MACROECONOMICS
United States Fiscal Policy &
International Trade
Fiscal Policy
Spending, taxing,
and borrowing
policies of the United
States government
within a 12-month
period of time
Types of Taxes
• Proportional
• Progressive
• Regressive
How does the government
collect taxes?
• Individual Income
Tax
• Corporate Income
Tax
• Social Security Tax
• Excise Tax
• Estate & Gift Tax
• Customs Duties
Supply-Side
Economics
•
•
•
•
Say’s Law, law of
markets
Laissez-faire
Reduce government
regulations
Supply-side
economics
Fiscal Policy
Problems
1. To invest or not to
invest?
2. What budget areas
get cut?
Demand-Side
Economics
•
•
John M. Keynes
Government
involvement
1. Government
spending
2. More production
3. Lower
unemployment
4. Newly employed
spend, create more
demand for
production
•
Employment Act of
1946
Five Tools of Fiscal Policy
1.
2.
3.
4.
5.
Marginal Tax Rates
Tax Incentives
Government Spending
Public Transfer Payments
Progressive Income Taxes
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
Tax Incentives
Tax breaks given
to businesses in
the hope that they
will invest in new
capital goods
Government
Spending
1. Decrease in spending:
slows down business
activity and reduces
inflation
2. Increase in spending:
reduces
unemployment and
increases business
activity
Public Transfer
Payments
1. Unemployment
checks
2. Welfare checks
3. Social Security
checks
4. Veteran’s benefits
5. Medicare and
Medicaid coverage
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
Limitations of Fiscal Policy
1.
2.
3.
Timing and Unpredictability: Difficult to predict
what the economy will do
Political Pressure: Voters will remove elected
officials if they feel the economy is not
proceeding down a positive path
Lack of Coordination: Government agencies
cannot always work together quickly enough
to get an economic policy in place
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
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
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
08/18/2004
08/17/2004
08/16/2004
08/13/2004
08/12/2004
08/11/2004
08/10/2004
$7,343,012,590,769.26
$7,337,786,947,237.37
$7,341,461,448,755.40
$7,335,563,157,880.75
$7,312,230,696,984.50
$7,312,306,434,333.71
$7,305,246,621,955.51
$7,308,629,683,239.34
International Trade
1. Specialization
2. Absolute advantage
3. Comparative
advantage
International Trade
Foreign Exchange Rates
August 20, 2004
Country
Monetary
Unit
August
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
Balance of
Payments
• Keeps
track of
money
invested
in the
U.S. by
other
nations
and vice
versa
Foreign Direct
Investment in the U.S.
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
Balance of
Trade
• The difference
between imports and
exports
U.S. Balance of Trade
30.0
Quantity
25.0
20.0
Exports
15.0
10.0
Imports
5.0
0.0
1
2
3
4
5
6
7
1992-2002
8
9
10 11
Trade Barriers
•
•
•
Tariffs: taxes on
imports
1. Revenue
tariffs
2. Protective
tariffs
Import quotas
Voluntary trade
restrictions
International Trade
Cooperation
•
•
Reciprocal Trade Agreements
Regional Trade Organizations
1. European Union
2. Caribbean Community & Common
Market
3. Association of Southeast Asian
Nations
•
International Trade Agreements
1. General Agreement on Tariffs &
Trade 1947
2. World Trade Organization 1995
North
American Free
Trade
Organization
(NAFTA)
• Signed in 1992 by the
Canada, the U.S., and
Mexico
• Reduced, then
eventually eliminated
tariffs
NAFTA Effects
1. U.S. agricultural
exports worldwide
2. U.S. farm and food
exports to NAFTA
partners
3. Increases
MICROECONOMICS
Demand and Supply
through
Market Structures
Microeconomics
is the study of…
•
•
•
•
Individuals
Households
Businesses
Industries
Microeconomics
revolves around two
very important
concepts:
• Demand
• Supply
Demand
• The desire and
ability to purchase a
good or a service
• Demand represents
the consumer’s
point of view
You may desire to purchase a…
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…
Trade Off
&
Opportunity
Cost
OR
• Trade Off: choosing
between two things
• Opportunity Cost:
the thing given up in
order to attain the
other thing
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.
