Aggregate
Economics
and
Government
Policy
Executive MBA 512
Session #23
Presented by
Brian Greber
December 14, 2012
1
Today
Objectives:
• Understand factors that drive economic activity, how it is
measured, and the tools and goals of government policy.
• Introduce basic concepts related to trade and exchange rates.
Agenda:
• Review role of government in market economies.
• Review how goods & services flow in the economy.
• Summarize the basic measures of “economic well-being”
• Contrast the tools that government has to manage the economy.
• Provide a basic introduction to international trade and exchange
rates.
2
Government’s Role in Market Economies
• Provide the legal structure (Micro)
– Set the laws we live by (incl. property rights)
• Maintain competition (Micro)
– Monopoly and antitrust laws
• Reallocating resources due to market failure (Micro)
– “Internalize externalities”
– Provide public goods
• Facilitating Exchange (Macro)
– Viable currency and banking system.
• Redistribute income (Macro)
– Transfer payments
– Taxation
• Promoting stability (Macro)
– Unemployment
– Inflation
3
•Land
•Labor
•Capital
•Entrepen.
• Households Sell
• Businesses Buy
Resource
Market
Goods &
Services
Businesses
Goods &
Services
Government
Net Taxes
Net Taxes
Goods &
Services
Expenditures
Product
Market
4
Households
• Households Buy
• Businesses Sell
• Sell Resources
Resources
• Buy Products
• Sell Products
• Buy Resources
Expenditures
Households
• The owners and source of all resources.
• The recipients of all income.
This is uncontestable –
Distribution among households may be contested,
as can be the sovereignty of consumers.
5
Functional Distribution of Income 2007
Income By Function Performed
0
National Income Received (Percent)
10
20
30
40
50
60
Wages &
Salaries
71%
Rents
1%
Interest
Proprietor’s
Income
Corporate
Profits
70
68%
3%
5%
4%
9%
14%
10%
Uses of household income?
• Personal taxes (13%)
11%
• Personal saving (1%) -- net 3%
• Personal consumption (86%) 86%
• Durables (12%)
11%
• Nondurables (22%)
23%
66%
• Services (66%)
15%
Source: Bureau of Economic Analysis
Numbers in Red are Approx 2011
Services Include Housing (“Rent”+Utilities) and Health –6
each accounts for about 25% of service expend.
• GDP
• Unemployment
• Inflation
Measures of Economic Well-Being
7
US Economy In Perspective:
Historic Unemployment
US Unemployment Rate: January 1948-January 2012
12.0
10.0
8.0
1950-2012
5.8
1970-2012
6.3
1990-2012
6.0
2000-2012
6.2
2009-2012
9.2
6.0
4.0
2.0
1948
1949
1950
1951
1953
1954
1955
1956
1958
1959
1960
1961
1963
1964
1965
1966
1968
1969
1970
1971
1973
1974
1975
1976
1978
1979
1980
1981
1983
1984
1985
1986
1988
1989
1990
1991
1993
1994
1995
1996
1998
1999
2000
2001
2003
2004
2005
2006
2008
2009
2010
2011
0.0
© Brian J Greber 2012
Source:bls.gov
8
2007 data
Unemployment
Who’s in the labor
force?
• Part-time
employment
• Discouraged
workers
Under 16
And/or
Institutionalized
(71.8 Million)
Not in
Labor Force
(78.7 Million)
Total
Population
(303.6 Million)
Employed
(146.0 Million)
Source: Bureau of Labor Statistics
Labor
Force
(153.1 Million)
Unemployed
(7.1 Million)
Unemployment Rate
=
Unemployed
Labor Force
x 100
9
Unemployment
• Types of unemployment
– Frictional – labor in natural motion
– Structural – trend economy capacity (wrong skills, wrong
location, etc.)
