Mikeroeconomics

Daily Review -- Three Questions

2012-01-29T15:20:00.000-08:00

What are the three questions that every society must answer about their economic system?

What will be produced? How it will be produced? How should the output be distributed? These questions define the Market, Command, and Traditional economies. When there are elements of of all three economies in one economic system, then the economy is described as mixed.

A good description of these economies can be found by clicking here.

Lecture for Tuesday

2012-01-29T10:46:00.000-08:00

Complete these problems for Wednesday by completing the green cells. Prove that GDP from final sales equals Total Factor Income equals the total of value added.

Daily Review -- Loanable Funds Basics

2012-01-28T15:37:00.000-08:00

When savings increases, the supply of loanable funds increases, the real interest rate decreases. This shown first through the Circular Flow model then with supply and demand analysis.

In Figure 1, households save more when the budge is balanced. I assumed no transfer payments. When the supply of savings increases, the price of borrowing becomes cheaper as shown in Figure 2, below.

Starting at point 1 in the supply and demand, what would happen if the government borrowed loanable funds to finance construction of a new school? My answer is that the supply curve would shift to the left and the real interest rate would rise.

It is my proposition that the supply of loanable funds is the sum of private and public savings. Thus by using logic one can predict the movement of interest rate by simple know if the supply increases or decreases.

Daily Review -- Friday's Lecture

2012-01-28T05:04:00.000-08:00

We constructed a GDP Price Deflator. We began to delve into the Loanable Funds Market.

As a review, can you complete this table:

Here are the definitions I used. Nominal GDP equals Price times Quantity. I assumed that only one good was made so the Price was the price level. Real GDP is equal to current year output at base year prices. The price index is weighted fixed market basket which is $50 in the base year. The GDP Price Deflator equals Nominal GDP divided by Real GDP. Can you complete the table above?

My answers follow.

And the formulas.

Now calculate the inflation rate and Real GDP growth rate.

From the above table, you can observe that GDP is increasing faster than inflation so the economy is growing in real terms.

Are Power Retailers A Monopsony?

2012-01-28T04:17:00.000-08:00

Many economists think that the monopsony model is out of date, but I think the model can be applied to power retailers. Power retailers is the Logistics term for big box retailers like Target and Walmart who dictate the terms of supply contracts.

For example, Walmart might tell a wholesaler that it will chose another distributor for Peach Kreme Puffs if the distributor cannot lower the wholesale cost to Walmart. As Walmart expands, their retailing power increases so influence the procurement of resources that it sells. If Target can lower their prices and Walmart does not, then consumers will shop at Target.

I think that the monopsony model applies to retail of final goods and services and not just to the acquisition of land, labor, and capital.

Does the FED Print Money?

2012-01-27T02:44:00.000-08:00

This is a good answer.

The text of the video is here. I want to add that credit cards are not counted in the M1, M2, or M3 money supply.

Today's Lecture PPT

2012-01-25T03:08:00.000-08:00

I think this awesome presentation was made my Ken Norman. You will find a link to his homepage on my blog.

Gross Domestic Product [What is not included]

View more presentations from knorman31

Data For Today's Lecture

2012-01-25T02:48:00.000-08:00

What happens to investment, Ig, during a recession? This data shows that investment in capital, inventories, and new residential housing declines. Can you offer an explanation?

Net Exports, Nx, show that the United States has imported more than they have exported? Can you offer a reason?

Savings increases during a recession? Is an increase in savings good for the economy as a whole? Why do people increase their saving during an economic downturn?

2012-01-24T17:34:00.000-08:00

An increase in the Consumer Price Index is commonly referred to as

economic growth.
inflation.
unemployment.
discouraged workers.
deflation.

My answer is "B". Recall that the Consumer Price Index is made up of a fixed market basket so that only the prices change. Since the prices change while the quantity bought in each period stays the same, the CPI measures price changes. In this case the price level is increasing so it must be a time of inflation.

Daily Review -- Sample MC Questions

2012-01-23T03:10:00.001-08:00

Q. Which of the following are harmed by unexpectedly high rates of inflation?

I. Borrowers repaying a long-term loan at a fixed interest rate.
II. Savers who have put their money in long-term assets that pay a fixed interest rate.
III. Workers who have negotiated cost-of-living raises into their contracts.
IV. Persons living on fixed incomes.

I and III only
II and III only
II and IV only
I, II, and IV only
II, III, and IV only

This question was taken from AP Macroeconomics Practice that I think is Eric Dodge's 5 Steps to a 5 workbook that is posted online. My answer to the above question is C. That is, savers are hurt because their real balances buy less and fixed income earners are hurt too for the same reason.

Unanticipated inflation catches the economy off guard and redistributes the gains from trade. In this case the gains are transfered from the creditors to the debtors in the first case. In the second case, people living on fixed income have to make new consumption choices which means delaying the purchase of new durable goods and buying inferior goods.

