Presentation Transcript

1. Reasons why Economists Disagree(from Gregory Mankiw) Differences in Scientific Judgments Example: Is it better to tax income or consumption? Differences in Values Example: Should we focus on growth or equity? Charlatans and Cranks (Mankiw’s words) Example: Supply-Side Economics (Mankiw’s words again)

2. Economists in Agreement

   From Gregory Mankiw http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html
3. Information from EH.Net Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a given time period. There are two ways to measure GDP: Nominal GDP is the dollar value of production at current-year prices. For example, nominal GDP in 1990, $5,800.5 billion, is calculated using year 1990 prices for goods and services. Real GDP is the dollar value of production using a given base year prices. For example, real GDP in 1990, $8,033.9 billion in year 2005 dollars, that is, the output of 1990 times the prices from 2005. The GDP Deflator measures changes in the overall level of prices for the goods and services that make up GDP. It is simply the ratio of nominal to real GDP times 100. Thus the value for 2005 is 100. GDP per capita is calculated by dividing either nominal or real GDP for a given year by the population in that year. These numbers can be thought of as the average share of output per person. The nominal GDP per capita in 1870 was $194, while in 2008 was $47,422; the real GDP per capita for those same years was $2,814 and $43,714.
4. GDP Defined GDP = Gross Domestic Product GDP = the market value of final goods and services produced in an economy Real GDP – the market value of final goods and services produced in an economy, stated in the prices of a given year. Per capita real output is real GDP divided by the total population. Per capita output = Per capita income = average income in the population
5. From Galor and Weil (AER, May 1999)
6. U.S. Economic Growth Data EH.net (or Economic History Net) http://eh.net/ How much is that? http://eh.net/hmit/
7. US GDP History What Was the U.S. GDP Then? http://www.measuringworth.org/usgdp/
8. Economic Growth in the 19th century(from EH.net)
9. Economic Growth in the 20th century(from EH.net)
10. Growth Happens!! Real GDP per-capita has increased in every decade in U.S. history. Growth was faster in the 20th century (relative to the 19th century). Average annual growth in the 20th century was about 2% per year. For the past 100 years…. Real Gross Domestic Product has increased (on average) 38.4% in each decade Real GDP per capita has increased (on average) 22.5% in each decade
11. Here is the 21st Century (assuming growth continues – at 2.1% -- as it has for the past 100 years)AND YES, that is $122 trillion in 2111 with average income nearing $400,000!!
12. Government Spending in the 20th century According to the BEA…government spending never exceeded 16.1% of GDP from 1933 to 1939. In 1951, government spending was 20.1% of GDP. It remained above 20% from 1951 until 1978 (under Jimmy Carter); reaching a peak of 23.9% in 1953 (under Dwight Eisenhower). Government spending also was above 20% from 1980 to 1992 (under Ronald Reagan and George Bush). From 1993 to 2007, government spending was less than 20%; reaching a minimum of 17.36% in 1998 (under Bill Clinton). From 2007 to 2011, government spending has been above 20%; reaching a peak of 21.2% in 2009. The average from 1951 to 2011 is 20.5%. So the peak in 2009 is close to the average across the last 60 years. In the first three quarters of 2012, government spending is once again below 20% of GDP. Since 1951, real GDP per capita has grown from $15,875 to $48,371 (according to EH.Net). In sum, government spending under the New Deal was not quite as large as the spending we have seen since 1951. The spending the BEA reports since 1951 has – in percentage terms – not been growing. And the economy, since 1951, has grown tremendously.
13. BLS Definitionshttp://www.bls.gov/bls/glossary.htm Employed persons (Current Population Survey): Persons 16 years and over in the civilian noninstitutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations. Colander, Economics
14. BLS Definitionshttp://www.bls.gov/bls/glossary.htm Civilian noninstitutional population: Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. Labor force participation rate: The labor force as a percent of the civilian noninstitutional population. Employment-population ratio (Current Population Survey): The proportion of the civilian noninstitutional population aged 16 years and over that is employed.
15. BLS Definitionshttp://www.bls.gov/bls/glossary.htm Unemployed persons (Current Population Survey): Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. Unemployment rate The unemployment rate represents the number unemployed as a percent of the labor force. Colander, Economics
16. Great Depression Unemployment Estimatesfrom Weir
17. Unemployment Rate: 1-48 to 1-13Source: Bureau of Labor Statisticshttp://data.bls.gov/timeseries/LNS14000000
18. Labor Force Participation Rate: 1-48 to 1-13Source: Bureau of Labor Statisticshttp://data.bls.gov/timeseries/LNS11300000 Colander, Economics
19. Employment Population Ratio: 1-48 to 1-13Source: Bureau of Labor Statisticshttp://data.bls.gov/timeseries/LNS12300000 Colander, Economics
20. Department of Labor Employment Report Monthly Data The Current Data
21. Reconcile the following empirical observations: - Most unemployment spells are of short-duration. - Most people unemployed at any given time have been unemployed for a long-duration Example: In one year, 2 people are unemployed Each month, 2 people lose a job and find one at the end of the month At any given time, how many people have been unemployed for a long time? Over the year, how many people were unemployed for a short period of time?
