Transcript aggregate price level
EC 102.01
Lecture 1
Syllabus
Instructors: Asst. Prof. Burçay ERUS and Dr. Burcu YAKUT ÇAKAR How to reach the instructor: By e-mail: [email protected]
By phone from the office: 359 7638 or 359 7652 After the class or by appointment Office Hours: Tuesday 15:00-17:00 and by appointment Textbook: : Macroeconomics in Context, Goodwin, et al., M.E. Sharpe, 2009, Powerpoints will be posted on the website
Course requirements: Midterms (2*30%) Final (40%) Cheating will be severely punished!
See the syllabus at the course website for more info.
What is economics
Study of how society decides what, how and for whom to produce Study of the way people organize themselves to sustain life and enhance its quality resource maintenance, production, distribution and consumption of goods and services.
Macroeconomics vs. Microeconomics
Microeconomics focuses on how decisions are made by individuals and firms and the consequences of those decisions. Ex.: How much it would cost for a university or college to offer a new course? (including the cost of the instructor’s salary, the classroom facilities, the class materials, and so on). Having determined the cost, the school can then decide whether to offer the course.
Macroeconomics vs. Microeconomics
Macroeconomics examines the aggregate behavior of the economy ─ how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole. Ex.: Overall level of prices in the economy ( how high or how low they are relative to prices last year ) rather than the price of a particular good or service.
Microeconomic vs Macroeconomic Questions
Microeconomic
Should I go to summer school or take a job?
What determines salary offered by Garanti Bank to Huseyin Kum, a recent Bogazici grad?
What determines the price of chocolate produced by Eti and Ulker?
What government policies are needed to make it easier for Roma students to enroll in schools?
What determines whether Akbank opens a branch in Berlin?
Macroeconomic
How many people are employed this summer?
What determines overall salary level in the economy?
What determines the level of prices in the overall economy?
What government policies should be adopted to promote employment and growth in overall economy?
What determines overall trade in goods, services, and financial assets between Turkey and the rest of the world?
Digression: Development of Macroeconomics
Classical Period
: 18th century – industrial revolution Stressing the issues of growth and development based on an image of smoothly-functioning markets.
Specialization/division of labour + laissez faire
Great Depression, Keynes and Monetarism
Aggregate demand is important, need to use fiscal policy to keep demand and employment at high levels – Keynes Governments should only aim for steadiness in the money supply via monetary policies - Monetarism
How Individuals Make Choices:
Basic principles behind the individual choices: 1.
Resources
are
scarce
. 2. The real cost of something is what you must give up to get it
Opportunity cost
It is all about what you have to
forgo
your choice.
to obtain
How Individuals Make Choices:
3. “How much?” is a decision at the margin.
Trade-offs
Marginal decisions
and
marginal analysis
4. People usually take advantage of opportunities to make themselves better off.
Incentives
Economic Activity in Context
Macroeconomic Goals positive vs. normative questions Concept of “well-being” (i) Living standards – “keep living standards of the individuals high enough to maintain long, healthy and enjoyable lives” economic growth + political freedom + social inclusion - economic development Growth but: What is produced? How ? For whom?
Economic Activity in Context
(ii) Stability – temporal dimension fluctuations - boom vs. recession business/trade cycles – alternating periods of B/R (iii) Sustainability financially? – “debt crises” socially? – “disparities in living standards” ecologically? – “catastrophic effects” Need for a rethinking of economic growth
Economic Activity in Context
Total Household Income Lowest 20 % Second 20 % Third 20 % Fourth 20 % Highest 20 % Gini coefficient 1987
100 5,2 9,6 14,1 21,2 49,9 0,43
1994
100 4,9 8,6 12,6 19 54,9 0,49
Share in national income 2002
100 5,29
2003
100 6
2004
100 6,04 9,81 14,02 20,83 50,05 0,44 10,28 14,47 20,93 48,32 0,42 10,69 15,22 21,88 46,17 0,40
2005
100 5,1 9,9 14,8 21,9 48,4 0,43
2006
100 5,8 10,6 15,2 21,5 46,9 0,41
What Economies Do?
