Notemaeba03 MACRO ECONOMIC BASE MEASUREMENTS
NOTES pre-Mod 1 MACRO ECONOMIC BASE MEASUREMENTS S. 2018
G.D.P. = Gross Domestic Product, means total (gross), in the U.S. (domestic), production (Product) or total U.S. production of all legal goods and services. Listen to the words, they will tell.
Ideally: G.D.P. should grow about 3%/year.
Labor Force grows 1 to 2% per year, = 1.5% about 150,000 jobs per month
Productivity grows 1 to 2% per year, = 1.5% reduces need for 225,000 workers
More than 3% growth is considered too rapid, employs too many –
Less than 3% and it won't employ enough of our expanding work force.
INFLATION = % increase in a year in the amount of money needed to purchase a given market basket of goods and services
Ideally: Inflation should be about 2%, core (excluding energy and food)
More than 3% and the prices rise distort markets too much, expectations very important
Less than 0%, a decrease in prices is DANGEROUS, causes WAR. 1% inflation would be fine BUT it is so close to negative. Federal Reserve Target 2%.
UNEMPLOYMENT = percentage of population over age 16 not employed but actively looking for a job
Ideally: 5.5% (Between 5 and 6%) or what the Natural Rate of Unemployment is (structural plus Frictional)
More than 6% and too many work hours wasted, never to be recovered.
Less than 5% and not enough surplus workers to keep wages and benefits down. Could cause wage inflation.
TO REVIEW (VERY IMPORTANT NUMBERS)
G.D.P. at or near 3% real growth
INFLATION 1-3% but above 0%, target 2%
UNEMPLOYMENT between 5% & 6%
BUSINESS CYCLE:
peak
3%
expansion expansion
contraction contraction recovery
trough
Time measured in years
INTERNATIONAL VALUE OF THE DOLLAR
Those who have traveled outside the U.S. know of exchange rates.
For example:
$1 = 113.6777 JPY (yen)/dollar 1/30/17
$1 = 8.8401 Krona (Swedish) per USD 1/30/17
$1 = 0.93572 EUR (Euros) per 1/30/17
$1 = 1.3122 CAD (Canadian) per USD 1/30/17
$1 = 20.8080 Peso (Mexican) per USD 1/30/17
The dollar (USD) gains power when more foreign people/businesses/governments want to use it to buy something in the USA or use it as a savings vehicle.
• Worksheet on exchange rates.
Example: Swedes would rather have $100 Americansky hidden in their home than 700 Kronas. This causes an increase in demand for dollars which drives up the value of the U.S. dollar.
SAY IT THIS WAY: Swede says, "I don't want kronas, I want dollars." What is not wanted drops in value. What is coveted increases in value.
An example of a dollar gaining value is when the exchange rate changes as follows:
$1 = 5 Kronas (old exchange rate)
$1 = 7 Kronas (new exchange rate)
The dollar NOW purchases more Swedish goods, and the Krona purchases fewer US goods. Appreciation
or
$1 = 300 Yen (old)
$1 = 100 Yen (new)
The dollar NOW purchases less, Japanese goods still priced at 300 yen now cost $3.00, USD down
In addition to perceptions of value, Three World-Wide Forces can and do change the international value of currencies.
(Why are there interest rates? To ration money borrowing.)
1. INTEREST RATES(fastest) The country in the world with the highest real, risk adjusted, interest rates will find savers converting their savings into that country's money so it can earn that high interest rate.
AT equilibrium all equally risky countries would have the same interest rate on similar duration bonds,
J =6% Can = 6% Germ = 6% US = 6% If the world offers 6% interest rates
And then
The U.S.A. interest rates fall to 5% interest rates
Savers in the U.S. will take their savings to Canada. In order to deposit (invest) in Canada, the U.S. savings (dollars) must be changed to Canadian money. (Or any of the other countries with higher risk adjusted interest rates.
SAY IT THIS WAY: I don't want U.S. dollars, I desire Canadian dollars. U.S. money value falls, Canadian money value rises.
When people covet Canadian dollars, then demand for their dollars increase, as does its value.
2. EXPORTS MINUS IMPORTS
a. (X-M) (Why do we import?) (what are exports, what are imports?)
Get used to the abbreviation X-M as in Xmas. If your country EXPORTS more than it IMPORTS, subtracting the two would give you a positive NET EXPORTS. Then foreigners are saying, “we want your products more often than you want our products”. It is the difference which is important: Concentrate the changes of Net Exports.
