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)
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Economists in
Agreement
From Gregory Mankiw
http://gregmankiw.blogspot.com/2009/02/news-flash-economistsagree.html
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• 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.
Information from EH.Net
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• 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
GDP Defined
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From Galor and Weil (AER, May
1999)
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5
• EH.net (or Economic History Net)
• http://eh.net/
• How much is that?
• http://eh.net/hmit/
U.S. Economic Growth Data
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• What Was the U.S. GDP Then?
• http://www.measuringworth.org/usgdp/
US GDP History
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7
Decade
Beginning
1791
1801
1811
1821
1831
1841
1851
1861
1871
1881
1891
1901
Real GDP
(in millions
of 2011 dollars)
$4,847
$8,781
$12,593
$17,226
$27,212
$36,429
$60,673
$94,773
$133,407
$244,512
$366,133
$504,794
Population
(in thousands)
4,048
5,461
7,436
9,899
13,277
17,612
24,095
32,215
41,010
51,466
64,432
77,584
Real GDP per capita
(in 2011 dollars)
$1,197.44
$1,607.92
$1,693.56
$1,740.15
$2,049.56
$2,068.43
$2,518.07
$2,941.89
$3,253.04
$4,750.93
$5,682.48
$6,506.41
Decade
Percentage
Change
NA
34.3%
5.3%
2.8%
17.8%
0.9%
21.7%
16.8%
10.6%
46.0%
19.6%
14.5%
Average
Annual Percentage
(last decade)
NA
3.0%
0.5%
0.3%
1.7%
0.1%
2.0%
1.6%
1.1%
3.9%
1.9%
1.5%
Economic Growth in the
th
19 century
(from EH.net)
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8
Decade
Beginning
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
Real GDP
(in millions
of 2011 dollars)
$624,789
$761,841
$946,562
$1,547,433
$2,449,443
$3,282,702
$5,002,409
$6,785,210
$9,084,331
$12,860,870
$15,094,000
Population
(in thousands)
93,863
108,538
124,149
133,402
154,287
183,742
207,692
230,008
253,530
285,335
312,041
Real GDP per capita
(in 2011 dollars)
$6,656.39
$7,019.12
$7,624.40
$11,599.77
$15,875.89
$17,865.82
$24,085.71
$29,499.89
$35,831.39
$45,072.88
$48,371.85
Decade
Percentage
Change
2.3%
5.4%
8.6%
52.1%
36.9%
12.5%
34.8%
22.5%
21.5%
25.8%
7.3%
Average
Annual Percentage
(last decade)
0.4%
0.7%
1.0%
4.6%
3.5%
1.2%
3.0%
2.1%
2.0%
2.3%
0.7%
Economic Growth in the
20th century
(from EH.net)
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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
Growth Happens!!
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Decade
Beginning
Real GDP
(in millions of 2011 dollars)
Real GDP per capita
(in 2011 dollars)
2021
$18,610,994
$59,642.78
2031
2041
$22,947,469
$28,294,369
$73,539.92
$90,675.16
2051
$34,887,129
$111,803.03
2061
$43,016,043
$137,853.82
2071
$53,039,043
$169,974.60
2081
$65,397,463
$209,579.71
2091
$80,635,470
$258,413.06
2101
$99,424,026
$318,624.88
2111
$122,590,429
$392,866.42
2121
$151,154,746
$484,406.68
2131
$186,374,723
$597,276.39
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!!
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11
spending as a percentage of GDP
Year
Consumption
Investment
Government
Spending
Net
Exports
1929
74.7%
15.9%
9.1%
0.4%
1930
76.9%
11.8%
11.0%
0.3%
1931
79.3%
7.7%
12.9%
0.0%
1932
83.0%
2.2%
14.8%
0.0%
1933
81.4%
3.0%
15.4%
0.2%
1934
78.0%
5.6%
15.9%
0.5%
1935
76.3%
9.1%
14.9%
-0.3%
1936
74.2%
10.3%
15.6%
-0.1%
1937
72.7%
13.3%
13.9%
0.1%
1938
74.7%
8.2%
16.0%
1.2%
1939
72.9%
10.1%
16.1%
0.9%
1940
70.3%
13.4%
14.8%
1.5%
1941
64.0%
14.3%
20.9%
0.8%
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.
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BLS DEFINITIONS
HTTP://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.
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14
BLS DEFINITIONS
HTTP://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.
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15
BLS DEFINITIONS
HTTP://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.
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16
16
Great Depression Unemployment Estimates
from Weir
McGraw-Hill/Irwin
Year
UE Rate
All workers
UE Rate
Non-farm workers
1929
2.9%
4.1%
1930
8.9%
12.4%
1931
15.7%
21.7%
1932
22.9%
31.7%
1933
20.9%
30.0%
1934
16.2%
23.6%
1935
14.4%
21.1%
1936
10.0%
14.9%
1937
9.2%
13.3%
1938
12.5%
18.3%
1939
11.3%
16.3%
1940
9.5%
13.5%
1941
6.0%
8.4%
1942
Colander,3.1%
Economics
4.3%
17
Unemployment Rate: 1-48 to 1-13
Source: Bureau of Labor Statistics
http://data.bls.gov/timeseries/LNS14000000
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18
Labor Force Participation Rate: 1-48
to 1-13
Source: Bureau of Labor Statistics
http://data.bls.gov/timeseries/LNS11300000
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19
Employment Population Ratio: 1-48 to 1-13
Source: Bureau of Labor Statistics
http://data.bls.gov/timeseries/LNS12300000
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20
The Current Data
Department of Labor
Employment Report
Monthly Data
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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?
6-22
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
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Jobs and Unemployment
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
17
Actual and natural rates of unemployment in the U.S.,
1960-2006
Percent of labor force
12
10
Unemployment rate
8
6
4
Natural rate of
unemployment
2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CHAPTER 6
Unemployment
Jobs and Unemployment
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
17
Jobs and Unemployment
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
f is called the rate of job finding
s and f are exogenous
CHAPTER 6
Unemployment
17
The transitions between employment and
unemployment
s E
Employed
Unemployed
f U
CHAPTER 6
Unemployment
Jobs and Unemployment
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
# of employed
people who
lose or leave
their jobs
# of unemployed
people who find
jobs
CHAPTER 6
Unemployment
17
Jobs and Unemployment
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,
U
s