Goals (were): good stds of living, stability and sustainability – need to understand building blocks Need to combine micro and macro perpectives to understand the functionings Four essential economic activities: resource maintenance, production, distribution and consumption of goods and services.
Essential Economic Activities
Resource maintenance:
tending to preserving or improving the stocks of resources for preservation and quality of life Capital stock – valuable for economic contribution!
Types: natural (physical assets provided by nature), manufactured (human productive activities added to natural), human (individual’s capacity fo labour – skills and knowledge), social (stock of trust, mutual understanding).
Essential Economic Activities
Production:
conversion of resources into useble products – tangible/intangible, manufactured Inputs -> outputs + waste products Need to consider capital stocks
Distribution:
sharing of products and resources among people Markets facilitate exchange relations Transfers - payments given without return expectation (monetary/non-monetary – in kind)
Essential Economic Activities
Consumption:
final use of goods and services by individuals to satisfy needs.
May choose to
save
for consumption in the following periods. Flow of savings (either from individuals, business and government) add to the stock of available financial assets.
Use of financial intermediaries help facilitate the savers to loan out to those who want to borrow Some borrowed funds could be used for creation of new investment goods – aim to maintain resources
Spheres of Economic Activity
Core Sphere
– household, family, community that organize resource management, production and consumption.
work is rewarded directly by what it produces eg. Childcare, elderly care, decisions on labour supply, decision on skills and education, allocation of consumption (and savings/investment)
Public-Purpose Sphere
–
organizations governments, NGOs, international Exist for a specific purpose related to the “public good”, i.e. beyond individual and family interest.
eg. Regulation, direct provision
Spheres of Economic Activity
Business Sphere
– firms, looking for opportunities to buy and manage resources.
Responds to demands for goods and services (as opposed to core: direct needs; public-purpose: its constitutents) Propriatorships, partnerships, cooperatives, corporations One clear goal : making profit! (most valuable outputs to produce, produce at the least possible cost,
innovation
) Less Developed Country Context –
Informal Sphere
Outside government oversight and regulation – could be illegal, illicit but not necessarily.
Models in Economics:
A
model
is a simplified representation of a real situation that is used to better understand real-life situations.
The
production possibility frontier (PPF)
illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other.
Tom’s Trade-offs: The Production Possibility Frontier
Increasing Opportunity Cost
Economic Growth
Economic growth results in an outward shift of the PPF because production possibilities are expanded.
Transactions: The Circular-Flow Diagram
The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle.
Circular-Flow of Economic Activities
Economic Agents:
Households: do consumption decision and are the owners of factors of production
Aim: maximize utility
Firms: rent or employ the factors of production and do the production decision
Aim maximize profits Where they interact:
Markets for goods and services Markets for factors of production
Market not a place but a mechanism bringing seller and buyer together Price mechanism allocates the resources
Graphs: Pay attention to scale and size of increments
Graphs:
Pay attention to the variable of interest Be wary of causality
The Great Depression
The Great Depression
precipitated a thorough rethinking of macroeconomics, which gave rise to modern macroeconomics.
The Business Cycle
The business cycle is the short-run alternation between economic downturns and economic upturns. A depression is a very deep and prolonged downturn.
Recessions are periods of economic downturns when output and employment are falling.
Expansions, sometimes called recoveries , are periods of economic upturns when output and employment are rising.
The Business Cycle
What happens during a business cycle, and what can be done about it? the effects of recessions and expansions on unemployment; the effects on aggregate output; and the possible role of government policy.
Employment and Unemployment
Employment is the number of people working in the economy. Unemployment is the number of people who are actively looking for work but aren’t currently employed. The labor force is equal to the sum of employment and unemployment.
Employment and Unemployment
Discouraged workers
are non-working people who are capable of working but are not actively looking for a job.