I write the Daily Review to keep my mind sharp and to give my students an edge when taking the AP exam. A FREE app is here. Look for my new app, Bottleneck, soon.

Who Should Teach Economics?

2012-01-23T02:49:00.000-08:00

What department should teach economics? Some say the Social Studies Department and some say the Business Department. This question will never be resolved, but I believe the Business Department should teach Microeconomics while the Social Studies Department should teach Macroeconomics. In the paragraphs that follow, I will briefly outline my arguments.

Social studies is the integrated study of the social sciences and humanities to promote civic competence. Within the school program, social studies provides coordinated, systematic study drawing upon such disciplines as anthropology, archaeology, economics, geography, history, law, philosophy, political science, psychology, religion, and sociology, as well as appropriate content from the humanities, mathematics, and natural sciences. The primary purpose of social studies is to help young people develop the ability to make informed and reasoned decisions for the public good as citizens of a culturally diverse, democratic society in an interdependent world.

Definition of Social Studies

National Council for the Social Studies (NCSS)

The Iowa Core Curriculum lists these and more outcomes of a rigorous and relevant curriculum:

Essential Concept and/or Skill: Understand the influences on individual and group behavior and group decision making.

·       Understand the components of social structure and how social structure affects the individual in society.

·       Understand society practices social control through the use of norms and sanctions.

·       Understand the role of deviance in society and its effects on individual and group behavior.

Social studies sure has it all. Yet, where in the standards does the ICC mention making a profit, or setting prices? Price theory is in the realm of Microeconomics.

It is my opinion that when the Iowa Core was developed the writers completely forgot about microeconomics. And that's too bad because it's microeconomics that runs this country.

This argument could go on indefinitely, but I conclude that Macro can be taught in the Social Studies Department. Let the Business Department have Microeconomics.

Daily Review -- Laffer Curve

2012-01-22T02:51:00.000-08:00

Read this PBS link to Paul Solman. The video is 9 minutes.

Which side of the Laffer Curve is the United States on? Who is right about taxes -- the Democrats or Republicans?

This WSJ article explains that people will change their behavior in response to higher taxes. The article suggests that higher taxes will induce behavior that will avoid higher taxes such as rolling over dividends into tax-deferred annuities. The result will be high deficits and higher unemployment.

For a biography on Arthur Laffer, click here.

I will eventually have an economics lesson on the Laffer Curve on EconEdLink.

Sample AP Multiple Choice Questions

2012-01-21T16:52:00.000-08:00

Here are some questions to help you study.

I thank whoever wrote these questions. I will use them in class for warm up.

Amazon.com Widgets

Daily Review -- Keynesian Cross

2012-01-21T16:46:00.000-08:00

It's getting election time and it's time to hear about all that the government can do to stimulate the economy. In the table below, what is equilibrium? Are inventories increasing or decreasing in equilibrium? (Click to enlarge.)

Here is the equation I used for the consumption function and planned investment. Y = 50 + .5Y

How much is the Marginal Propensity to Consume? How much is the multiplier?

The answers are below:

You will find that at GDP of 220 the economy is in equilibrium and inventories are neither increasing or decreasing. The multiplier is 2 and the MPC is .5. You should always graph your answer as shown below.

Daily Review -- Who Owns the Debt

2012-01-21T11:10:00.000-08:00

What is the difference between the national debt and the national deficit?

These terms are often used interchangeably by the press and laymen. The deficit is the amount of government spending greater than taxes in a fiscal period. The debt is the total of all deficits.

Daily Review -- Quantity Theory of Money

2012-01-21T03:42:00.000-08:00

Can the Quantity Theory of Money be used to explain real interest rates? I think it can.

If M/P(V) = Q then it can be shown that the amount of real output, Q, that can be purchased with a fixed money supply would decrease as the price level, P, increases. (I'm assuming the Classical approach that V is constant.)

One could also argue that PQ/M = V would show that nominal output, PQ, would take longer to purchase as the money supply, M, increased.

If less output can be bought as the price level increases, real buying power must decrease and using the Fisher Equation, the real interest must decrease.

The Daily Review is a feed for the FREE app and a way for the author to keep the methods of economics in a place in his mind where they can be used to analyze policy and make decisions.

Daily Review -- Real Balances

2012-01-21T03:22:00.000-08:00

Real money balances measure how many goods and services your share of the nation's money supply will buy. Using this information, if Juan's share of the nation's money supply is $100, how much can Juan buy of aggregate output if the price levels are 100, 102, 104, and 98?

My answers are: 100, 98, 96, and 102 with rounding. Real balances shows that the amount of real GDP that a consumer will consume decreases as the price level increases and the amount a consumer buys will increase as the price level decreases. You are to conclude that the aggregate demand curve is downward sloping because of the real buying power of money.

For extra credit, what are the other reasons why aggregate demand slopes downward and to the right? See here. And here.

The Daily Review is a feed for the FREE app and a way for the author to keep the methods of economics in a place in his mind where they can be used to analyze policy and make decisions.