L sf
CHAPTER 6
Unemployment
17
Jobs and Unemployment
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:
U
s
0.01


 0.05, or 5%
L s  f 0.01  0.19
CHAPTER 6
Unemployment
17
The CPI
(from Mankiw)



Jobs and Unemployment
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
6-32
17
Jobs and Unemployment
A bit of inflation history











Period % Change in Money Supply
---------------------------1834-37
+ 61
1837-43
- 58
1843-48
+ 102
1848-49
- 11
1849-54
+ 109
1854-55
- 12
1855-57
+ 18
1857-58
- 23
1858-61
+ 35
% Change in Price Level
--------------------+ 28
- 35
+ 9
0
+ 32
+ 2
+ 1
- 16
- 4




(Sources: John Knox, A History of Banking in the United States, New York: Bradford
Historical Statistics, 1960, series E1-12.)
Rhodes, 1903; and
Review data at eh.net
Compare before and after WWII
6-33
17
Jobs and Unemployment
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.
6-34
17
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.
nominal output
real output 
 100
price index
6-35
Jobs and Unemployment
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.
6-36
17
Inflation and Money Growth
13-37
Jobs and Unemployment
Quantity Theory and the
Inflation/Growth Trade-Off


17
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.
13-38
Jobs and Unemployment
Why Central Banks Increase the
Money Supply



17
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.
13-39
Jobs and Unemployment
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.
13-40
17
Jobs and Unemployment
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.
17
The Phillips Curve
5
A
Inflation
4
3
2
B
1
0
4
5
6
7
Unemployment rate
13-42
Jobs and Unemployment
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.
17
Jobs and Unemployment
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).
17
Inflation
rate
The Rise of the Phillips Curve (19541968)
1968
1956
4
3
1966
1967
1957
1955
1964
1965
1959
1954
2
1
0
4
5
Unemployment rate
13-45
1960
1963
1962
6
1958
1961
7
Jobs and Unemployment
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)
17