MACROECONOMICS
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Transcript of MACROECONOMICS
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MACROECONOMICS
United States Fiscal Policy & International Trade
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Fiscal Policy
Spending, taxing, and borrowing policies of the United States government within a 12-month period of time
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Types of Taxes
• Proportional• Progressive• Regressive
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How does the government collect taxes?
• Individual Income Tax
• Corporate Income Tax
• Social Security Tax• Excise Tax• Estate & Gift Tax• Customs Duties
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Supply-Side Economics
• Say’s Law, law of markets
• Laissez-faire • Reduce government
regulations• Supply-side
economics
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Fiscal Policy Problems
1. To invest or not to invest?
2. What budget areas get cut?
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Demand-Side Economics • John M. Keynes
• Government involvement
1. Government spending
2. More production3. Lower
unemployment4. Newly employed
spend, create more demand for production
• Employment Act of 1946
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Five Tools of Fiscal Policy
1. Marginal Tax Rates
2. Tax Incentives
3. Government Spending
4. Public Transfer Payments
5. Progressive Income Taxes
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Marginal Tax Rates
1. Lowering taxes: increases individual and business spending power, unemployment rates decrease
2. Raising taxes: decreases individual and business spending power, limiting inflation
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Tax IncentivesTax breaks given to businesses in the hope that they will invest in new capital goods
1.Decrease in spending: slows down business activity and reduces inflation
2. Increase in spending: reduces unemployment and increases business activity
Government Spending
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Public Transfer Payments
1. Unemployment checks
2. Welfare checks
3. Social Security checks
4. Veteran’s benefits
5. Medicare and Medicaid coverage
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Progressive Income Taxes
1. People and businesses naturally fall into lower tax brackets during a recession
2. Conversely, they move up into higher tax brackets during a time of prosperity
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Limitations of Fiscal Policy1. Timing and Unpredictability: Difficult to predict
what the economy will do 2. Political Pressure: Voters will remove elected
officials if they feel the economy is not proceeding down a positive path
3. Lack of Coordination: Government agencies cannot always work together quickly enough to get an economic policy in place
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How Is the Federal Budget Created?
1. The President consults with• Advisers• Office of Management &
Budget (OMB)• Council of Economic Advisers• Department of the Treasury
2. President sends proposed budget to Congress for review
3. Congress passes it with changes and sends it back to the President for his signature
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Budget Deficits
• Deficits: Occur when more money is spent than is taken in than tax revenues
• Deficit Spending: The government spends more money on its programs than its tax revenues can cover
• Four reasons for deficit spending:
1. Promote economic stability
2. Stimulate the economy
3. Provide public goods
4. Provide help during national emergencies
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The National Debt
The term “National Debt” refers to how much the government has borrowed. It includes money carried over from previous years.
Debt to the Penny: Examples
08/19/2004 $7,343,012,590,769.26 08/18/2004 $7,337,786,947,237.37 08/17/2004 $7,341,461,448,755.40 08/16/2004 $7,335,563,157,880.75 08/13/2004 $7,312,230,696,984.50 08/12/2004 $7,312,306,434,333.71 08/11/2004 $7,305,246,621,955.51 08/10/2004 $7,308,629,683,239.34
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International Trade
1. Specialization2. Absolute advantage3. Comparative
advantage
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International Trade
Foreign Exchange Rates August 20, 2004Country Monetary
UnitAugust
16
August
17
August
18
August
19
August
20
Australia Dollar 0.7169 0.7148 0.7145 0.7245 0.7238
Brazil Real 3.0155 2.9960 2.9890 2.9780 2.2780
Canada Dollar 1.3076 1.3080 1.3074 1.2964 1.2980
China, P.R.
Yuan 8.2768 8.2767 8.2767 8.2768 8.2767
Denmark Krone 6.0305 6.0330 6.0470 6.0165 6.0270
EMU Members
Euro 1.2333 1.2329 1.2299 1.2368 1.2324
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Balance of Payments
• Keeps track of money invested in the U.S. by other nations and vice versa
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Country and Industry Detail for Capital Inflows, 2003 [Millions of dollars; not seasonally adjusted; outflows(-)]
Year 2003 I II III IVr
All countries, all industries ............. 29,772 29,635 -1,191 -4,145 5,473
Europe ................................................ 6,572 30,932 -7,176 -11,583 -5,602
Latin America and
other Western Hemisphere .............. 3,525 481 3,606 637 -1,199
Africa ...................................................... -50 -116 138 42 -113
Middle East ........................................... 522 380 -78 377 -157
Asia and Pacific ............................... 10,086 -1,755 1,363 4,431 6,048
European Union (15)/1/ .................... 11,516 25,392 -9,818 -10,501 6,443
Foreign Direct Investment in the U.S.