Demand Curves &
Schedules
50
Quantity
Price
Quantity
Demanded
$5
50
$25
25
$50
5
D
25
5
$5
$25
Price
$50
Curve
Schedule
Supply
• The desire and
ability to sell a good
or service to people
• Supply represents
the producer’s point
of view
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.
Supply Curves
and Schedules
S
50
25
Quantity
5
$5
$25
Price
Price
Quantity
Supplied
$5
5
$25
25
$50
50
$50
Benefits of the
Price System
•
•
•
•
•
Information
Incentives
Choice
Efficiency
Flexibility
Limitations of
the Price System
• Externalities
• Public Goods
• Instability
Demand and Supply
Curves and Schedules
50
D
S
Quantity
Surplus
25
Quantity
Demanded
Price
Quantity
Supplied
50
$5
5
25
$25
25
5
$50
50
Equilibrium
Shortage
5
$5
$25
$50
Price
Curve
Schedule
Government
Regulations
and the Price
System
D
S
Surplus
Price
Floor
Quantity
• Price Ceilings
• Price Floor
$50
Equilibrium
$25
Price
Shortage
Ceiling
$5
$5
$25
Price
$50
Productivity
• The amount of
goods and services
produced per unit of
input
• Productivity has an
impact on what
producers can
supply at various
prices
Production Schedule and
Curve: Vanilla Mint Cookies
300
Total Product
0
0
Marginal
Product
0
1
36
36
2
72
36
3
108
36
4
144
36
5
170
36
6
206
36
7
254
48
8
278
24
9
265
-13
10
258
-7
11
245
-13
12
240
-5
13
238
-2
275
250
Number of Cookies Produced
Labor Input
225
200
175
150
125
100
75
50
25
1 2 3 4 5 6 7 8 9 10 11 12 13
Labor Input
Marginal Product and
Costs: Vanilla Mint Cookies
Labor Input
Total Product
Marginal
Product
0
Fixed
Costs
$500
Variable
Costs
0
Total
Costs
$500
Marginal
Costs
--
0
0
1
36
36
$500
$150
$650
$1.39
2
72
36
$500
$253
$753
$2.86
3
108
36
$500
$400
$900
$7.03
4
144
36
$500
$527
$1,027
$3.53
5
170
36
$500
$672
$1,172
$4.03
6
206
36
$500
$785
$1,285
$3.14
7
254
48
$500
$889
$1,389
$2.17
8
278
24
$500
$994
$1,494
4.38
9
265
-13
$500
$1,079
$1,579
-6.54
10
258
-7
$500
$1,198
$1,698
-17
11
245
-13
$500
$1,874
$2,374
-52
12
240
-5
$500
$2,326
$2,826
-90.4
13
238
-2
$500
$2,868
$3,368
-271
Market
Structures
Four types of
competition and
market structures:
• Pefect Competition
• Monopolistic Competition
• Oligopoly
• Pure Monopoly
Perfect Competition
1.
2.
3.
4.
Characteristics of a
market that has
perfect competition:
Many buyers and
sellers
All the products are
identical
There are no price
regulations in the
market
Sellers/Producers can
enter and exit the
market very easily
Monopolistic
Competition
1.
2.
3.
4.
Characteristics of a market that
has monopolistic competition:
Many buyers and sellers
Product differentiation is
necessary because the products
essentially do the same thing
Non-price competition exists
because buyers will purchase
their favorite product regardless
of price
Sellers/producers can enter and
exit the market easily
Oligopoly
1.
2.
3.
4.
Characteristics of a market
that has an oligopoly:
There are only a few
sellers/producers
Products can be identical
or very similar
The market is very difficult
for other producers to enter
into
Non-price competition
exists among buyers of the
products
Monopoly
1.
2.
3.