– Cyclical – induced by fluctuations
• Full employment =
– No cyclical unemployment
– Implies a natural rate of unemployment
• 1980’s 6%, Today 4-5%
»
»
»
»
Aging labor force (less frictional unemployment)
Temp agencies and the internet
New welfare laws and work requirements
Prison population has doubled
10
Unemployment
Unemployment Rates in Five Industrial Nations,1995-2005
Source: Bureau of Labor Statistics
11
Year
1949
1950
1951
1952
1954
1955
1956
1957
1959
1960
1961
1962
1964
1965
1966
1967
1969
1970
1971
1972
1974
1975
1976
1977
1979
1980
1981
1982
1984
1985
1986
1987
1989
1990
1991
1992
1994
1995
1996
1997
1999
2000
2001
2002
2004
2005
2006
2007
2009
2010
2011
US Historic Inflation
Consumer Price Index - All Urban Consumers
Year Over Year Change 1948-2012 (Feb)
16
14
1948-2012
1970-2012
1990-2012
2000-2012
2009-2012
3.71
4.44
2.75
2.54
1.65
12
10
8
6
4
2
0
-2
-4
Source:bls.gov
Nominal vs. Real Values
• Using dollar (or other currency) values creates problems
– Inflation is included and makes it difficut to compare
between periods or think about the future
• Nominal Values
– Use prevailing price(s)
– Also know as current or actual values
• Real Values
– Reflect inflationary/deflationary impacts
– Use base year deflators
– Also known as “inflated” or “deflated” values
13
Price Deflators (aka, price indices)
• Use price index to determine real values
• Note, chain weights essentially update the market basket
each year to “last year’s”
Price
Index
In Given
Year
Real
Value
=
Cost of Base Market Basket
In Given Year
Cost of Base Market Basket
In Base Year
=
Nominal value
Price Index
Note: May be presented in % terms
14
Shortcomings of Indices Like CPI
In general, measures like CPI over state the
impact of price changes as they do not
adequately account for :
– Substitution patterns
– Quality changes
– Differences between measured market basket and
actual market basket of specific segment.
15
Inflation is a Compound Factor,
As to the market basket question, the "quantity of goods in the basket (or weights)" remains fixed at the base year. The
price changes are cumulative year over year changes. So in the table you sent the inflation from 1998 to 2009 would be....
(1.0219)*(1.0338)*(1.0283)*(1.0159)*.............*(1.0385)*(1-0.0034).
Since 1984, if average inflation were 2.5%, prices would be up (1.025)^26 or 1.90 times -- so the market basket today
would be 90% more expensive than it was in 1984!
16
Inflation is a Compound Factor,
Calculating Inflation Rates:
FVn = PV*(1+f)^n
FV = Ending Value Value (e.g., your price index)
PV = Beginning value
n = number of years between PV and FV
f = inflation rate
f = [FV/PV]^(1/n) – 1
This is just your normal compound interest formula. Your calculator may due it for you.
An alternative (continuously compounding rate)
FVn = PV*e^(n*f)
F = ln( FV/PV)/n
17
Inflation
• Types of Inflation
–Demand pull
–Cost-push
18
Impacts of Price Changes
Inflation
Deflation
• Hurt
• Hurt
– Fixed-income receivers
– Savers
– Creditors
• Unaffected or helped?
– Flexible-income receivers
• Cost-of-living adjustments
(COLAs)
– Debtors
– Flexible-income receivers
• Cost-of-living adjustments
(COLAs)
– Debtors / Economic Investors
• Unaffected or helped?
– Fixed-income receivers
– Savers
– Creditors
19
US Economy In Perspective:
Historic GDP Growth
Real US GDP 1929-2011
(Billion 2005 Chain Weighted $'s)
14,000
1929-2010
1950-2010
1970-2010
1990-2010
12,000
3.63%
3.27%
3.03%
2.89%
10,000
Note: the above
should say
through 2011
8,000
6,000
4,000
2,000
© Brian J Greber 2012
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
1945
1943
1941
1939
1937
1935
1933
1931
1929
0
Source:bea.gov
20
Gross Domestic Product
• Measure of aggregate output
–Monetary measure
–Avoid multiple counting
• Market value final goods
–Ignore intermediate goods
–Count value added
• Exclude financial transactions, public and
private transfer payment
• Exclude Second hand sales
–Except value added (e.g., commission)
21
Financial House must Balance!