Daily Review -- Balance of Payments

2012-01-20T03:06:00.000-08:00

These links are courtesy of Gene Hayward, Steven Reff, and Dick Brunelle of Reffonomics.

First, review the Balance of Payments here.
Then, practice with this interactive here.

Now answer this question. Why does the Balance of Payments always equal zero?

Extra Credit: Can you prove that NX + NCI = 0?

Visual Comparison Between US and China

2012-01-20T02:53:00.000-08:00

This visual from popular economics teacher, David Mayer, on the GDP growth rate, labor force, and other key variables.

David also has two textbooks to help with AP Preparation. One of his book is shown below.

No One Understands The National Debt

2012-01-19T18:31:00.000-08:00

Who bears the burden of the national debt? Some believe that the current generation bears the burden. Some believe that the burden is pushed on to our children or the future generation. This topic has given me trouble for 10 years. I will now try to tackle it.

The Current Generation Bears the Burden

This argument can be summarized by using a production possibilities curve. Say the US government wants to send troops in Afghanistan so the government borrows funds from the public by issuing bonds. The country now moves along the PPC to a point where it produces more military goods and less consumer goods. So the current generation must give up consumption of consumer goods to pay for military might today.

When the government spends money today in exces of tax revenues, the government must get a loan from the Loanable Funds market. When the government demands Loanable Funds, the interest rate increases and private investment falls. Private investment can be new capital goods, durable goods, and non-durable goods. If the private sector reduces its investment in capital goods, then the future generation will have less and will suffer. As an example, suppose the government spends less on public education to finance a war. The current generation will suffer because there will be less educational resources now. This is the classical argument for crowding out.

If the government issues bonds today and I buy them, who pays the debt off when they come due 30 years from now? The great economist, Abba Lerner, said that the future generation will have to pay the debt off. By the time the debt comes due, my children will be working and their taxes will be used to repay me. This is the "We owe it to ourselves" argument. As long as Americans owe the debt to ourselves, the national debt is immaterial. According to this view, the future generation sacrificed nothing for the increased government spending 30 years ago because they would have had to pay taxes anyway. As long as the public debt is held by United States nationals, the debt is not a problem from this view point.

How much of the public debt is owned by foreign nationals?

The table to the left is from Forbes and gives an view of how much of our debt, a claim on our assets, are owned by foreign nationals. The article is here and recommended. According to this article, about half of the national debt is owned by foreign nationals.

The Future Generation Owes the Debt

One reason to save is because you want to be able to consume more in the future. So if I buy a bond today I willingly give up less consumption today for more later. So I trade one asset, a bond, for another, money, in the future. According to economist James Buchanan, it's like trading a $20 bill for four $5 bills. The bondholder does not incur any of the debt, but the future generation does because it is their taxes that increase to pay the bonds when they come due.

For the most intelligent discussion, Steven Landsburg is here.

This is outstanding. So is this from Cafe Hayek. Steven Landsburg's take.

Daily Review -- Monetary Policy

2012-01-19T03:04:00.000-08:00

This question was posted on the AP forum.

"Suppose that the Federal Reserve is committed to keeping the nominal

interest rate fixed. To maintain the interest rate target in the face of an

expansionary fiscal policy, the Federal Reserve can do which of the following?"

a. Increase the prime rate

b. Increase the discount rate

c. Increase the federal funds rate

d. Engage in open-market purchases

e. Engage in open-market sales

What is the answer?

Answers a, b, c, and e increase the "interest rate" so the answer must be d. Here's my reasoning. When the government uses expansionary Fiscal Policy, the government demands loanable funds increasing the interest rate. The Fed must accomodate by buying bonds to add more liquidity to the market to lower the interest rate. Buying bonds increases excess reserves and lowers the interest rate.

A student in AP economics would have to know the Loanable Funds framework, how banks create money, and Keynes' Liquidity Preference Model to answer this question. Why don't we teach the IS-LM model in AP economics to give the students the right tool to analyze the question?

If you like the Daily Review, which isn't always daily, you can get it on your Android device here. The app is FREE.

Today's Data for Lecture

2012-01-17T10:28:00.000-08:00

Remember there's a fixed market basket.

Daily Review -- Unemployment Rate

2012-01-17T06:22:00.000-08:00

Find the unemployment rate using the data below:

Year	Labor Force	Unemployed	Unrate
2011	153373	12692
2010	153156	13997
2009	152693	14740

Data is from the FRED Data Base, St. Louis Federal Reserve Bank.

My Answers are:.083, 091, .097

Work Time Waster

2012-01-17T02:53:00.000-08:00

This was sent from a friend. There are markets in everything including auras, homeopathy, and the like. But the point is clear. Legitimate businesses don't market prayer.

Unemployment Rate by Category

2012-01-16T17:15:00.000-08:00

This is for my lecture Tuesday, but the data is from the Bureau of Labor Statistics and breaks down the unemployment by age, gender, and ethnicity. The link is here.