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https://baruch.zoom.us/j/95762509350 (Password: SongMacro) Section 1: Basic Economics Concepts Module 1 The Study of Economics ● Economics is the study of scarcity and choice ○ Limited resources ● Individual choice is decisions by individuals about what to do, which necessarily involve decisions about what not to do. ● An economy is a system for coordinating a society’s production and consumption activities. ○ Producers ←→ Consumers ○ Sellers ←→ Buyers ● Market economy vs Command economy ○ USA vs China Macroeconomics examines the overall behavior of the economy ● Incentives are rewards or punishments that motivate particular choices. ● Marginal analysis is the study of the costs and benefits of doing a little bit more of an activity vs. a little bit less. ○ How to decide the price of a product? (Want to maximize profit) ■ $389 vs $400 ● A resource (factors of production) is anything that can be used to produce something else. ○ Land (timber, water, minerals) ○ Labor (effort of workers) ○ Capital (machinery, buildings, tools, goods used to make other goods & services) ○ Entrepreneurship (risk taking, innovation, and the organization of resources for production) ● Opportunity cost (not just money or time) ○ The real cost of something is what you must give up to get it. ○ The value of the choice of a best alternative cost while making a decision ○ Explicit and implicit cost ○ It is important in individual choice and decision making. ■ Reading book OR watching TV OR listening to music

Module 2: Intro to Macroeconomics What’s the goal of a country in terms of economics? 1. Economic growths => Business cycle 2. Stable price level ( ⇔ Low inflation) 3. Low unemployment ●

The business cycle is the alternation between economic downturns and upturns in the macroeconomy. ○ Depression is a very deep and prolonged downturn ○ Recessions are periods of economic downturns when output and employment decreases. ○ Expansions are periods of economic upturns when output and employment increases

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Employment: # of people currently employed in the economy

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Unemployment: # of people who are actively looking for work but aren’t currently employed.

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Labor force: Employment + unemployment

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Unemployment rate: (# of unemployed workers) / (Labor force)

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Output is the quantity of goods & services produced ○ GDP (Gross Domestic Product) ■ Aggregate measure of production equal to the sum of the gross value added of all resident and institutional units engaged in production Inflation: A rising overall price level Deflation: A falling overall price level

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Module 3: The Production Possibilities Curve (PPC) Model (CHECK HOMEWORK) PPC: A model that helps us understand and think about the trade-offs every economy faces.. ● Understand 3 important aspects: Efficiency, opportunity cost and economic growth Robinson Crusoe Economy: Producing two goods (coconut,fish)

A→B ● To get 8 more fish, he gives up 6 coconuts ● Opportunity cost per additional fish: 3/4 coconuts ● To get 1 more fish, he gives up 3/4 coconuts B→A ● Then, opportunity cost per additional coconuts: 4/3 fish ● To get 6 more coconuts, he gives up 8 fish Note that absolute slope of PPC is 30/40 = 3/4 - From PPC, we can get opportunity cost directly.

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PPC can be nonlinear (non straight line, curve); it is more realistic.

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When slope is steep = Opportunity cost is high = Give up more Y to get X

Economic growth: A sustained rise in aggregate output. ● Can be happened by: ○ An increase in the resources ■ Robinson is working more or he has new tools ■ Robinson’s skill increase ○ Technology

Module 4: Comparative Advantage and Trade In a market economy, individuals engage in trade. ● There are gains from trade ○ People can get more of what they want through trade than they could if they tried to be self-sufficient. ○ Due to specialization: Each person specializes in the task that he is good at performing.

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Trade based on comparative advantage By agreeing to specialize and provide goods to each other, ○ T and H can produce more ○ Both are better off than it each tried to be self-sufficient As long as people have different opportunity cost, everyone has a comparative advantage in something and everyone has a comparative disadvantage in something. Note that T has an absolute advantage in both (C&F)

Section 2: Supply and Demand Module 5: Intro and Demand Competitive market A market in which there are many buyers & sellers of the same good/service, none of whom can influence the price at which the good/service is sold. ● ●

A model of competitive market 5 Key elements in this model ○ Demand curve ○ Supply curve ○ The set of factors ⇒ Shift D ○ The set of factors ⇒ Shift S ○ The market equilibrium: EQ in price & EQ in quantity ○ Changes in the market equilibrium

