llad phillips1 introduction to economics macroeconomics the us economy
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Llad Phillips 1
Introduction to EconomicsIntroduction to Economics
MacroeconomicsMacroeconomics
The US EconomyThe US Economy
Llad Phillips 2
Outline: Lexture SixOutline: Lexture Six
News: Fed Cuts Interest Rates; Dow up 330News: Fed Cuts Interest Rates; Dow up 330 National Income AccountingNational Income Accounting The Great DepressionThe Great Depression
Llad Phillips 3
NewsNews
Why did the Fed cut interest rates?Why did the Fed cut interest rates? Why did the Dow go up 330?Why did the Dow go up 330? What effect will lower interest rates have on What effect will lower interest rates have on
consumers?consumers? Is a recession coming?Is a recession coming?
How could How could youyou figure that out? figure that out?
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Review Part II: Chapter ThreeReview Part II: Chapter Three Conceptual Framework: Circular FlowConceptual Framework: Circular Flow
Firms
Households
Income Labor
Firms
Households
SupplyGoods
Demand Goods
Income Perspective Expenditure Perspective
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Expenditure PerspectiveExpenditure Perspective
Firms
Households
SupplyGoods
DemandFor Goods
Households: Consumption of Goods and ServicesFirms: Investment in Plant and Equipment
Consumption
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Expenditure Perspective: ClosedExpenditure Perspective: Closed
Firms
Households
SupplyGoods
Demand Goods
Households: Consumption of Goods and ServicesFirms: Investment in Plant and EquipmentGovernment: Expenditures on Goods and Services
Government
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Expenditure Perspective: OpenExpenditure Perspective: Open
Firms
Households
SupplyGoods
Demand Goods
Households: Consumption of Goods and ServicesFirms: Investment in Plant and EquipmentGovernment: Purchase of Goods and ServicesAll Three: Exports - Imports = Net Exports
Imports(puchases)
Exports(Sales)
Government
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What has been happening to expenditure in the last year?What has been happening to expenditure in the last year? Sources of informationSources of information
US Department of Commerce: US Department of Commerce: Survey of Survey of Current BusinessCurrent Business
The Conference Board: The Conference Board: Business Cycle Business Cycle IndicatorsIndicators
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Lab Three: National Income and Product Accounts (NIPA)-Ch. 20Lab Three: National Income and Product Accounts (NIPA)-Ch. 20
97 II 97 III 97 IV 98 I 98 II
Consumption 4872.7 4947.0 4981.0 5055.1 5130.2
Investment 1211.3 1215.8 1241.9 1321.8 1306.5
Government 1284.4 1288.9 1289.2 1283.0 1294.8
Net Exports -131.6 -142.4 -149.0 -198.5 -245.2
Total: GDP 7236.5 7311.2 7364.6 7464.7 7486.3
Billions of 1992 $
GDP is Gross Domestic Product
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Federal Reserve Bank: PhiladelphiaFederal Reserve Bank: Philadelphia
98 III 98 IV 99 I 99 II 99 III
GDPB 92$
7530.0 7587.0 7629.9 7668.8 7716.3
GDP%In-crease
2.1 3.1 2.3 2.1 2.5
NetExportsB $
-271.8 -280.0 -287.6 -289.7 -287.3
http://www.phil.frb.org/Economics/Survey of Professional ForecastersAugust 21, 1988
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Dr. Ed Yardeni, Deutsch Bank SecuritiesDr. Ed Yardeni, Deutsch Bank Securities
98I
98II
98III
98IV
99I
99II
99III
99IV
RealGDP% In-crease
5.5 1.8 3.0 2.5 2.2 1.5 0.0 -1.0
Consum-ption% In-crease
6.1 6.1 3.4 2.7 1.9 1.5 0.9 0.0
http://www.yardeni.com September 24, 1998
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Index of Consumer ConfidenceIndex of Consumer Confidence
Last Recession ‘91
‘70-’95
Lab One:http://www.mlinet.com/mle/econdata.htm
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Monthly Index of Consumer Confidence, 1985=100 .
