ECONOMIC POLICY

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ECONOMIC POLICY

• What are the problems or goals?
• What are the Solutions?

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Macro economic goals

• Economic Growth
• Low Unemployment
• Low Inflation

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• I. ECONOMIC GROWTH
• A. How do we define and measure economic growth?
• Supply-side or demand side GDP
• Supply-side production of durable goods (e.g.,
  refrigerators, cars, computers, 16), non-durable
  goods (consumer products, food, 22), services
  (53), and structures (homes, commercial
  buildings, 9).
• Demand side, and divide up into what is demanded
  for consumption (68), investment (15),
  government (16),and trade (12 export, 13
  imports). D C I G X - M

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• 2) Real GDP
• Adjust for the fact that the value of the
  monetary unit may vary from one period to
  another.
• 3) Per Capita GDP
• per-capita refers to dividing real GDP by the
  population. Rough way of comparing stand of
  living across times and places. 1998 world GDP of
  28 trillion / world population 6 billion per
  capita GDP of 6,500. U.S. GDP of 10 trillion /
  290 million GDP of 36,300 per person.

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• B. Strengths and Weaknesses of using GDP to
  measure economic well-being.
• 1) GDP is the size of the economy, so it is by
  no means identical with human well being
• 2) leisure, the environment, health, and the
  presence of poverty or inequality. Other things
  included in GDP, like protection against crime or
  fixing up after a natural disaster. Basically,
  GDP mans only what is bough and sold.
• 3) Societies with higher real GDPs tend to have
  higher quality of life (standard of living)

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• C. How to stimulate Growth
• Increase Savings to stimulate investment
• 2. In recent years we have tried special savings
  incentives like IRA ad 401(k). easy (but
  expensiv) credit have largely offset any saving
  gains.
• 3. Reducing the government budget deficit

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• D. Sources/Causes of Economic Growth
  productivity
• 1) Physical Capital ¼ real growth
• 2) Human Capital
• 3) Technology accounts for ½ of real growth

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• LOW UNEMPLOYMENT
• Survey Definition Bureau of Labor Statistics
  Survey of people 20 and 64 years of age. Must be
  looking for work. In 1998 about 1/3 of the
  population was considered out of the labor force
• Economist Definition Supply and demand. When
  someone is willing to work but can't find a job.
  
• Why is unemployment bad? It reduces the size of
  the economy, GDP and raises the need for gov't
  spending on welfare, unemployment. Lowering the
  unemployment rate by 1 would add 1 (or 100
  billion dollars to the U.S. GDP)
• History of unemployment rates low from the
  1950s to 1970s, rose mid 1970s, peaked at about
  12 in 1982, but have since dropped back to the
  earlier range of around 4-5.

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• E. Explanations of unemployment and policy
  implications
• Frictional the first cause is frictional. the
  ebb flow of markets, firms closing. Leads to
  unemployment of about 1-2
• 2. Structural laws that provide disincentives to
  firms to hire people and disincentives to people
  to find work. 1) min. wage laws, taxes on
  employment, mandatory health benefits, etc. 2)
  generous welfare/unemployment benefits.
  Solution?
• 3. Cyclical unemployment recession and
  depressions. Low consumer Demand. Policy
  solution - government spending? Pump up the
  economy with temporary spending and tax cuts to
  create more disposable income and consumer demand
  and investment.

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• F. Jobs vs. "good jobs and good wages"
• G. Productivity one could argue that wages are
  based on productivity of workers.

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• III. LOW INFLATION
• What is inflation?
• overall increase in the level of prices, not the
  increase in anyone price.
• Consumer Price Index
• Bureau of Labor statistics. Consumer surveys
  conducted every three months help adjust the
  basket over time. VCRs, camcorders, Xbox etc.
• Causes of Inflation
• inflation caused by supply side (higher costs)
  called cost-push or from the demand side (too
  many dollars chasing too few goods), termed
  demand-pull i.e. war-production lows or too
  high wages.

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• 4. Cycle of expectation
• as opposed to a one-time rise in prices, a
  cycle of expectation becomes established in
  which everyone expects prices to rise, and thus
  acts in a way which helps them to keep rising.
  The expectation becomes self-fulfilling.
• 5. History of inflation rates
• Up until 1964 typically 1-3 a year. after the
  war high level of demand and few non-military
  goods prices shoot up from 8 in 1946 to 14.
  Great depression, prices drop because of low
  demand (deflation). In the 70s inflation rose
  again maybe because of the cost of funding the
  great society and also fighting the Vietnam war.