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The Economy

The Economy

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The Economy

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  1. The Economy What you didn’t want to know Where it is Where it isn’t Where it might go Where it might not go Why? Why not? are you blue enough?

  2. Some people who majored in economics: Gerald Ford Ronald Regan George Bush, Sr. Sandra Day O’Connor Arnold Schwarzenegger Mick Jagger Tiger Woods

  3. Some people who majored in economics: before economics after economics

  4. What is Economics? Economics: is NOT always what you think is NOT Rocket Science will NOT tell you how to get rich Economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing.

  5. What is Economics? Economics: The First Law of Economics:  For every economist, there exists an equal and opposite economist. The Second Law of Economics:  They're both wrong. Economics is the painful elaboration of the obvious. Economics is common sense made difficult. What IS economics?

  6. What is Economics? Economics is: about people and the choices they make.(Gwarthey & Stroup, Economics: Private and Public Choice, 4th Ed., 1987, p. 4.) the study of almost everything humans must do as they attempt to live their lives.(Carson & Thomas, The American Economy - Contemporary Problems and Analysis, 1993, p. 4) the study of the use of limited productive resources in a society to satisfy the unlimited desires of its members.(Hyman, Microeconomics, 3rd Ed., p. 9) the study of individuals’ behavior and the resulting effects on the allocation of scarce resources.(Barron & Lynch, Economics, 3rd Ed., 1993, p. 4) focuses on all the choices people make as well as the personal and social consequences of their choices.(Byrns & Stone, Economics 5th Ed., 1992, p. 4.)

  7. Economics is: the study of how scarce resources are allocated among competing uses.(Ragan & Thomas, Principles of Economics, 1993, p. 6) the study of individuals’ behavior in a world of scarcity.(Barron & Lynch, Economics, 3rd Ed., 1993, p. 4) an inquiry into the nature and causes of the wealth of nations.(Adam Smith,1776) the academic discipline most discussed by the general public. It is also one of the least understood.(Ramsey, Economic Forecasting - Models or Markets, 1977, p. 11) the science of wealth.(Murad, Economics - Principles and Problems, 1963, p. 3.)

  8. Economics is: the study of the economy(Collander, Economics, 1993, p. 6) what economists do.(Quoted by Becker, Economic Theory, p. 1.) the idea of economizing.(Albrecht, Economics 3rd Ed. p. 7.) the study of constrained maximization.(Bowden, Principles of Economics, 4th Ed. 1983, p.1.) the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices.(Miller, economics today - the micro view, 2006, p. 3)

  9. Things are not always what they seem • Everything has a price • There is a cost to everything • Actions have consequences • Frédéric Bastiat (1801-1850) • That Which is Seen, and That Which is Not Seen

  10. Basic Economics Scarcity is: LimitedResources&UnlimitedWants Our wants exceed our ability to satisfy Resources of production are insufficient to satisfy all of our wants Must make choices

  11. Scarcity Choices OpportunityCost Basic Economics LimitedResources&UnlimitedWants

  12. Basic Economics Opportunity Cost = The value of your next best alternative, not taken. Whatever you give up to do something. Whenever you choose, you lose! Where would you be if you weren’t here right now?

  13. Basic Economics • Basic assumptions: • People are rational. • Never intentionally do anything that would make themselves worse off. • People act in their own self interest.

  14. What is the economy? The economy is the way that society chooses to answer the three questions: • What (to produce) • How (to produce it) • Who (who gets it)

  15. What is inflation? Blue Pill Answer: A sustained rise in the average level of prices Price index: CPI; PPI; PCE Red Pill Answer: An artificial increase in the money supply Inflation is always and everywhere a monetary phenomenon (Milton Friedman)

  16. 1) Destroys the purchasing power of money 2) Redistributes income & wealth 3) Hurts lenders 4) Helps borrowers 5) Hurts workers 6) Helps business owners 7) Hurts those on fixed incomes Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless. (Milton Friedman) Effects of inflation

  17. Nominal versus Real values: Nominal = named, or market value Real = purchasing power Real = (Nominal / price index) x 100 Effects of inflation

  18. Nominal wage = $10 per hour Price level (CPI) = 100 Real wage = $10 per hour Hamburgers are $1 Each hour of work = 10 hamburgers Effects of inflation

  19. Inflation! Price level (CPI)= 120 Hamburgers = $1.20 Nominal wage = $10 per hour Real wage = $8.33 per hour ($10/120)x 100 Each hour of work = 8 hamburgers It now takes $12 to buy what used to cost $10 Effects of inflation

  20. Historical purchasing power of US dollar thru 2004(American Institute for Economic Research)

  21. Inflation I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.(Friedrich August von Hayek) Inflation is repudiation. (Calvin Coolidge) Inflation is always and everywhere a monetary phenomenon (Milton Friedman)

  22. What is Unemployment? Blue Pill Answer: Fraction of the labor force not employed Population - under 16 - institutionalized - don’t want to work = Labor force Labor force = employed + unemployed Unemployment rate = (U / LF) x 100

  23. What is Unemployment? Types of unemployment Seasonal Frictional = 3% Structural = 2% Cyclical = 0% Full employment = 5% unemployment Natural Rate of Unemployment

  24. What is Unemployment?

  25. What is Unemployment?

  26. What is Unemployment? Problems with measurement: Underemployed? Discouraged Workers? Home production? Underground economy?