0
20
40
60
80
100
120
140
96.0196.0396.0596.0796.0996.1197.0197.0397.0597.079.09
97.1198.0198.0398.0598.0798.09Date
Index
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The Great DepressionThe Great Depression
Impact on the US EconomyImpact on the US Economy Impact on Economic Thinking as a Impact on Economic Thinking as a
ConsequenceConsequence
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Unemployed Persons, Millions, 1929-1997 .
1982 trough
1991 trough
1945 trough
1938 trough
1933 trough
0
2
4
6
8
10
12
14
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97Year
Millions
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UnemploymentUnemployment the number of unemployed persons increased the number of unemployed persons increased
from 1,550,000 in 1929 to 12,830,000 in from 1,550,000 in 1929 to 12,830,000 in 19331933
in 1933, 25% of those who wanted work, and in 1933, 25% of those who wanted work, and were willing to look for work, could not find were willing to look for work, could not find a joba job
the depression of the thirties was nearly an the depression of the thirties was nearly an order of magnitude worse than subsequent order of magnitude worse than subsequent recessionsrecessions
unemployment is cyclical, rising in bad times unemployment is cyclical, rising in bad times and falling in good timesand falling in good times
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What happened in the early 30’s?What happened in the early 30’s? An aggregate expenditures perspectiveAn aggregate expenditures perspective
gross domestic product: its componentsgross domestic product: its components personal consumption expenditurespersonal consumption expenditures gross private domestic investmentgross private domestic investment exports minus imports = net exportsexports minus imports = net exports government expendituresgovernment expenditures
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Personal Consumption Expenditures, Billions of '92 $ .
1997
1929
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97Year
Billions
Llad Phillips 20
Personal Consumption Expenditures, Billions of '92 $ .
1997
1929
100
1000
10000
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97Year
Billions
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Why does consumption fall by 20% between 1929 and 1933?Why does consumption fall by 20% between 1929 and 1933? income has fallen and a large fraction of people income has fallen and a large fraction of people
are unemployedare unemployed times are bad, sentiment and expectations are times are bad, sentiment and expectations are
low, and people save for a rainy day if they canlow, and people save for a rainy day if they can wealth has decreasedwealth has decreased
for example, the stock market crash of 1929 for example, the stock market crash of 1929 decreased the wealth of investors in stocks, and decreased the wealth of investors in stocks, and decreased consumption out of wealthdecreased consumption out of wealth
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Gross Private Domestic Investment, Millions 92 $ .
1933 trough
1982 trough
1991 trough
0
200
400
600
800
1000
1200
1400
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97Year
Millions
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Why does investment fall from $92.4 B in’29 to $9.9 B in ‘32? Why does investment fall from $92.4 B in’29 to $9.9 B in ‘32? Not only are many people idle, so is much of plant and Not only are many people idle, so is much of plant and
equipmentequipment with existing capital redundant, there is less urgency to invest with existing capital redundant, there is less urgency to invest
in new equipmentin new equipment times are bad, consumers are not buying, and businesses times are bad, consumers are not buying, and businesses
are failing, so business sentiment and expectations are loware failing, so business sentiment and expectations are low if there is any cash flow, businesses may decide to keep it if there is any cash flow, businesses may decide to keep it
as cash reserve against the unexpected event rather than as cash reserve against the unexpected event rather than invest it invest it
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Gross Domestic Product Components in 1929 . .
investment16%
net exports0% government
9%
consumption75%
federal government was 1.6%, whilestate & local government was 7.3%
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Were consumers & firms afraid to spend?Were consumers & firms afraid to spend?