If Japan wants a plane, they buy one from Boeing for $100,000,000. That is an export for the USA, and import for Japan. To get the plane the Japanese must get rid of Yen and demand USDs. This pushes the value of the Yen down and drives the USD upward.
Exporting means SAY IT THIS WAY: You want our product so you must have our currency to make the purchase. You don't want your money, you want our U.S. dollars so you can buy the U.S. product.
If US consumers want $100,000,000 worth of Kirin Bier (made in J). Then we are Importing
and the Japanese are exporting. We must convert the USD into Yen to buy the beer.
Importing means, SAY IT THIS WAY: We want foreign products so we must get foreign money to make the purchase. I don't want U.S. dollars, I want the foreign currency.
IF X = M then there is no change in the international value of the USD.
IF X > M then the USD rises in value. If only the plane transaction occurred.
Or if we X = $100 and M = $80 then $80 cancels out, but the $20 of X causes the USD to
Rise.
IF X < M then the USD falls. If only the Beer transaction occurred.
Or if we X = $70 and M = $100, $70 cancels out leaving a net of $30 to move currencies.
IT IS NET EXPORTS THAT MATTER. Think ‘eXports minus iMports’….
b. WHAT causes X and M to change? Product demand and GDP growth. If GDP increases 10%, then our M will increase 10% and our increased GDP does not change X. Other countries GDP determines their importing level. We don’t export surpluses.
Reasoning. For every dollar of GDP there is $1 of income for households.
For every $1 of income a typical household spends 80% on domestically produced items , and 20% on imports. When our economy grows from $14 trillion to $15 trillion our imports in crease 200 billion. We used to buy 14T times .20 = 2.8T in imports,
now we buy 15T times .20 = 3.0T in imports.
Our economy grew, we imported more. Refer above. When a country imports more the force on their currency is downward. Just because we produced more does not mean we are more self-sufficient. As incomes grow we want more. More of everything and that includes imports.
Just because we produced more DOES not mean foreigners bought more from us. They will buy more when their incomes increase. We do not export our surplus production, we sell our production to the highest bidder.
In Japan, when their economy grows and their incomes increase they will buy more of everything, Domestic and imported. We will sell more to the J when their economy expands, not when ours expands.
Also see #4 below on how the changing value of a currency can impact Exports or Imports.
Why are there price differences among countries?
3. PURCHASING POWER PARITY means that goods and services in different countries should
(slowest mover of the three) eventually all have the same price.
A loaf of bread should have the same price in terms of labor hours.
A worker at McDonalds should be able to buy the same number of Big Mac’s per hour worked no
matter where in the world they happen to be.
When a difference in wheat price is discovered between two nations, such as $5/bu in Argentina and $5.02/bu in the rest of the world, world-wide buyers will rush into Argentina to buy the wheat. Eventually they bid the price up to world standard of $5.02/bu.
HOW DOES THIS AFFECT INTERNATIONAL VALUE OF ARGENTINE MONEY?
To purchase the wheat, buyers must have Argentine currency. So SAY IT THIS WAY: We want your product, we must have your money to buy it. We can’t use our money, we to trade our currency for your currency to buy the wheat.
Purchasing Power Parity continue to exist because workers, and land don’t easily move. And a home country bias continues to exist. Unlike commodities (oil, lumber, paper, gold, etc) many things do not age or ship well. Why not import Big Macs from countries where they are relatively less expensive? You want to eat a 48 hour old Big Mac?
* The Economist, Burgernomics, The Big Mac Index updated in May 2003, yearly
SUMMARY of How Currencies Change in Value:
1. INTEREST RATES; A VERY QUICK, speed of light
2. X- M; slower affects perhaps in MONTHS, AND YEARS
3. P.P.P. Glacial, a slow powerful grinding force often felt in YEARS or DECADES.
*4. When the USD gains strength (gets stronger, gets more valuable, gets more
expensive for foreigners to buy), then it makes our X more expensive and there for we sell
few X AND it makes M less expensive so we buy more M. If the USD falls
internationally, then everything in the US is “on sale” for foreign buyers.
-----------------------
Key concepts:
What is the business cycle?
What causes it?
What problems accompany each of the different stages?
How and Why do we control it?
size of economy /
GDP
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