First Day 1/14/09 – Class Notes
1.Macroeconomics
- Definitions
i. The study (meaning investigation of the change of conditions) of a nation’s economic activities.
ii. The study of unemployment and inflation.
iii. The measure of economic activity (activity meaning buying and producing) through GDP.
iv. Identifying economic problems and offering the solution.
1. Unemployment and inflation are examples of problems.
Chapter One – Book Notes
1. Economics
a. Broad ranging discipline, both in the questions it asks and the methods it uses to seek answers.
2. Opportunity Cost
a. The value of the next best alternative that must be given up because of that decision.
i. Going to school or going to work over going to school is an example.
b. Represents the opportunities the individual, firm, or government must forgo to make the desired expenditure.
i. Rational decision making must be made based on opportunity cost, not just dollar costs.
3. Comparative Advantage
a. Sally is a better farmer than Ally. Ally is a worse singer than a farmer. Sally is a great singer. Sally should be the singer and Ally the farmer for Sally. This would allow for Sally to spend all of her time getting better at singing and Ally to become a better farmer than Sally.
4. The Tradeoff Relationship Between Unemployment and Inflation
a. Low unemployment (more people at work) normally makes inflation rise. High unemployment normally makes inflation fall.
i. (IMO based upon the definition of Inflation being the printing of money not backed by anything and expanding the money supply) Falling Inflation equals the value of the dollar to rise. Higher Inflation equals the value of the dollar to drop. When people are at work, more people demand and hold dollars. This then allows the value of the dollar to remain the same or increase in value when the government increases Inflation. When people are not at work, less people demand and hold dollars. This allows the value of the dollar to increase if the government decides to pull off Inflation. If the government increases Inflation while people are not at work, the purchasing power of the dollar declines tremendously.
1. When the government sends out money/checks in the mail, they expect you to spend it. When you do not spend it and save it, money loses value since the value comes from the demand/want of dollars and since the dollar is backed by nothing. When the money loses its value, the price of everything rises. When the price of everything rises, more people want to save instead of spend. When more people want to save instead of spend and the government keeps sending out money, the price of everything will keep increasing and the sales of everything will keep diminishing.
b. According to Keynes, it is impossible to reduce unemployment and Inflation rates at the same time.
i. (IMO) The way a nation can reduce unemployment and inflation rates at the same time would be increasing the interest rate. When you lower interest rates, you create Inflation by printing more money. This then leads to the devaluing of the dollar. When you raise interest rates, you bring back strength to the dollar therefore letting people feel comfortable about buying lower priced products and jumpstart employment again.
5. Productivity
a. The amount that an average worker can produce in an hour.
b. Rising labor productivity is the cause of rising living standards because more items are produced when productivity rises. When more items are produced, more people will want to buy more products because supply and demand says these products will cost less. This leads to more people being able to afford more things.
6. Government Control on Prices
a. Ceiling Price
i. The highest price allowed on a certain product according to the government.
1. If a government puts a ceiling on a product, the product will then be extremely scarce because demand will outnumber the supply. This then creates a black market because people are willing to pay more than the ceiling says it’s worth.
a. The food shortage during the 1970’s is an example.
b. Floor Price
i. The lowest price allowed for a product according to the government.
1. If a government puts a floor on a product, there will be an abundance of products not being sold because nobody is willing to pay that much for a product. Demand is outnumbered by supply. Businesses will go out of business.
a. (IMO) The government puts a floor on products through Inflation since the value of the dollar diminishes when Inflated. When this happens, the purchasing power of the dollar goes down, which, in turn, jacks prices up.
7. Government Policies for Full Employment and Price Stability
a. Keynesian Theory
i. The state/government should stimulate economic growth and improve stability in the economic private sector through Interest Rates, Taxation, and Public Projects.
b. Fiscal Policy
i. Control over taxes and government spending.
c. Monetary Policy
i. Control over money and interest rates.
8. Abstraction in Economic Theory
a. Abstraction
i. Ignoring many details so as to focus on the most important elements of a problem.
b. Theory
i. A deliberate simplification of relationships used to explain how those relationships work.
c. Abstraction is important to economic theory because the economy encompasses every aspect of a human being. Keeping track of all interactions and emotions is possible, but it is impossible to explain all.
d. The author is presenting a map because he is making the point that, when a map includes so much detail, it is impossible to read. When economics encompasses all interaction and emotions, there isn’t enough time to read and understand all of it.
9. Appendix; Mathematical Analysis
a. Slope of a Straight Line
i. The ratio of the vertical change to the corresponding horizontal change as we move in the direction of right along the line.
b. The slope based upon the question one on page 18 is 4/1 or 4. This means for every 4 students who enroll, 1 takes an economic course.
c. I am not sure how to interpret the different slopes of two different lines because I do not understand what it is asking and cannot find it in the book. I will change this answer after I find out what it is in class
1/16/09 – Class Notes
10. GDP
a. How well a nation’s productivity is in comparison of others
11. Keynes says excitement causes buying. This equals the expansion of economy.
a. Excitement is created through prices dropping and new ideas being created.
i. An example of this would be housing and the “Dot-Coms” of the 90’s.
ii. It is impossible to tell when the downtime (downward slope of the graphed productivity) will come
iii. We can only tell what’s going on “today” 9 months into the future.
1. This means that we don’t know what the stimulus package will do the day it was put into effect until 9 months from the day it was put into effect.
iv. The more you advance, the more you need an advisor.
1. The more technology becomes available, the more people you need to inform you of it
12. True Information is not Always Practical
a. Economic Theory
i. Spending impacts production.
