CH1 Intro to Macro 3 Economic Concepts Jobs income economic production 1 2 Prices lvl of prices measure how much it cost to live in relation to income 3 Output how much is produced by society econ growth affects standard of living Macroeconomic You do not have control over ex Finding a job lots of offer or only a few Is pay high or low Microeconomic Decisions you have control over ex What kind of jobs 5 Key Ideas 1 Incentives Positive and negative Cause people to change action Ex Mexico City reduce of cars 2 Money Increases speed of transactions Less time to trade more time to produce Eliminate double coincidence Assess product s quality Useful benchmark measuring stick 3 Scarcity Needs desires available resources Tradeoff 4 Interconnections The whole world is connected economically Fixed amount of resources Interconnections increase output increase because specialists increase 5 Non Zero Sum Game Size of pie changes When one wins doesn t mean another loses Newly created wealth vs destroyed weath Ex Economy is not poker The Language of Economics Definition Capital Recession Goods Services Definition Goods Able to resell Services Does not make sense to resell Positive Normative Economic Positive Economy Objective view of world that is potentially verifiable More or less factual Normative Economy Subjective Values and personal judgement of how the world should be Economic Model How successful Businesses Work Consistently make money Profit Revenue Cost Revenue Price Sold Quantity Sold Cost Function Quantity Sold The Law of Demand Price of good is inversely related to the quantity purchased by customers Fable political economic are tied together Capitalist ind owns country s businesses Socialist gov t owns key sectors while ind owns minor businesses Communist gov t owns all businesses Data CIA World Fact Book Macroeconomic information Good overview Great for comparing countries Limited amount of macro information Only recent numbers hard to compare World s Back Development Indicators WDI Created after WWII to make long term development loans to poor countries eliminate poverty No background information From 1960 to present Country Specific Statistical Conpendium Countries issue microeconomic statistics themselves CH4 The World s Population Population increases demand increases supply increases labor business increases Population increases tax base increases less need to increase tax rates less effects on business hiring when there s military conflict Pop growth easier to meet profit targets 4 Key Facts to Population 1 Births 2 Deaths 3 Immigration 4 Emigration All influenced by macroeconomic factors Change in pop Births Immigrants Deaths Emigrants Adjust business data with population data per person Ex China Belgium If pop growth economic growth decrease in standard of living Therefore control population Ex China India UN predicts pop if grow to 10 billions then steady off Life expectancy doubles triples while females have less kids Equations diff in reference pt Change in Pop New Value Old Value Old Value Ref Past Change in Pop New Value Old Value New Value Ref Present Change in Pop ln New Value ln Old Value Ref Inbetween Bond price is inversely proportional to interest rate of bond therefore when pop decreases bond price decreases interest rate increases incentive for buyers Pop Density of ppl Land area Resources Consumed By Avg Person Total Resources of people GDP per person GDP Pop Data World Population Clock Pop clocks of world and U S U S Census Bureau U S Statistical Abstract Key facts pop land resources etc Threats of diseases natural disasters but pop is still growing Social Security Federal pension program financed by taxes on worker s pay 15 3 of pay 12 4 pension prg 2 9 retiree heath prg Medicare paid by employer Currently Defined Benefit Plan Recipients were paid around 820b yr HUGE of gov t spending Work 40 quarters 3 months does not need to be consecutive Earliest 62 if wait until 67 pension increases If earn more than 1 000 before taxes in any 3 month period and reported to government 1 quarter does not have to be in the same company 1 000 month Over Time Life expectancy doubles triples How Do you Get Benefits Why is Soc Sec Important U S spending not saving Survey of consumer finances 44 did not save Labor Market Impact Why Some people in USA put in VERY long work weeks 80 hrs wk Soc tax structure employee tax half paid by employer half by employee Cheaper to hire 1 person than 2 tax only up to 100 000 even with benefits compensation costs lower than 2 people 2 Types of Pensions Defined Benefit A pension pool of all workers past present Comp adds if investment is not doing well Workers put portion of salary into pool no matter when they retire Get fixed income based on of years they worked amount they were paid Company shoulders all risk benefit while workers shoulder none Defined Contribution A pension pool for each individual workers Comp irrelevant to the pool investment s performance Workers allowed to select type of investments Worker shoulder all risk company shouler none Companies are switching from DB DC Defined Benefit Workers who work for a long time 15 yrs at one company Dislike risk or uncertainty Expect to live a long time do not run out Defined Contribution Workers who move from job to job Enjoy risks Want to leave an inheritance Good points help people to be better off Bad points people feel less need to save makes it even more necessary to save Crisis More retirees People are living longer Soc Sec Pay as you go No storage Only some Trust fund gov t bonds Tax Rate Benefit Recipients Wages Workers Replacement Rate Benefit Wages Dependency Ratio Recipients Workers Replacement Rate Wages even after inflation has been going up due to productivity improvements Soc Sec pensions Benefit Inflation Productivity growth 2 more Solve problems retirees have less money to spend by eliminating productivity growth in pension Dependency Ratio More retirees than children problems Soc Sec induces people to have less children against its own interest Fable Soc Sec is Going Bankrupt 1 Low rates of return 2 Constant workers provide 3 General tax revenue other source Solutions Raise Soc Sec Tax From DB DC Advantages Currently SS gov t bond stock Can be passed onto another generation Disadvantages Staggering 2b current cost More risk Low payments CH2 Supply Demand Supply provides goods and services Demand how much consumers want a product or service Oil Barrel 42 U S