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Balance of Trade
• The difference between imports and exports
U.S. Balance of Trade
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1 2 3 4 5 6 7 8 9 10 11
1992-2002
Qu
an
tity
Exports
Imports
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Trade Barriers
• Tariffs: taxes on imports
1. Revenue tariffs
2. Protective tariffs
• Import quotas• Voluntary trade
restrictions
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International Trade Cooperation
• Reciprocal Trade Agreements• Regional Trade Organizations
1. European Union2. Caribbean Community & Common
Market3. Association of Southeast Asian
Nations
• International Trade Agreements1. General Agreement on Tariffs &
Trade 19472. World Trade Organization 1995
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North American Free
Trade Organization
(NAFTA)
• Signed in 1992 by the Canada, the U.S., and Mexico
• Reduced, then eventually eliminated tariffs
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NAFTA Effects
1. U.S. agricultural exports worldwide
2. U.S. farm and food exports to NAFTA partners
3. Increases
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MICROECONOMICS
Demand and Supply through
Market Structures
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3 Basic Questions
• What goods and services are to be produced?
• How the goods and services to be produced?
• For whom are the goods and services to be produced?
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Central Problem
• The central economic problem is SCARCITY.
• Human wants are unlimited, but resources are limited (scarce).
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Microeconomics is the study of…
• Individuals• Households• Businesses• Industries
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Microeconomics revolves around two very important concepts:
• Demand
• Supply
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Demand
• The desire and ability to purchase a good or a service
• Demand represents the consumer’s point of view
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You may desire to purchase a…
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Scarcity
• A lack of resources • The desire to
purchase the Corvette may be strong, but the ability may not be there due to a scarcity of…
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• Trade Off: choosing between two things
• Opportunity Cost: the thing given up in order to attain the other thing
OR
Trade Off
OpportunityCost
&
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Law of Demand
As the price of an item goes down, demand goes up; as the price of an item goes up, demand goes down.
EXAMPLE:
If the price of flip flops is $5 per pair, 50 people would go to buy them. If the price went up to $50 per pair, there would only be five people who would buy them.
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Demand Curves & Schedules
D50
5
$5 $50
Quantity
Price5$50
25$25
50$5
Quantity
Demanded
Price
25
$25
Curve
Schedule
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Supply
• The desire and ability to sell a good or service to people
• Supply represents the producer’s point of view
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Law of Supply
As the price of an item goes up, supply goes up; as the price of an item goes down, supply goes down.
EXAMPLE:If the price of flip flops is $5 per pair, 50 people would go to buy them; however, the store might only have 5 pairs on the shelves.
If the price went up to $50 per pair, there would only be five people who would buy them; however, the store would want to make a lot of money so they would make sure they had 50 pairs on the shelves.
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Supply Curves and Schedules
50
25
5
$5 $25 $50
Quantity
Price
S
50$50
25$25
5$5
Quantity
Supplied
Price
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Benefits of the Price System
• Information• Incentives• Choice• Efficiency• Flexibility
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Limitations of the Price System
• Externalities• Public Goods• Instability
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Demand and Supply Curves and Schedules
50
25
5
$5 $25 $50
Surplus
Shortage
50$505
25$2525
5$550
Quantity
Supplied
PriceQuantity
DemandedD S
Curve Schedule
Qu
anti
ty
Price
Equilibrium
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Government Regulations
and the Price System
• Price Ceilings
D S
Equilibrium
Shortage
Surplus
Price
Ceiling
Price
Floor
$50
$25
$5Q
uan
tity
$5 $25 $50
Price
• Price Floor
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Productivity
• The amount of goods and services produced per unit of input
• Productivity has an impact on what producers can supply at various prices
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Production Schedule and Curve: Vanilla Mint Cookies
-223813
-524012
-1324511
-725810
-132659
242788
482547
362066
361705
361444
361083
36722
36361
000
Marginal Product
Total ProductLabor Input
Nu
mb
er
of
Co
ok
ies
Pro
du
ce
d
Labor Input1 2 3 4 5 6 7 8 9 10 11 12 13
300
275
250
225
200
175
150
125
100
75
50
25
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Marginal Product and Costs: Vanilla Mint Cookies
-271$3,368$2,868$500-223813
12
11
10
9
8
7
6
5
4
3
2
1
0
Labor Input
240
245
258
265
278
254
206
170
144
108
72
36
0
Total Product
-5
-13
-7
-13
24
48
36
36
36
36
36
36
0
Marginal Product
-90.4$2,826$2,326$500
-52$2,374$1,874$500
-17$1,698$1,198$500
-6.54$1,579$1,079$500
4.38$1,494$994$500
$2.17$1,389$889$500
$3.14$1,285$785$500
$4.03$1,172$672$500
$3.53$1,027$527$500
$7.03$900$400$500
$2.86$753$253$500
$1.39$650$150$500
--$5000$500
Marginal
Costs
Total
Costs
Variable
Costs
Fixed
Costs
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Market Structures
Four types of competition and market structures:
• Pefect Competition
• Monopolistic Competition
• Oligopoly
• Pure Monopoly
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Perfect Competition
Characteristics of a market that has perfect competition:
1. Many buyers and sellers
2. All the products are identical
3. There are no price regulations in the market
4. Sellers/Producers can enter and exit the market very easily
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Monopolistic Competition
Characteristics of a market that has monopolistic competition:
1. Many buyers and sellers
2. Product differentiation is necessary because the products essentially do the same thing
3. Non-price competition exists because buyers will purchase their favorite product regardless of price
4. Sellers/producers can enter and exit the market easily
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Oligopoly
Characteristics of a market that has an oligopoly:
1. There are only a few sellers/producers
2. Products can be identical or very similar
3. The market is very difficult for other producers to enter into
4. Non-price competition exists among buyers of the products
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Monopoly
Characteristics of a market that has a monopoly:
1. There is only one seller/producer
2. There is no substitute for the product
3. No other sellers/producers can enter into the market easily
4. The seller/producer has complete control over the price of the product
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Four Main Types of
Monopolies
• Natural• Geographic• Technological• Government
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MICROECONOMICS
Part II
Businesses, Unions, Saving, and Investing
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Three main types of business organizations• Sole Proprietorship• Partnership• Corporation
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Sole Proprietorship
A business owned and controlled by one person.