Two Approaches to GDP: The
Consumption by
Households
Wages
Investment by
Businesses
Rents
+
+
+
Government
Purchases
Expenditures
By Foreigners
Expenditures Basis
G
= D=
P
+
+
+
+
Interest
Profits
Statistical
Adjustments
12-22
Expenditure Approach:
•
Personal consumption expenditures (C)
• Durable & nondurable consumer goods
• Consumer expenditures for services
• Domestic plus foreign produced
•
Gross private domestic investment (I)
• Machinery, equipment, and tools
• All construction
• Changes in inventories
• Inclusive of re-lifing assets (depreciation)
Remember: this is economic investment, not financial investment (it is creation of
new capital assets, not investment transactions)
•
Government purchases (G)
• Expenditures for goods and services
• Expenditures for social capital
• Excludes transfer payments
•
Net exports (Xn)
• Add exported goods
• Subtract imported goods
• Xn= exports – imports
In an open economy:
GDP = C+Ig+G+Xn
23
U.S. Economy 2007: in Billions
Receipts
Expenditures Approach
Personal Consumption (C)
Allocations
Income Approach
$ 9734
Gross Private Domestic
Compensation
Rents
$ 7874
65
Investment (Ig)
2125
Interest
603
Government Purchases (G)
2690
Proprietor’s Income
1043
Net Exports (Xn)
-708
Corporate Profits
1627
Taxes on Production and
Imports
National Income
1009
$12,221
Net Foreign Factor Income (-)
96
Statistical Discrepancy (+)
29
Consumption of Fixed Capital
(+)
Gross Domestic Product
$ 13,841
Gross Domestic Product
1687
$ 13,841
24
25
Economic Growth
• Growth U.S. real GDP 1950-2005
– Increased 6 fold
– 3.5% per year
• Growth in U.S. real GDP per capita
– Increased more than 3 fold
– 2.3% per year
• Qualifications
– Improved products and services
– Added leisure
– Other impacts
26
U.S. Economic Growth
Annual Averages for Five Decades
Average Annual Increase (Percent)
5
Real GDP
Real GDP Per Capita
4
3
2
1
0
1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2005
Year
Source: Bureau of Economic Analysis
27
Basic Ingredients of Growth
• Supply factors
–
–
–
–
Increases in quantity and quality of natural resources
Increases in quality and quantity of human resources
Increases in the supply (or stock) of capital goods
Improvements in technology
• Demand factor
– Households, businesses, and government must purchase
the economy’s expanding output
• Efficiency factor
– Must achieve economic efficiency and full employment
28
Growth ultimately = labor productivity
Accounting for Growth of U.S. Real GDP,
1953-2013 (average annual percentage changes)
1953 Q2
to
1973 Q4
1973 Q4
to
1995 Q2
1995 Q2
to
2001 Q1
2001 Q1
to
2007 Q3
2007 Q3
to
2013 Q4*
3.6
2.8
3.8
2.6
2.8
Increases in
Quantity of Labor
1.1
1.3
1.4
-0.1
0.3
Increases in
Labor Productivity
2.5
1.5
2.4
2.7
2.5
Item
Increases in Real GDP
*Beyond 2007 are Projections
Source: Economic Report of the President, 2008
29
What drives labor productivity?
–Technological advance (40%)
–Quantity of capital (30%)
–Education and training (15%)
–Economies of scale and resource
allocation (15%)
30
Nominal vs. Real GDP
• GDP is a dollar measure of production
• Using dollar values creates problems
• Nominal GDP
– Use prevailing price
• Real GDP
– Reflect changes in price
– Use base year price
31
Shortcomings of GDP
•
•
•
•
•
•
•
Nonmarket activities
Leisure
Improved product quality
The underground economy
GDP and the environment
Composition and distribution of the output
Noneconomic sources of well-being
32
Underground Economy
As a percentage of GDP, Selected Nations, 2007
Percentage of GDP
0
Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States
5
10
15
20
25
30
Source: Open Assessment, E-Journal
33
The Business Cycle
Peak
Level of Real Output
Peak
Peak
Trough
Trough
Time
34
Causes of Business Cycles
•
•
•
•
•
Shocks and price stickiness
Supply and productivity shocks
Monetary shocks
Financial bursts and bubbles
Unexpected political events
Common link = Unexpected changes in
spending that are often more psychological
than structural
35
Investment Cycles are Very Volatile (particularly
when inventories are recognized)
36
More on investment volatility
37
Twin problems of the
business cycle
–Unemployment
–Inflation
38
39
Government Policy
Fiscal
• What:
– managing economic activity through
tax policy and government spending
• Who:
– Congress with input from
administrative agencies and staff.
• How:
– Raise and lower taxes to change
spending patterns.
– Spend money on public projects.
– Redistribute income
• Considerations:
–
–
–
–
Long time to debate
At least one year to change tax policy
Projects take time for approval
Requires discipline
Monetary
• What:
– managing economic activity through
changing the supply of money to spend
• Who:
– The Federal Reserve with input from
administrative agencies and staff.
