group as a whole
-It may not, however, apply to each individual person.
-Of course, you have outliers on either end. There are people that make millions, while there are those on welfare. These are on the margin.
Ceteris Paribus
-"The other things equal assumption"
-To construct a generalization, you must hold all other variables in an experiment as constant, except for the one in question. If not, your results will be tainted.
Abstractions
-An abstraction is a concept or idea not associated with any specific instance.
-Economic principles are by necessity an abstraction and do not reflect the full complexity or the full reality.
Macroeconomics (what we are studying this semester)
-Deals with the economy as a whole with basic subdivisons and aggregates.
-Ex.
-Gov't
- Households
- Business Sectors
-How will a tax increase affect the economy?
Microeconomics
-Deals with specific economic units and a detailed consideration thereof.
-Basically, you are putting a small unit of the economy under a microscope,
-Ex. Which TV will sell the most units?
Positive vs. Normative Statements
-Positive Statements
-Deals with facts and avoids value judgments.
-A purely objective and scientific approach.
-Normative Statements
-Involves value judgments about what the economy looks like.
-What is versus what should be.
THREE BASIC ECO QUESTIONS
What to produce?
-what good/service should I provide?
-decision has to be based on scarcity
Example: the rise in fuel-efficient, hybrid vehicles
How to produce?
-build yourself or outsource?
For whom to produce?
-who is your target market?
FACTORS OF PRODUCTION
FOP are the resources required to produce goods and/or services
-land; surface land and water
-labor; either in mental or physical form
-capital; tools, factories, and equip. used in making goods and services
-entrepreneurs; innovators and risk takers
HOW TO IDENTIFY AN ENTREPRENEUR
1. initiative: a spark plug to economic activity
2. Decision making: makes non-routine decisions and thinks outside of the box
3. Innovator: creates a new product or service
4. Risk taker: no guarantee of profit with a huge risk of loss. Also potential for huge gain.
Economics Defined
-The social science that studies the production, distribution, and consumption of resources.
-Resources: anything that has value, e.g. Gas, water, coal
Impact of Economics
-Like it or not, economics impacts every aspect of your life.
-Most of the ideologies of the modern world (even religion) are shaped by economics.
-The study of resources and how we use them forms the foundations for most philosophical disciplines.
Economic Awareness
-It is vital that you understand economics so that you can be a well-informed, productive member of society. You need to understand economic issues- such as healthcare, taxes, wages, unemployment- and make the right decisions when voting.
Economic Application
-As a consumer, you need to understand economics to make wise choices in purchasing.
-You need to understand marginal cost and benefit as well as opportunity costs to
to make the right decisions.
How do we study economics?
-Descriptive or Empircal Economics
-Concerned with gathering facts to form theories about economic problems.
-Economists form theories and principles and then generalize about economic behaviour.
Induction vs. Deduction
-Induction
-Creating principles from facts
-Deduction
- Hypothetical method
-You make a generalization and try to prove it.
-I&D aren't opposing techniques of investigation-they actually compliment each other. Economists use both.
Economic Policies
-Talk about the general knowledge of economic behaviour
- Policies are potential solutions to problems. It isn't a given solution, but a potential solution, because you have tried it yet. Make the policy based on deduction, see if it works, then take the data and use induction to revise your policy.
Generalizations
-Economic principles are generalizations.
-They apply to the group as a whole
-It may not, however, apply to each individual person.
-Of course, you have outliers on either end. There are people that make millions, while there are those on welfare. These are on the margin.
Ceteris Paribus
-"The other things equal assumption"
-To construct a generalization, you must hold all other variables in an experiment as constant, except for the one in question. If not, your results will be tainted.
Abstractions
-An abstraction is a concept or idea not associated with any specific instance.
-Economic principles are by necessity an abstraction and do not reflect the full complexity or the full reality.
Macroeconomics (what we are studying this semester)
-Deals with the economy as a whole with basic subdivisons and aggregates.
-Ex.
-Gov't
- Households
- Business Sectors
-How will a tax increase affect the economy?
Microeconomics
-Deals with specific economic units and a detailed consideration thereof.
-Basically, you are putting a small unit of the economy under a microscope,
-Ex. Which TV will sell the most units?
Positive vs. Normative Statements
-Positive Statements
-Deals with facts and avoids value judgments.
-A purely objective and scientific approach.
-Normative Statements
-Involves value judgments about what the economy looks like.
-What is versus what should be.
THREE BASIC ECO QUESTIONS
What to produce?
-what good/service should I provide?
-decision has to be based on scarcity
Example: the rise in fuel-efficient, hybrid vehicles
How to produce?
-build yourself or outsource?
For whom to produce?
-who is your target market?