4.
Characteristics of a market
that has a monopoly:
There is only one
seller/producer
There is no substitute for
the product
No other sellers/producers
can enter into the market
easily
The seller/producer has
complete control over the
price of the product
Four Main Types
of Monopolies
•
•
•
•
Natural
Geographic
Technological
Government
MICROECONOMICS
Part II
Businesses, Unions, Saving,
and Investing
Three main types of
business organizations
• Sole Proprietorship
• Partnership
• Corporation
Sole Proprietorship
A business owned
and controlled by
one person.
Advantages
Disadvantages
1. Easy to start
1. Unlimited liability
2. Total control
2. Total responsibility
3. Keep all profits
3. Limited growth
4. Limited life
Partnership
A business owned by
two or more people.
Advantages
Disadvantages
1. Easy to start
1. Unlimited liability
2. Partner
specialization
2. Potential partner
conflict
3. Shared decisions
3. Limited life
4. Shared losses
4. Limited growth
Corporation
A company owned by many
stockholders, each of whom
share limited liability.
Advantages
Disadvantages
1. Limited liability
1. Expensive to start
2. Separation of
owners and
managers
2. Government
regulations
3. Easy fund raising
4. Unlimited life
3. Slow decision making
4. Double taxation
Steps in Forming a
Corporation
•
•
•
•
Articles of
incorporation
Board of directors
Corporate charter
Stocks and bonds
Corporate
Combinations
•
•
•
Horizontal
mergers
Vertical mergers
Conglomerates
The U.S. Labor
Force
•
•
•
•
•
•
Six factors affecting
the U.S. labor force:
Wages
Skills
Working conditions
Work location
Intrinsic rewards
Market trends
Long-Term
Changes Affecting
the Labor Force
Labor-Intensive Economy
(pre-Industrial Revolution)
Capital-Intensive Economy
(Industrial Revolution to the
present)
History of
Labor Unions
• Knights of Labor
• American
Federation of Labor
(AFL)
• Congress of
Industrial
Organizations (CIO)
• AFL-CIO
Types of
Unions
Local Unions National Unions
Example:
plumbers in a
certain county,
group of counties,
or a state
Example:
the AFL-CIO
Independent
Unions
Example: the NEA
(National
Educators
Association)
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
Union
Bargaining
Contract Issues
• Wages and fringe
benefits
• Working conditions
• Job security
• Union security
• Grievance
procedures
Negotiating
Techniques
• Collective
bargaining
• Mediation
• Arbitration
Labor Tactics
Union Tactics
• Striking
• Picketing
• Boycotting
• Coordinated
campaigning
Management Tactics
• Hiring scabs
• Lockouts
• Injunctions
Scabs being driven through
a picket line
Saving
• Savings accounts
• Money-market
accounts
• Time deposits
- Certificates of
deposit
- Savings bonds
Investments
Financial Plans
• Budgets
• Investment plans
• Retirement
accounts
• Estate plans
Stocks
Trading
Investing
1. Profit and loss
1. Brokers
- Dividends
2. Investment banks
- Capital gains and losses
3. Stock exchanges
2. Stock splits
-NYSE
-AMEX
4. Over-the-counter
markets
-NASDAQ
Investments
Stock Prices
Weekly
52 Week
Hi
Lo
Name
PacSun
Tom
WalM
Ko
Div
Yield
PE
Vol
Wkly
Hi
Lo
Last
Charge
YTD
Fri
%
Chng
Wkly
Bonds
• Yields
• Corporate bonds
• Municipal bonds
• Government bonds
Bills
Bonds
Notes
Short-term
investment
Long-term
investment
Long-term
investment
Matures
3 months to 1 year
Matures
1–10 years
Matures
10–30 years
Minimum order
$10,000
Minimum order
$1,000–$5,000
Minimum order
$5,000
Credit
• Credit bureau
- Credit rating
• Credit terms
- Finance charges
- Annual
Percentage Rate
(APR)
• Credit abuse
- Bankruptcy
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