Underemployment
is the number of people who work during a recession but receive lower wages than they would during an expansion due to smaller number of hours worked, lower-paying jobs, or both.
The
unemployment rate
is the ratio of the number of people unemployed to the total number of people in the labor force, either currently working or looking for jobs.
History of the unemployment rate since 1948
Taming the Business Cycle
Policy efforts undertaken to reduce the severity of recessions are called stabilization policy. One type of stabilization policy is
monetary policy
, changes in the quantity of money or the interest rate. The second type of stabilization policy is
fiscal policy
changes in tax policy or government spending, or both.
,
Long-Run Economic Growth
Secular long-run growth, or long-run growth, is the sustained upward trend in aggregate output per person over several decades.
A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth. So a central concern of macroeconomics is what determines long-run growth.
U.S. real gross domestic product per person from 1900 to 2004
Aggregate Price Level
A nominal measure is a measure that has not been adjusted for changes in prices over time. A real measure is a measure that has been adjusted for changes in prices over time.
The change in real wages is a better measure of changes in workers’ purchasing power than the change in nominal wages. The aggregate price level is the overall level of prices in the economy.
Consumer price index from 1913 to 2004
Inflation and Deflation
A rising aggregate price level is
inflation
. A falling aggregate price level is
deflation
.
The
inflation rate
is the annual percent change in the aggregate price level.
The economy has
price stability
when the aggregate price level is changing only slowly.
Inflation and deflation since 1929
The Open Economy
A closed economy is an economy that does not trade goods, services, and assets. The United States has become increasingly open, so that open economy macroeconomics has become increasingly important.
Open-economy macroeconomics is the study of those aspects of macroeconomics that are affected by movements of goods, services, and assets across national boundaries.
The Open Economy
One of the main concerns introduced by open-economy macroeconomics is the exchange rate, the price of one currency in terms of another. Exchange rates can affect the aggregate price level. They can also affect aggregate output through their effect on the trade balance, the difference between the value of the goods and services a country sells to other countries and the value of the goods and services it buys in return.
Economists are also concerned about capital flows, movements of financial assets across borders.
Movements of the exchange rate between the U.S. dollar and the euro
Distribution: Who gets what and how???
Distribution in form of exchange and in form of transfer – Main Q: who receive the incomes generated by production and the role of government, if any.
Exchange relations:
two agree to trade on the basis of mutuall agreed terms.
Goods and labour markets – monetary flow (L/K income) Wages, rents, profits – controversial debate over which is the productive one!
Distribution: Who gets what and how???
Taxes and transfers:
funds flowing
to
and
from
gov.
From –
dependency needs not met elsewhere (care, shelter, education, health services) Two main types of transfer programs – social insurance and means-tested.
Insurance- pool insurance (contributions) to hedge for risks Means-tested - non-contributory but income/assets/wealth being tested TR: Social Insurance Institution, Unemployment Insurance Fund, Social Assistance and Solidarity Fund
Distribution: Who gets what and how???
Taxes and transfers:
funds flowing
to
and
from
gov.
To –
collection of income and consumption/sales taxes (e.g.VAT) – direct vs. indirect taxes Proportional?? Progressive vs. regressive Tax system in TR relies heavily on indirect taxes: in 2008, 32.7 % of tax revenues come from income taxes while indirect taxes comprise of 63 % (OECD average 42 %).
Structure of taxation: share of tax revenues in TR constitutes only 24.5 % of GDP (OECD average: 35.8 %, EU-15: 38.8%) Share of income taxes in GDP (2007) in TR 5.6% (OECD: 13.2%; EU 15: 14%)
Distribution: Who gets what and how???
Distribution of Income -
share of income received by the population/households Quintiles – equal sized groups Distribution of income in TR
Distribution: Who gets what and how???
Measuring Inequality -
need to describe the pattern of inequality -
Lorenz Curve
The more bended the curve, the greater the inequality of income Gini Coefficient: ratio of area between the Lorenz Curve and diagonal 0 (perfect equality) < Gini < 1 (complete inequality)