Fear
Consumers
Firms
? $
? $
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Impact of the Great Depression on Economic ThoughtImpact of the Great Depression on Economic Thought The conventional wisdom at that time was to wait, The conventional wisdom at that time was to wait,
and the economy would recoverand the economy would recover The Englishman John Maynard Keynes was not The Englishman John Maynard Keynes was not
only a great economist but was aware of the only a great economist but was aware of the political danger the depression posed to capitalismpolitical danger the depression posed to capitalism he realized that it would be difficult to convince he realized that it would be difficult to convince
consumers and businesses to spend more in the consumers and businesses to spend more in the depths of a recessiondepths of a recession
he emphasized the importance of uncertainty he emphasized the importance of uncertainty and expectations on behaviorand expectations on behavior
he stressed an aggregate expenditures he stressed an aggregate expenditures perspective and a role for government spendingperspective and a role for government spending
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A simple Keynesian modelA simple Keynesian model The aggregate demand emphasisThe aggregate demand emphasis
for simplicity, ignore net exports and government for simplicity, ignore net exports and government expenditure, small in ‘29expenditure, small in ‘29
Aggregate expenditures, GDP, equals consumption, Aggregate expenditures, GDP, equals consumption, C, plus investment, IC, plus investment, I GDP = C + IGDP = C + I
National Income, Y, equals consumption, C, plus National Income, Y, equals consumption, C, plus savings, S savings, S
In Equilibrium, Aggregate Expenditures, GDP In Equilibrium, Aggregate Expenditures, GDP equals National Income, Y equals National Income, Y GDP = Y GDP = Y so C + I = C + Sso C + I = C + S and, in equilibrium, savings equals and, in equilibrium, savings equals investmentinvestment
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A simple Keynesian ModelA simple Keynesian Model The Consumption FunctionThe Consumption Function
consumption expenditures has two componentsconsumption expenditures has two components autonomous consumption,Cautonomous consumption,C0 0 ,that does not vary with ,that does not vary with
income, for example, even if income was zero, there income, for example, even if income was zero, there would be some spending out of wealth; shifts with would be some spending out of wealth; shifts with fearfear
a component that increases with income but not $ a component that increases with income but not $ for $, allowing for some savingsfor $, allowing for some savings
InvestmentInvestment assume investment, I, is autonomous, i.e. does assume investment, I, is autonomous, i.e. does
not vary with income, Y; shifts with fearnot vary with income, Y; shifts with fear
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consumption, C
Income, Y
autonomousconsumption, C0
The Consumption Function
C = C0 + mpc* Y
the slope of the consumption function,the marginal compensity to consume,mpc, is the increase in consumptionper $ increase in income
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Consumption, CInvestment, IGDP
Income, Y
autonomousconsumption, C0
Gross Domestic Product Equals Consumption Plus Investment
C = C0 + mpc* Y
I
GDP = C + I
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Consumption, CInvestment, IGDP
Income
autonomousconsumption, C0
Equilibrium Level of Gross Domestic Product GDP=Y
C = C0 + mpc* Y
I
GDP = C + I
GDP=Y
GDP=Y
450
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Consumption, CInvestment, IGDP
Income
autonomousconsumption, C0
Equilibrium Level of Gross Domestic Product GDP=Y
GDP = C + I
GDP=Y
GDP=Y
450
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Consumption, CInvestment, IGDP
Income, Y
Less than Full Employment Equilibrium
C = C0 + mpc* Y
I
GDP = C + I
450
GDP = Y YFE
Full Employment Income
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Consumption, CInvestment, IGDP
Income, Y
Less than Full Employment Equilibrium
GDP = C + I
450
GDP = Y YFE
Full Employment Income
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Policy OptionPolicy Option
“The only thing we have to fear is fear itself”
Franklin Delano Roosevelt
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Policy OptionPolicy OptionGovernment As a Fraction of GDP .
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97Year
Fraction
Llad Phillips 40
Summary-Vocabulary-ConceptsSummary-Vocabulary-Concepts national incomenational income circular flow economycircular flow economy value addedvalue added gross domestic productgross domestic product consumptionconsumption gross private domestic gross private domestic
investmentinvestment government government
expendituresexpenditures net exportsnet exports aggregate production aggregate production
functionfunction
nominal GDPnominal GDP closed economyclosed economy John Maynard KeynesJohn Maynard Keynes aggregate expendituresaggregate expenditures uncertaintyuncertainty expectationsexpectations consumption functionconsumption function autonomous consumptionautonomous consumption marginal propensity to consumemarginal propensity to consume equilibrium GDPequilibrium GDP full employment GDPfull employment GDP