• How:
– Buy/sell bonds to add/subtract money
in circulations.
– Changing rules at banks that determine
their loans/assets relationships.
– Setting borrowing rates among banks.
• Considerations:
– Can be done relatively quickly.
– Not targeted, deals with the aggregate
economy
– Need to be proactive
40
Policy Options Simplified
• Determine How Much Money is in the System
• Determine who gets to spend it first.
41
•Land
•Labor
•Capital
•Entrepen.
• Households Sell
• Businesses Buy
Resource
Market
Goods &
Services
Businesses
Goods &
Services
Government
Net Taxes
Net Taxes
Goods &
Services
Expenditures
Product
Market
42
Households
• Households Buy
• Businesses Sell
• Sell Resources
Resources
• Buy Products
• Sell Products
• Buy Resources
Expenditures
The Multiplier Effect
• More spending results in higher GDP
• Initial change in spending changes GDP by a
multiple amount
• Huge leverage – so often economic policy looks
to move the dial on big ticket expenditures (cars,
housing, capital investments, etc.)
Multiplier =
Change in Real GDP
Initial Change in Spending
43
The Multiplier
Effect
Increase in Investment of $5
Second Round
Third Round
Fourth Round
Fifth Round
All other rounds
Total
(2)
(3)
(1)
Change in Change in
Change in Consumption Saving
Income
(MPC = .75) (MPC = .25)
$ 5.00
$ 3.75
$ 1.25
3.75
2.81
.94
2.81
2.11
.70
2.11
1.58
.53
1.58
1.19
.39
4.75
3.56
1.19
$ 20.00
$ 15.00
$ 5.00
$20.00
$4.75
15.25
13.67
11.56
8.75
5.00
$1.58
$2.11
$2.81
ΔI=
$5 billion
$3.75
$5.00
1
2
3
4
Rounds of Spending
5
All
44
Fiscal Policy
• Expansionary fiscal policy
– Increased spending and/or lower taxes
– Budget deficit
• Contractionary fiscal policy
– Lower spending and/or higher taxes
– Budget surplus
– So it is all about government spending and revenue collections.
– It is redistributing income, not altering money in the system
– Note deficit must be funded by selling bonds, either takes money out
of private hands or brings in foreign money.
45
Government Expenses, G
and Tax Revenues, T
Principle of Built-In Stability
T
Dampens an
Overheated
Economy
Stokes a Weak
Economy
Surplus
G
Deficit
GDP1
GDP2
GDP3
Real Domestic Output, GDP
46
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013 estimate
2015 estimate
2017 estimate
Federal Outlays and Deficit as a
% of GDP: 1930 -2017
Outlays
Surplus or Deficit (–)
45.0
35.0
25.0
15.0
5.0
-5.0
-15.0
-25.0
-35.0
Debt Held Outside
The Federal
Government and
Federal
Reserve (47%)
Debt Held by the
Federal Government
and Federal
Reserve (53%)
Other, Including
State and Local
Governments
U.S. Banks
And other
Financial
Institutions
8%
7%
9%
Federal
Reserve
25%
Foreign
Ownership
The
Public
Debt
7%
44%
U.S.
Government
Agencies
U.S.
Individuals
Total Debt: $9.01 trillion
Source: U.S. Treasury
2007 Numbers
48
Monetary Policy
• What is it:
–Management of US economic activity,
particularly full-employment and noninflationary growth in domestic output,
through changing the “supply” of
money (availability, interest rate, and, to
some extent, exchange rate).
• Key players:
– The Federal Reserve
– Private Banking Institutions
49
•
•
•
•
•
•
•
•
Federal Reserve's Role
Issue currency
Set reserve requirements
Lend money to banks
Set discount rate
Check collection
Fiscal agent for U.S. government
Supervise banks
Control the money supply
Does so relatively autonomously (Government appointed
Board of Governor’s ; public/private directors of regional
reserve banks)
50
Tools of Monetary Policy
1. Open market operations to influence money supply
•
Buying and selling of government securities/bonds
2. The reserve ratio
•
Changes the money multiplier & thus supply
3. The discount rate
•
Rate charged by banks on overnight loans
•
Changes basis for “cost of borrowing”
4. Term auction facility
•
“Auctioning off reserve funds”, Banks bid for the right to borrow
reserves
•
Sets a money supply change target and lets interest rate be market
determined.
