USC ECON 205 - Government Policy and GDP

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ECON 205 2nd Edition Lecture 5Outline of Last Lecture I. Schedule of demand and supply II. Shift or change in demand and supplyIII. Market equilibriumIV. Elasticity of supply and demandV. Consumer and producer surplusVI. Factors of productionVII. Role of government in a market economy- price controls – floor and ceilingVIII. Equity – fairness and InequalityOutline of Current LectureMacroeconomic policiesA. Monetary policy – the Federal Reserve board (Fed)B. Fiscal policy– taxes, expenditures and subsidies – the AdministrationC. Market policy–market structureD. International policy—currency regulationII. MaximizationIII. Economic Growth of GDPIV. Price StabilityV. Aggregations to understand national output.VI. Gross Domestic ProductVII. The problem of averagesVIII. Price IndicesCurrent LectureMacroeconomic PoliciesA. Monetary policy is the ability of government to control the money supply available by regulating interest rates. The Federal Reserve (Fed) determines the United States’ monetary policy.• Ben Bernanke is the chairman of the board that determines US monetary policy.2007 Great Recession is part of the business cycle.• Still over 8% unemployment.Chairman of the Fed controls the twelve regional banks. The current and past chairs are:Ben Bernanke – Princeton (four year terms) –since 2006Alan Greenspan – Business Economist (1987-2006)B. Fiscal policy is taxation, government expenditures, and subsidies created by the administration (the White House).Fiscal policy is decided by the White House and approved by Congress, while the Fed changes monetary policy weekly.C. Market policy determines the market structure and promotes competition.Current issues are global food shortages due to changes in climate. In some areas, food prices have gone up over 30% and created bread riots.D. International policy determines how the currency is regulated.Current issues are the Euro currency crises due to extremely high sovereign debt of some member nations (like Portugal, Spain, Greece, Ireland, Italy, etc.)II. MaximizationConsumers try to maximize utility, businesses try to maximize profit by reducing costs, and consumers that own factors of production try to sell it at the highest price.III. Economic Growth of GDPA rate of 4+% growth per year as a national output is a healthy goal of growth. 4% unemployment is also ideal.IV. Price StabilityWe need a stable rate of inflation of approximately 2 or 3% per year.V. Aggregations to understand national output.Aggregate Supply describes how much output businesses produce and sell at given prices, costs,and market conditions.•It is fictive in that to create a supply curve of 10,000 different items too many factors exist to create a meaningful representation.Aggregate Demand describes how much consumers demand and buy at given prices, costs, and market conditions.Both depend on price, quantity, fiscal policy, monetary policy, and international policy.Overall macroeconomic equilibrium is when aggregate demand equals aggregate supply.VI. Gross Domestic ProductGDP is composed of the consumption, investment, government expenditures, and net export values combined.Two measures of national product:(1) Good flows(2) Earnings flow—add income of people, rent of people, profit of people, and interest of people to find the GDP.(3) Value added—the difference between sales and purchase of materials and services. Nominal or Current vs. Real GDP:Nominal price is the current price, what the dollar value is worth at the time.Real GDP is the real price based on a base year (i.e. 1970). You take the current price and divide by the price index to determine the real price. By doing that, you remove the inflation (a GDP deflator). GDP deflator is the difference between nominal and real GDP.Over time, consumption as a share of GDP is stable (about 70% of the overall GDP). Income either goes into consumption or savings (which end up in investment).During 1950-2000, high-income nations experienced rapid growth of output per capita in recorded history. The US real GDP per capita increased by 250%--a remarkable performance.VII. The problem of averagesWhen you talk about a per capita income, it may be misleading. If a person is making $1000 andanother is making $100, the per capita income would be $550. But the overall living standard of both people would not be the same as the per capita income. VIII. Price IndicesThe Consumer Price Index is a tracker of 80,000 goods and services that are placed into 8 groups. The Producer Price Index is a tracker for producer and wholesale prices, based on changes of 8,000 commodity

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