  27. What is GDP? Gross Domestic Product is The total market value of all final goods and services produced within national borders in one year 2009 U.S GDP =$14,730,200,000,000 RELEASED AT 8:30 A.M. EDT, FRIDAY, OCTOBER 29, 2010 (

  28. What is GDP? Nominal GDP = $14,730,200,000,000 Real GDP = $13,260,700,000,000 Price Index = 1.11

  29. What is GDP? Consumption $10,376,700,000,000 Spending by households on goods & services Most stable 70.5% Investment $ 1,896,100,000,000 Spending by business on capital goods Business inventory adjustment Most volatile 13% Government $ 3,018,900,000,000 Spending on goods and services 20.5% Exports $ 1,842,100,000,000 Spending by ROW on U.S. goods & services 12.5% Imports Spending on ROW by U.S. $ 2,403,500,000,000 16.5%

  30. What is GDP?

  31. What is GDP? Country GDP (PPP) European Union $14,890,000,000,000 United States $14,720,000,000,000 China $ 9,872,000,000,000 Japan $ 4,338,000,000,000 India $ 4,046,000,000,000 Germany $ 2,951,000,000,000 Russia $ 2,229,000,000,000 Brazil $ 2,194,000,000,000 United Kingdom $ 2,189,000,000,000 France $ 2,160,000,000,000 Italy $ 1,782,000,000,000 Mexico $ 1,560,000,000,000 South Korea $ 1,467,000,000,000 Spain $ 1,375,000,000,000 Canada $ 1,335,000,000,000 Indonesia $ 1,033,000,000,000 Turkey $ 958,300,000,000

  32. What is GDP? Country GDP (PPP) Lebanon (87) $58,650,000,000 Bill Gates $53,000,000,000 Costa Rica $51,300,000,000 Bolivia $47,980,000,000 Uruguay $47,800,000,000 Warren Buffett $47,000,000,000 El Salvador $43,980,000,000 Panama $43,480,000,000 Luxembourg $40,810,000,000 North Korea $40,000,000,000 Cambodia $29,400,000,000 Afghanistan $28,900,000,000 Christie Walton $22,000,000,000 Madagascar $20,730,000,000 104 more countries

  33. What is GDP? Problems: No household production No “underground” production No black market production Only indicates production not living standard

  34. Six basic economic models(tools of analysis) Cost = Benefit Production Possibilities Frontier Circular Flow Supply and Demand Business Cycle Aggregate Supply and Aggregate Demand

  35. Cost = Benefit model Marginal! If MB > MC? If MB < MC? Economic Decision Rule Self Interest Never intentionally do something that will make you worse off.

  36. Production Possibilities Curve (Frontier) 1) The PPC models scarcity. 2) The PPC models trade-offs. 3) The PPC models Opportunity Cost. 4)The PPC models the Law of Increasing Opportunity Cost. 5) The PPC models efficiency. 6) The PPC models full employment:

  37. Basic Economics LimitedResources: Land Labor Capital Entrepreneurship ? Technology ?? Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices. (Miller, economics today - the micro view, 2006, p. 3)

  38. Production Possibilities Curve (Frontier)

  39. Production Possibilities Curve (Frontier)

  40. Production Possibilities Curve (Frontier) Given: Land Labor Capital Entrepreneurship Technology • Unattainable Y1 Y • Attainable • but • inefficient X1 X

  41. Production Possibilities Curve (Frontier) 1) The PPC models scarcity. 2) The PPC models trade-offs. 3) The PPC models Opportunity Cost. 4)The PPC models the Law of Increasing Opportunity Cost. 5) The PPC models efficiency. 6) The PPC models full employment:

  42. Say’s Law Jean Baptiste Say (1767–1832) "products are paid for with products" (J.B. Say; 1803: p.153) "supply creates its own demand.” (J.S. Mill) “It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.   When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands.  Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable.  But the only way of getting rid of money is in the purchase of some product or other.  Thus the mere circumstance of creation of one product immediately opens a vent for other products.” (J. B. Say; 1803: p.138-9) The act of production creates income sufficient to purchase what was produced. or: Income equals expenditure equals the value of production or: Y = AE = GDP

  43. Say’s Law & the Circular Flow Model Goods & Services Market Business Firms Households Land Labor Capital Entrepreneurship Resource Market