Advantages
1. Easy to start
2. Total control
3. Keep all profits
Disadvantages
1. Unlimited liability
2. Total responsibility
3. Limited growth
4. Limited life
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Partnership
A business owned by two or more people.
Advantages
1. Easy to start
2. Partner specialization
3. Shared decisions
4. Shared losses
Disadvantages
1. Unlimited liability
2. Potential partner conflict
3. Limited life
4. Limited growth
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CorporationA company owned by many stockholders, each of whom share limited liability.
Advantages
1. Limited liability
2. Separation of owners and managers
3. Easy fund raising
4. Unlimited life
Disadvantages
1. Expensive to start
2. Government regulations
3. Slow decision making
4. Double taxation
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Steps in Forming a Corporation
• Articles of incorporation
• Board of directors• Corporate charter• Stocks and bonds
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Corporate Combinations
• Horizontal mergers
• Vertical mergers• Conglomerates
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The U.S. Labor Force
Six factors affecting the U.S. labor force:
• Wages• Skills• Working conditions• Work location• Intrinsic rewards• Market trends
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Long-Term Changes Affecting
the Labor Force
Labor-Intensive Economy
(pre-Industrial Revolution)
Capital-Intensive Economy
(Industrial Revolution to the present)
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History of Labor Unions
• Knights of Labor• American
Federation of Labor (AFL)
• Congress of Industrial Organizations (CIO)
• AFL-CIO
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Types of Unions
Local Unions
Example: plumbers in a
certain county, group of counties,
or a state
Example: the AFL-CIO Example: the NEA
(National Educators
Association)
National Unions Independent Unions
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Key Labor Legislation
• Clayton Antitrust Act (1914)
• Norris-La Guardia Act (1932)
• Wagner Act (1935)• Fair Labor
Standards Act (1938)
• Taft-Hartley Act (1947)
• Landrum-Griffin Act (1959)
Senator Robert F. Wagner
Senator Robert A. Taft
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Union Bargaining
Contract Issues• Wages and fringe
benefits• Working conditions• Job security• Union security• Grievance
procedures
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Negotiating Techniques
• Collective bargaining
• Mediation• Arbitration
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Labor Tactics
Union Tactics• Striking• Picketing• Boycotting• Coordinated
campaigning
Management Tactics• Hiring scabs• Lockouts• Injunctions
Scabs being driven through a picket line
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Saving
• Savings accounts• Money-market
accounts• Time deposits
- Certificates of deposit
- Savings bonds
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Investments
Financial Plans• Budgets• Investment plans• Retirement
accounts• Estate plans
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Stocks
Investing1. Profit and loss- Dividends- Capital gains and losses2. Stock splits
Trading
1. Brokers
2. Investment banks
3. Stock exchanges
-NYSE
-AMEX
4. Over-the-counter markets
-NASDAQ
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Investments
Stock Prices
Ko
WalM
Tom
PacSun
%
Chng
WklyFriLastLoHiVol
Wkly
PEYieldDivNameLoHi
52 Week ChargeWeekly YTD
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Bonds
• Yields• Corporate bonds
Minimum order
$5,000
Minimum order
$1,000–$5,000
Minimum order
$10,000
Matures
10–30 years
Matures
1–10 years
Matures
3 months to 1 year
Long-term investment
Long-term investment
Short-term investment
NotesBondsBills
• Municipal bonds• Government bonds
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Credit
• Credit bureau- Credit rating
• Credit terms- Finance charges- Annual Percentage Rate (APR)
• Credit abuse- Bankruptcy
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Credit as a Stimulant for the Economy
A lot of people and businesses
deposit their money in bank
accounts
The banks loan this
money out to businesses, people, and
the government
Businesses buy new equipment
with the borrowed
money
The people who borrow the
money buy different things
The government spends the
borrowed money on public goods
All of the spending
of this borrowed
money causes
DEMAND
to increase
When Demand
increases
SUPPLY
increases too