- HW #3 is due on Wednesday at the beginning of class- Readings: should have chapters 1-9 finished, start reading chapter 10------------------------------------------------------------------------------------------------------------------------- Abbreviations:o LR = long runo SR = short runo RGDP = real GDPo FE = full employment- Government deficit: spending more than is earned from taxes. The U.S. is currently running a deficit.- Trade deficit: when more money is spent on imports than is earned from exports. The U.S. is currently running a trade deficit.o A trade surplus occurs when more money is earned from exports than is spent on imports- Proof that the U.S. has long run (LR) economic growth since 1905 is that we now own cell phones, have electricity, own TVs, etc. (items that no or very few people had in 1905).- Observations on macroeconomicso Real GDP/population = real GDP per capita If the growth rate of RGDP > the growth rate of the population, RGDP/capita willincrease The growth rate of RGDP in the U.S. is about 2-3% The growth rate of U.S. population is about 1%o RGDP is measured in constant dollarso U.S. RGDP has increased rapidly. Sources include: A growing population Productivity improvements (output/labor) has increased Increase in human capital (skills/training/education) Increase in capital stock (more equipment) Improvements in technologyo Small differences in RGDP growth rates can make an enormous difference in the LR E.g. a country with an original RGDP of $100 that experiences a constant growthrate of 2% will have a RGDP of $739 after 100 years, vs. with a growth rate of 7%in which after 100 years their RGDP would be $109,660o Growth rates vary from country to countryo Growth varies over time Rule of 70: the number of years it takes for a variable to double (if the growth rate is constant) can be approximated by the equation (70/annual growth rate) E.g. if the growth rate is 0.5% per year 70/(0.5) = about 140 years to double E.g. r = 2.25% per year 70/2.25 = about 31 years to double E.g. r = 8% per year 70/8 = about 8.75 years to double E.g. r = 5%, and you start out with $1000. 70/5 = 14 years to double. How many years does it take to reach $32,000? 14 years = $2000, 28 years = $4000, 42 years = $8000, 56 years = $16000, 70 years = $32000o Growth is important for poor countries and for rich countries It is necessary to account for a growing population People like a higher standard of living It is necessary in order to achieve social goals (else to help the poor money mustbe taken away from the rich)- Full Employment (FE)o LR Unemployment- Wasted resources- Affects the standard of living (lowers it)- Affects the economic and psychological well-being of citizens RGDP and employment are closely related- As RGDP decreases, employment decreases- (Or as RGDP decreases, unemployment rises) FE- Happens at the natural unemployment rateo *Does not mean that unemployment = 0. Unemployment > 0.o Cyclical unemployment = 0o Structural unemployment + frictional unemployment > 0- No tendency toward inflationo SR Employment Act of 1946LR RGDP trend lineBoom/ expansionRecession/ contractionpeakRGDPtroughpeakpeaktroughtroughBusiness cycleTime- post WWII- to combat the return to the poor economy of the 1930s- the government took responsibility for maintaining FE and the stability of inflation Full Employment & Balanced Growth Act of 1978- Similar to the Employment Act of 1946- The government’s unemployment target was
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