–
Avoids “guessing at right discount rate”
•
Introduced December 2007
51
Fractional Reserve System
• Key Concepts
– Only a portion of deposits are available in form of cash at any given
time
• Most have been lent
– The Federal Reserve sets minimums (that can be altered) and
collect and hold these
– In essence, if the reserve rate is set at 20%, your $100,000 deposit
enables $180,000 of immediate economic activity:
• The $80,00 that will get lent
• And the $100,000 still available to you!
• But there is an even larger multiplier, as you will soon see…
– Shell Game? Shouldn’t be
•
•
•
•
•
Assets = Liabilities + Net Worth
Liabilities include the “demand deposits”
Net worth includes equity input.
Assets include the “loan collateral”
Issues arise when those asset value fall precipitously
52
The Money Multiplier
• Implications of “Multiple-deposit
expansion”
• Assumptions:
– 20% required reserves
– All banks “loaned up”
– Banks lend all of excess reserves
– Each lent dollar ends up in the hands of
some-one who places it is a bank.
• A $100 bill is found and deposited …..
53
Assumption:
-Lent
-Spent
-Re-Banked
Bank
(1)
Acquired
Reserves
and Deposits
Bank A
$100.00
Bank B
80.00
Bank C
64.00
Bank D
51.20
Bank E
40.96
Bank F
32.77
Bank G
26.21
Bank H
20.97
Bank I
16.78
Bank J
13.42
Bank K
10.74
Bank L
8.59
Bank M
6.87
Bank N
5.50
Other Banks
21.99
(2)
Required
Reserves
(Reserve
Ratio = .2)
(3)
Excess
Reserves
(1)-(2)
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
64.00
51.20
40.96
32.77
26.21
20.97
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.59
(4)
Amount Bank Can
Lend; New Money
Created = (3)
1
Monetary
multiplier = required reserve ratio
$80.00
64.00
51.20
40.96
32.77
26.21
20.97
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.59
$400.00 17/18-16
=
1
R
54
55
CAUSE-EFFECT CHAIN
Expansionary Monetary
Policy
Problem: unemployment and recession
Fed buys bonds, lowers reserve ratio, lowers
the discount rate, or increases reserve auctions
Excess reserves increase
Federal funds rate falls
Money supply rises
Interest rate falls
Investment spending increases
Aggregate demand increases
Real GDP rises
56
CAUSE-EFFECT CHAIN
Restrictive Monetary
Policy
Problem: inflation
Fed sells bonds, increases reserve ratio, increases
the discount rate, or decreases reserve auctions
Excess reserves decrease
Federal funds rate rises
Money supply falls
Interest rate rises
Investment spending decreases
Aggregate demand decreases
Inflation declines
57
Interest Rates
• Equilibrium interest rate
–Changes with shifts in money supply and
money demand
• Less supply, higher interest rates
• More supply, lower interest rates
58
Market for Money: Monetary Policy
Impacts Supply, Fiscal Policy Demand
Rate of interest, i percent
(a)
Transactions
demand for
money, Dt
(c)
Total
demand for
money, Dm
and supply
(b)
Asset
demand for
money, Da
10
Sm
7.5
=5
+
5
2.5
Dt
Da
Dm
0
50
100
150
200
Amount of money
demanded
(billions of dollars)
50
100
150
200
Amount of money
demanded
(billions of dollars)
50
100
150
200
250
300
Amount of money
demanded and supplied
(billions of dollars)
59
60
Balance of Payments
• Balance of payments accounts must sum to zero
– Current account deficits generate asset transfers
to foreigners
– Official reserves (sure up the balance with
government reserves)
p768 – Why the Balance to zero “… people can only
trade one of two things with each other: currently
produced goods and services or preexisting assets….if
trading partners have an imbalance in their trade of
currently produced goods and services, the only way to
make up for that imbalance is with a transfer of assets
from one party to the other.”
61
Balance of Payments:
2007/2010 US Bill.
2010
1289
-1935
-646
549
-403
146
-500
Trade
Balance
165
-136
-471
0
0
1246
-1005
241
240
Stats Discrep
Fin Deric
217
14
22-62
What causes our Goods
Imbalance?
Table 1308. U.S. Exports and General Imports by Selected SITC Commodity Groups: 2000 to 2010
[In millions of dollars (781,918 represents $781,918,000,000). SITC = Standard International
Trade Balance
Selected Commodity
2010
Millions
Total
-634,897
Agricultural commodities \3
Manufactured goods \3
Automatic Data Processing (ADP) equipment; office machinery
Clothing
Electrical machinery
Television, Videocassette Recorder (VCR), etc.