Can be happened when changes in: ● Price of related goods/services ○ Substitutes: Pepsi vs Coke ○ Complements: Coffee & doughnut ● Income ○ More income, more likely to buy a good at any given price ○ Normal good: Income ^ ⇒ Demand ^ ○ Inferior good: Income ^ ⇒ Demand v ● Tastes ● Expectations ○ Pre Black Friday ● Number of consumers ○ Population increase/decrease

Module 6: Supply & Demand The Supply Curve ● The quantity supplied is the actual amount of a good/service producers are willing to sell at some specific price ● The supply schedule shows how much of a good/service producers will supply at different price ● A supply curve shows the relationship between quantity supplied and price

Can be happened when changes in: ● Input prices ○ Substitutes in production ○ Complements in production ● Technology ● Expectations ○ An increase in the anticipated future price of a good/service ● Numbers of producers

Module 7: Changes in Equilibrium Demand Increases

Supply Decreases

Simultaneous shifts of the D&S curve

Module 8: ● Price ceiling when a government thinks the price is way too high. ○ Then they want to reduce the price; they impose a price ceiling

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Price floors when a government thinks the price is way too low. ○ Then they want to increase the price; they impose a price floor

Chapter 1: Macroeconomics The study of economy as a whole, addresses many topical issues: - What causes recessions? What’s stimulus

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as "constant-price," "inflation-corrected", or "constant dollar" GDP

Real GDP decreases: Depression (severe); Recession (moderate) Real GDP increases: Expansion

Economic models ● Are simplified versions of more complex realities with irrelevant details stripped away ● Are used to: ○ Show relationships between variables ○ Explain the economy’s behavior ○ Devise policies to improve economic performance Endogenous vs. Exogenous variables ● Endogenous (dependent) variable are determined in the model ● Exogenous (independent) variables are determined outside the model: the model takes their values and behaviors as given Prices: Flexible vs Sticky Market clearing: An assumption that prices are flexible and adjust to equate supply and demand. Short run: Price sticky -- adjust sluggishly in response to changes in supply and demand,

CHAPTER 2: The Data of Macroeconomics Gross Domestic Product (GDP) - A measure of how well an economy is performing is computed every 3 months by the Bureau of Economics Analysis. - The total value of all final G/S produced in an economy during a given period (Yearly;Quarterly) - Two definitions (view) - Total expenditure (Quarterly) on domestically produced final goods and services. - Total income earned by domestically located factors of production. Expenditure equals income because every dollar a buyer spends becomes income to the seller

NNP= Total Income - Depreciation National Income = NNP Corporate Profits= Corporate Income Taxes + Dividends + Retained Earnings Personal Income= National Income Corporate Profits + dividends Disposable Personal Income= Personal Income- Personal Income Tax The Circular Flow

Value Added The value of output minus the value of the intermediate goods used to produce that output

Final goods, value added, and GDP ● ●

GDP= Value of final goods produced = Sum of value added at all stages of production The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double counting

The Expenditure Components of GDP Y=C+I+G+NX ● Consumption, C ● Investment, I ● Government Spending, G ● Net Exports, NX An important identity:

Consumption (c) The value of all goods and services bought by households, including: ● Durable goods ○ Cars, home appliances ● Nondurable goods ○ Food, clothing ● Services ○ Intangible items purchase by consumer, dry cleaning Investment (I) Spending on capital, physical asset used in future production ● Including: ○ Business fixed investment ■ Spending on plant and equipment ○ Residential fixed investment ■ Spending by consumers and landlords on housing units ○ Inventory investment ■ The change in the value of all firms’ inventories Government Spending (G) ● G includes all government spending on goods and services ● G excludes transfer payments (e.g., unemployment insurance payments) because they do not represent spending on goods and services. Net Exports (NX) ● NX= Exports - imports ○ Exports: the value of g&s (goods and services) sold to other countries. ○ Imports: the value of g&s purchased from other countries ● Hence, NX equals net spending from abroad on our g&s.