FACTORS OF PRODUCTION
FOP are the resources required to produce goods and/or services
-land; surface land and water
-labor; either in mental or physical form
-capital; tools, factories, and equip. used in making goods and services
-entrepreneurs; innovators and risk takers
HOW TO IDENTIFY AN ENTREPRENEUR
1. initiative: a spark plug to economic activity
2. Decision making: makes non-routine decisions and thinks outside of the box
3. Innovator: creates a new product or service
4. Risk taker: no guarantee of profit with a huge risk of loss. Also potential for huge gain.
Wednesday, August 24, 2011
Aug 24th Notes - Scarcity
| Scarcity
Scarce: when a resource is in limited supply. Ex. Water, oil, money. fundamental problem of economics. There aren't enough resources to satisfy the wants of people. *nothing is free!!!!!!!!!!!!! Think about where it came from. Every choice you make has a cost -opportunity cost: when you make the decision to buy an item, you lose the potential or ability to buy something else. -every decision involves opportunity cost. "needs vs wants" -a need is a basic requirement for survival. -A want is a way of expressing your need. -In order to make choices, you need to understand your needs and wants. "Maslow's Hierarchy of Needs" 1. Self actualization 2. Esteem needs 3. Social needs 4. Safety needs 5. Physiological needs "Rational Behavior and Balance" -Scarcity forces us into a system of rational behavior. -You have to balance your needs and wants against your limited resources. -Economics is grounded in the assumption of rational self-interest. "Perspective and Incentives" Why do people behave differently if everyone else is working under rational self-interest? It comes down to perspective. They feel that the incentive from doing these things is worth working towards. "Margin" -Is a border or an edge. -A choice made on the margin is a choice made by comparing all the relevant alternatives. -Most economic choices change the "Status Quo" "Marginal Benefit" What you gain when you acquire one more unit of something. "Marginal Cost" What you lose when you acquire one more unit of something. You have to weigh the Marginal Benefit vs the Marginal Cost to decide if a decision is worth it or not Sent from my iPad |
Tuesday, August 23, 2011
3rd Period AP class working on the iPads
Great job today setting up and learning to use the iPads. They will be a valuable part of the course.
Don't forget to check Edmodo and the blog at least every other night for updates and discussion board topics.
Monday, August 22, 2011
What A Great First Day!
Guys and Gals-
What a great way to start the year. Ya'll are a really fun group and I'm looking forward to getting to know you better as we work our way through the economics course. Tomorrow we will introduce the iPad expectations and begin using the devices.
Don't forget to turn in your Advanced Academic Honor Code and your Student Information Sheets.
What a great way to start the year. Ya'll are a really fun group and I'm looking forward to getting to know you better as we work our way through the economics course. Tomorrow we will introduce the iPad expectations and begin using the devices.
Don't forget to turn in your Advanced Academic Honor Code and your Student Information Sheets.
If you haven't checked out your textbook you need to do so tomorrow. Reading assignments start tomorrow night!
Tuesday, August 16, 2011
Welcome to the start of another school year!
The new school year is soon to be upon us. I'm glad that you have chosen to accept the challenge of taking the AP Macroeconomics class. It will be a learning experience for us all.
I will use this blog to communicate with you, my students, as well as your parents. I will be posting links to videos and articles to supplement our daily activities as well as examples of student work.
I will be sending home a student information survey on the first day. If you do not want your student's picture or video of your student posted on this blog, make sure to check "no" on that portion of the information sheet.
One student each day will be randomly selected to post their notes onto this blog. This will allow students who were absent or missed a portion of their notes to fill in the blanks. Each student will also be required at some point in the semester to create a video (under 3 mins) to explain a designated topic. I have a flip video camera to lend if the student does not have access to a video recording device.
Also, please check the links to the right. They will direct you to the class calendar, discussion group (access code is 09thds), Skyward Parent Access, Skyward Student Access, and AP Central web pages. AP Central contains a wealth of information for AP students and their parents.
I will use this blog to communicate with you, my students, as well as your parents. I will be posting links to videos and articles to supplement our daily activities as well as examples of student work.
I will be sending home a student information survey on the first day. If you do not want your student's picture or video of your student posted on this blog, make sure to check "no" on that portion of the information sheet.
One student each day will be randomly selected to post their notes onto this blog. This will allow students who were absent or missed a portion of their notes to fill in the blanks. Each student will also be required at some point in the semester to create a video (under 3 mins) to explain a designated topic. I have a flip video camera to lend if the student does not have access to a video recording device.
Also, please check the links to the right. They will direct you to the class calendar, discussion group (access code is 09thds), Skyward Parent Access, Skyward Student Access, and AP Central web pages. AP Central contains a wealth of information for AP students and their parents.
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