Vehicles
Mineral fuel \3
33,771
-565,371
-91,238
-75,321
-42,615
-115,794
-90,827
-274,508
63
Flexible Exchange Rates
• Eliminate balance of payments
deficit or surplus
• Disadvantages of flexible exchange
rates
–Volatility
–Uncertainty and diminished trade
–Terms-of-trade changes
–Instability
64
How do Exchange Rates Get Set?
• Flexible/Floating Exchange Rates
– Daily values are determined in open market auctioning
of currencies.
– Exchange rates flex with the relative supply and
demand of currencies (through the goods and services
produced in the countries utilizing those currencies) .
– Through time, balance of payments establish the trend;
• Fixed Exchange Rates
– Set and manipulated by governments
65
Classic Floating Rate:
European goods
getting cheaper in
US, US goods more
expensive in Europe
© Brian J Greber 2011
5-66
Classic Fixed Rate:
Chinese goods getting
more expensive in US,
US goods cheaper
inChina
?
© Brian J Greber 2011
5-67
Hmmmm……
© Brian J Greber 2011
5-68
Exchange Rate Fundamentals
• Currency values are supply and demand driven
• Question
– Who wants to supply US dollars and demand
Mexican Pesos?
• Answer:
– Mexican exporters to US
– American speculators
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Exchange Rate Example: Caution
overly simplified but indicative
• Country A holds 1,000,000 R’s of country B’s currency
at start of year.
• Country B holds 500,000 W’s of country A’s currency
– For simplicity assume 1W=2R
• End of Year
– Country B is a net importer and a net trade deficit of
250,000 R’s
– Country A is a Net Exporter and has a current account
balance of 250,000 R’s
• Now the reserves essentially are 1,250,000 R’s for
country A, and 500,000 W’s for country B
– Now 1W = 2.5R (R has been devalued)
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Factors Driving Exchange Rates
• Basically as demand for your products, services, or financial
investments raise,
your currency appreciates
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Currency Impacts
Imports
Exports
Effect
Dollar Appreciates
(Strengthens)
Foreign Imports
Less Expensive to
US Consumers
US Exports More
Expensive to
Foreign Consumers
US Consumption up;
US Production
Down;
Foreign
Consumption Down;
Foreign Production
Up
Dollar Depreciates
(Weakens)
Foreign Imports
More Expensive to
US Consumers
US Exports Less
Expensive to
Foreign Consumers
US Consumption
Down;
US Production UP
Foreign
Consumption Up;
Foreign Production
Down
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Bottom Line
• US Continual Trade Deficit is a Problem
– Drives the Value of the Dollar Down
• Increases inflationary Pressure
– Represents an on-going “leakage” to the economy
– Leaves foreign entities little choice other than to
buy investment or real assets
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Assignment: Due 12/24
•
•
Part 1:
– Go to the Bureau of Economic analysis website (www.bea.gov).
• Choose Interactive Data Tables from Left Hand Menu
• Choose National Income and product Accounts
• Select “list of selected NIPA tables”
• Select Table 1.1.5. Gross Domestic Product
• Pull the data from 1975 to 2011, on an annual basis.
– Graph GDP and its 4 major Expenditure components from 1975 to 2011 (on one graph), using lines – note under tools, advanced
downloads you can pull the whole data set as an excel spreadsheet.
– Highlight 4 major “ahas” (i.e., insightful observations) that you have.
Part 2:
– Go to the website for the Bureau of Labor Statistics (http://www.bls.gov)
–
Under Subject Area got to Employment, Then Choose National Employment
•
Choose CES Tables and Charts, then choose Tables from Employment & Earnings
• Table B-2 has Average hours and earnings for non-farm employees
• Column 3 (after the year) has the average weekly earnings for Private, non-fram employees in nominal (current terms)
• Pull this data from 1980-2011
–
Under Subject Area got to Inflation, Then Consumer Price Index
•
Choose CPI Tables, then choose Table Containing History of CPI-U
•
Table has an Annual Average CPI-U , base year 1982-1984
• Pull this data from 1980-2011
–
Calculate Real Wages for 1980-2011, base year 1982-1984
–
Real(t) = Current(t) / (Index(t)/100)
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Flow of Expenditures & Income
The Big View…..
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