22. Natural Rate of Unemployment The unemployment rate will not be reduced to zero. The rate that it will be when the economy is at “full employment” is called the Natureal Rate of Unemployment or the Target Rate of Unemployment Colander, Economics
23. Natural rate of unemployment Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates. In a recession, the actual unemployment rate rises above the natural rate. In a boom, the actual unemployment rate falls below the natural rate. CHAPTER 6 Unemployment
24. Unemployment rate Natural rate of unemployment Actual and natural rates of unemployment in the U.S., 1960-2006 12 10 8 Percent of labor force 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 CHAPTER 6 Unemployment
25. A first model of the natural rate Notation: L = # of workers in labor force E = # of employed workers U = # of unemployed U/L = unemployment rate CHAPTER 6 Unemployment
26. Assumptions: 1. L is exogenously fixed. 2. During any given month, s = fraction of employed workers that become separated from their jobs s is called the rate of job separations f= fraction of unemployed workers that find jobs fis called the rate of job finding s and fare exogenous CHAPTER 6 Unemployment
27. s E f U The transitions between employment and unemployment Employed Unemployed CHAPTER 6 Unemployment
28. # of employed people who lose or leave their jobs # of unemployed people who find jobs The steady state condition Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant. The steady-state condition is: sE =f U CHAPTER 6 Unemployment
29. Finding the “equilibrium” U rate f U =sE =s(L –U ) =sL –sU Solve for U/L: (f + s)U = sL so, CHAPTER 6 Unemployment
30. Example: Each month, 1% of employed workers lose their jobs (s = 0.01) 19% of unemployed workers find jobs (f = 0.19) Find the natural rate of unemployment: CHAPTER 6 Unemployment
31. The CPI(from Mankiw) A measure of the overall level of prices Published by the Bureau of Labor Statistics (BLS) Uses: tracks changes in the typical household’s cost of living adjusts many contracts for inflation (“COLAs”) allows comparisons of dollar amounts over time
32. A bit of inflation history Period % Change in Money Supply % Change in Price Level ‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ 1834‑37 + 61 + 28 1837‑43 ‑ 58 ‑ 35 1843‑48 + 102 + 9 1848‑49 ‑ 11 0 1849‑54 + 109 + 32 1854‑55 ‑ 12 + 2 1855‑57 + 18 + 1 1857‑58 ‑ 23 ‑ 16 1858‑61 + 35 ‑ 4 (Sources: John Knox, A History of Banking in the United States, New York: Bradford Rhodes, 1903; and Historical Statistics, 1960, series E1‑12.) Review data at eh.net Compare before and after WWII
33. Problems with CPI(from Mankiw) 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.
34. Real and Nominal Concepts Nominal output is the total amount of goods and services measured at current prices. Real output is the total amount of goods and services produced, adjusted for price level changes.
35. Costs of Inflation Inflation may not make a nation poorer. It can redistribute income from those who do not raise their prices to those who do. It can reduce the amount of information that prices convey. Inflation is a very serious problem IF it increases to hyperinflation – exceptionally high levels of inflation, 100 percent or more a year.
36. Inflation and Money Growth
37. Quantity Theory and the Inflation/Growth Trade-Off Quantity theorists believe that low inflation should be the priority of policy. They believe that low inflation leads to growth because: It reduces price uncertainty, making it easier for businesses to invest in future production. It encourages businesses to enter into long-term contracts. It makes using money much easier.
38. Why Central Banks Increase the Money Supply If the central bank must buy government bonds to finance a government deficit, the money supply increases and inflation may occur. This inflation works as a kind of tax on individuals, and is often called an inflation tax because it reduces the value of cash. Central banks have to make a policy choice: Ignite inflation by bailing out their governments with an expansionary monetary policy. Do nothing and risk recession or economic breakdown.
39. Demand-Pull and Cost-Push Inflation Demand-pull inflation occurs when the economy is at or above potential output. It is generally characterized by shortages of goods and workers. Cost-push inflation occurs when the economy is below potential output. Significant proportions of markets or one very important market experience price increases not related to demand pressure.
40. Unemployment and Inflation A.W. Phillips. “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957.” Economica, November, 1958. This work gave us the Phillips Curve, or the negative relationship between unemployment and inflation.
41. 5 A 4 3 Inflation 2 B 1 0 4 5 6 7 Unemployment rate The Phillips Curve
42. Inflation Vs Unemployment in the United States, 1900-1960 During the period 1900-1960 in the United States, a low unemployment rate was typically associated with a high inflation rate, and a high unemployment rate was typically associated with a low or negative inflation rate.
43. Inflation versus Unemployment in the United States, 1948-1969 The steady decline in the U.S. unemployment rate throughout the 1960s was associated with a steady increase in the inflation rate. This is the negative relation between unemployment and inflation that A.W. Phillips found for the United Kingdom, and Robert Solow and Paul Samuelson found for the United States (or the original Phillips curve).
44. Inflation rate 1968 1956 4 1966 1957 3 1967 1955 2 1964 1958 1960 1965 1959 1963 1 1961 1954 1962 7 0 4 5 6 Unemployment rate The Rise of the Phillips Curve (1954-1968)
45. In the 1970s life changed... Beginning in 1970, the relation between the unemployment rate and the inflation rate disappeared in the United States. Inflation versus Unemployment in the United States, 1970-2000 (next slide)