Expenditure-output puzzle Unsold output goes into inventory and is counted as “inventory investment” . . . whether or not the inventory buildup was intentional. • In effect, we are assuming that firms purchase their unsold output

Stocks vs. Flows A stock is a quantity measured at a point in time (10am) Ex. The US capital stock was $10 trillion on January 2016 A flow is a quantity measured per unit of time (a year) Ex. US investment was $2 trillion during 2016

NOW YOU TRY Stock or flow? • The balance on your credit card statement STOCK • How much time you spend studying FLOW • The size of your MP3/iTunes collection STOCK • The inflation rate FLOW • The unemployment rate STOCK • The GDP FLOW An important and versatile concept We have now seen that GDP measures: • total income • total output • total expenditure • the sum of value added at all stages in the production of final goods GNP vs. GDP • Gross national product (GNP): Total income earned by the nation’s factors of production, regardless of where located. GNP= GDP+Net factor payment • Gross domestic product (GDP): Total income earned by domestically located factors of production, regardless of nationality. • GNP=GDP + factor payments from abroad - factor payments to abroad • Examples of factor payments: wages, profits, rent, interest and dividends on assets

Real vs. nominal GDP • GDP is the value of all final goods and services produced. • Nominal GDP measures these values using current prices. • Real GDP measures these values using the prices of a base year Real GDP= Nominal GDP/ Price level

Nominal: PxQ (same year) Real GDP: Q x Price of Base year RGDP(2016)=$30*1000+$100*200

Real GDP controls for inflation • Changes in nominal GDP can be due to: • changes in prices • changes in quantities of output produced • Changes in real GDP can only be due to changes in quantities because real GDP is constructed using constant base-year prices.

Nominal > Real = Inflation

GDP deflator ● Inflation rate: the percentage increase in the overall level of prices. ● One measure of the price level: GDP deflator Definition: GDP deflator = 100 x (Nominal GDP/Real GDP) Real GDP = Nominal GDP / Price Level Real Wage = Nominal Wage / Price Level

Percentage Changes

LN (X/Y) = LN X - LN Y

Inflation rate= NominalGDP%-RealGDP%

Consumer price index (CPI) A measure of the overall level of prices • Published by the Bureau of Labor Statistics (BLS) • Uses: • tracking changes in the typical household’s cost of living • adjusting many contracts for inflation (“COLAs”) • allowing comparisons of dollar amounts over time How the BLS constructs the CPI 1. It surveys consumers to determine the composition of the typical consumer’s “basket” of goods 2. Every month, it collects data on the prices of all items in the basket and computes the cost of the basket 3. CPI in any month equals

BASE QUANTITY

The Composition of the CPI’s Basket

Why the CPI may overstate inflation ●

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Substitution bias: ○ The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen. Introduction of new goods: ○ The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI because the CPI uses fixed weights. Unmeasured changes in quality: ○ Quality improvements increase the value of the dollar but are often not fully measured.

The size of the CPI’s bias ● In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year. ● The BLS therefore made adjustments to reduce the bias. ● Now, the CPI’s bias is probably under 1% per year. CPI vs. GDP deflator ● Prices of capital goods: ○ included in GDP deflator (if produced domestically) ○ excluded from CPI ● Prices of imported consumer goods: ○ included in CPI ○ excluded from GDP deflator ● The basket of goods: ○ CPI: fixed ○ GDP deflator: changes every year The PCE deflator Another measure of the price level: personal consumption expenditures (PCE) deflator, the ratio of nominal to real consumer spending ●

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How the PCE is like the CPI: ○ only includes consumer spending ○ includes imported consumer goods How the PCE is like the GDP deflator: ○ the “basket” changes over time The Federal Reserve prefers PCE.