1. You cannot have production without spending. You cannot have spending without production.
ii. Based upon “true information is not always practical.”
1. Leads to abstraction, which temporarily leaves out many true factors.
iii. A relationship between two variables
13. Opportunity Cost
a. Income forgone or given up in order to pursue something
14. Market Strength
a. Rewarding companies who do the right thing and punishes those whom do the wrong thing
b. Right Things to Do
i. Produce products people want
ii. Produce at the lowest cost
15. Scarcity
a. Affects price.
i. Price dictates everything.
16. International Trade
a. Leads to specializations.
i. We are able to become the best in an area. This leads to increased productivity. This leads to the increase of living standards.
Chapter 2 – Book Notes
17. Factors of Production/Inputs
a. Labor, machinery, building, and natural resources used to make outputs.
18. Outputs
a. Goods and services that consumers and others want to require
19. Gross Domestic Product (GDP)
a. A measuring of the economy’s size. The total amount it produces in a year.
b. REAL GDP
i. Adjusts this measure for changes in the purchasing power of money, that is, it corrects for inflation.
c. The United States has the larges GDP because we have a large working base with 150 million employees. The second reason we have the largest GDP is because we are among the most productive. We have a production of $45,000 of goods and services per living person in the United States. We have $90,000 per working person in the United States.
i. (IMO) The main reason we have the largest GDP in the world is because our nation is the world’s largest debtor. As of November 19, 2008, the average debt for each citizen was $37,316. GDP includes debt as a good thing because it assumes that the credit issued will be put forth for production or causes that will stimulate economic growth. The problem we see today is that consumers decided to take enormous amounts of debt against their homes and use that money for buying products. The majority of Americans thought they could forever refinance their homes because they were under the impression the value of housing would forever rise. Since they had false security, they decided they could afford to spend that money in whatever way they wished because they would have an ever-increasing investment to fall back upon. When consumers fuel the economy through debt, there is no real production or, as the book says, productivity because our GDP is now based upon 70% consumption. Instead of counting credit or debt as a negative, GDP counts it as a positive and counts it toward the total GDP. When I say GDP counts debt as a positive, I am actually meaning the government because they are the ones who figure out GDP.
d. The United States has 4.5% of the world’s total population and 27% of the world’s output/GDP (if you include debt).
20. Capitalism
a. An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by state.
21. Open Economy
a. If an economy’s exports and imports constitute a large share of GDP.
i. The Netherlands is the number one example of an open economy with 67% of Imports and Exports counting towards their GDP.
ii. Germany – 41%
iii. China – 37%
22. Closed Economy
a. If an economy’s exports and imports constitute a small share of GDP.
i. The United States is a closed economy since 70% of our GDP is based upon consumption
1. Imports and Exports is about 14%
23. Recession
a. The book’s definition is not correct. According to today’s standards, a Recession is defined as GDP falling for the past two or more quarters in a row.
i. The last four recessions
1. ’07 – current; ’01; ’90 – ’91; ’81 – ’82.
24. Employment
a. Unemployment Rate
i. Right now the unemployment rate in America is 7.2. It is 13.2 if you include people not looking for a job and people who are working part time.
ii. For the Euro area in Europe, unemployment is 7.8; Iceland 4.8; Norway 2.7; Poland 9.1; Russia 6.6; Sweden 7; Switzerland 2.8; Turkey 10.9; and the United Kingdom 3.3.
b. 54% of the labor force is man and 46% is woman. Women’s entering the workforce has gone up every year since the 1950’s.
i. (IMO based upon single women not entering the workforce as often as women in total http://occawlonline.pearsoned.com/bookbind/pubbooks/martin_awl/medialib/download/MARTFIG304.gif) The result of more women entering the workforce is a result of higher living expenses because of BOTH men and women going into debt to live beyond their means. When men go deeper into debt and they have a girlfriend, wife, or whatever, the man then relies more and more on the woman to get a job. We have never been in this deep of a debt hole in the history of the United States. When men work and save, like they did in the “Old Days,” women don’t have to work. They get to choose to work. I know my mom doesn’t want to work.
c. The service sector makes up 67.7% of the workforce.
25. Transfer Payments
a. Sums of money that certain individuals receive as outright gains from the government rather than as payments for services rendered.
26. Progressive Taxation
a. A tax is progressive if the ratio of taxes to income rises as income rises.
1/21/09 – Class Notes
27. Trade Off of Inflation and Employment
a. 1 – 4% unemployment is considered full employment in regards to the United States. It is considered to be a problem when unemployment goes between 4 & 8%. It is considered a huge problem if unemployment goes above 8%
b. Inflation at 1% is considered to be great control of inflation; 2 – 3% is considered a serious problem; 4% and above is considered a huge problem.
i. According to Keynes, you cannot have high inflation with high unemployment and you cannot have low inflation with low unemployment.
1. According to Keynes, you need to increase inflation to create spending and get back to full employment (the economy goal is full employment)
a. An example of this is when a government sends you a check in the mail.
b. Inflation is the price we pay to create jobs.
28. Productivity
a. Is found by placing output over the number of workers.
i. If you create 100,000 cars and employ 1,000 workers, you have a productivity of 100 cars.
29. Government Control
a. The U.S. economy is considered a “Mixed Economy.”
i. Mixes Capitalism and Communism
b. Price is the most important thing in Capitalism
i. Controlling price rids Capitalism
c. Price Ceiling
i. An example is the government controlling the price of rent
d. Price Floor
i. This mostly takes place in agricultural aspects of the economy (tobacco, alcohol, farming)
ii. Another example is minimum wage.
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