Categories of the population ● Employed ○ working at a paid job ● Unemployed ○ not employed but looking for a job ● Labor force ○ the amount of labor available for producing goods and services; all employed plus unemployed persons ● Not in the labor force ○ not employed, not looking for work, children, retired, discouraged Two important labor-force concepts ● Unemployment rate ○ percentage of the labor force that is unemployed ●

Labor force participation rate ○ fraction of the adult population that “participates” in the labor force—that is, is working or looking for work

Population= 255 x 1%= 255+2.55= 257.55 Labor force= 160.2 x 3%= 160.2+ 4.8= 165 Unemployed= 7 x 2%= 7.14 Unemployment rate= (7.14/165)x100%= 4.327% Labor force participation rate= (165/257.55)x100%= 64.1% Percentage changes ● Unemployment rate: 2% - 3% = -1% ● Labor force participation: 3% - 1% = 2% CHAPTERS 2 SUMMARY , PART 1 ● Gross domestic product (GDP) measures both total income and total expenditure on the economy's output of goods and services. ● Nominal GDP values output at current prices; real GDP values output at constant prices. ● Changes in output affect both measures, but changes in prices affect only nominal GDP. ● GDP is the sum of consumption, investment, government purchases, and net exports. ● The overall level of prices can be measured by either: ○ The consumer price index (CPI), the price of a fixed basket of goods purchased by the typical consumer, ○ the GDP deflator, the ratio of nominal to real GDP. ● The unemployment rate is the fraction of the labor force that is not employed. \ Chapter 2 Sapling The core inflation statistic excludes food and energy prices because they exhibit substantial short-term volatility, so core inflation is sometimes viewed as a better gauge of ongoing inflation trends SUMMARY Nominal GDP: PxQ (same year) Real GDP: Q x Price of Base year

CPI:

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Always use same base Quantity

Inflation: CPI/GDP Deflator ● X CPI - Above CPI/ AboveCPI ● X GDP Deflator - Above deflator/ Above deflator % change: ● B-A/A x100% Labor Force:

Labor force participation rate: = Labor Force/ Adult population x100%

Chapter 3: National Income:Where it Comes From and Where It Goes Outline of model A closed economy, market-clearing model ● Supply side ○ factor markets (supply, demand, price) ○ determination of output/income ● Demand side ○ determinants of C, I, and G ● Equilibrium

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goods market loanable funds market

Factors of production K = capital: tools, machines, and structures used in production L = labor: the physical and mental efforts of workers The production function: Y = F (K,L) Shows how much output (Y) the economy can produce from K units of capital and L units of labor ● Reflects the economy’s level of technology ● Exhibits constant returns to scale (CRS)

z>0 = Constant z>1= Increasing

a) Constant b) Constant

Assumptions 1. Technology is fixed. 2. The economy’s supplies of capital and labor are fixed at:

Determining GDP Output is determined by the fixed factor supplies and the fixed state of technology:

The distribution of national income determined by factor prices, the prices per unit firms pay for the factors of production ▪ wage = price of L ▪ rental rate = price of K

How factor prices are determined Factor prices are determined by supply and demand in factor markets. • Recall that the supply of each factor is fixed. • What about demand? Demand for labor

Assume that markets are competitive: each firm takes W, R, and P as given. ● Basic idea: A firm hires each unit of labor if the cost does not exceed the benefit. ● cost = real wage ● benefit = marginal product of labor Marginal product of labor (MPL) The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL decreases as L increases

Diminishing marginal returns ● As one input is increased (holding other inputs constant), its marginal product falls. ● Intuition: ○ If L increases while holding K fixed, machines per worker falls, worker productivity falls. ● A low marginal product of labor means that a lot of labor is needed to raise output by one unit. Then marginal cost of output is high. ● A high marginal product of labor means little labor needed to raise output by one unit. Then marginal cost of output is low.

Constant Diminishing

a) Constant b) Diminishing c) Diminishing

Determining the rental rate ● We have just seen that MPL = W/P= Real WAGE ● The same logic shows that MPK = R/P: ● Diminishing returns to capital:

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MPK falls as K rises The MPK curve is the firm’s demand curve for renting capital. Firms maximize profits by choosing K such that MPK = R/P

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Midterm C1-5 Mid October 26th

The Division of National Income ● If all firms in the economy are competitive & profit maximizing, then each factor of production is paid its marginal contribution to the production process.

Real Wage Real Capital Growth

The Income that remains after the firms have paid the factors of production is the economic profit

Normal Profit: ● An economic equal to zero ● It means the firm could not any better using its resources in any alternative activity.

The neoclassical theory of distribution ● States that each factor input is paid its marginal product ● A good starting point for thinking ab...