April 2005 Archives

We'll take any questions that you have, and then we'll do the 20-question multiple choice portion of the exam. The take-home portion is worth 30 points, and it will be due on Monday, May 9th. The questions are below.

Remember that you are free to attend the College Counseling reception Monday morning. We'll start class at 9 AM that day.

Problems: (10 points)

1. Components of GDP: (4 points) - Determine if each of the items listed below should be included in GDP and under which component or components: Consumption, Investment, Government, Exports or Imports.

1. A cell phone produced and sold in the US by a Japanese company
2. MPA tuition
3. Social Security payments
4. Best Buy stock purchased from Best Buy
5. The purchase of a plane ticket to Shanghai on Air China
6. The purchase of a US Treasury Bond by an individual
7. A new factory
8. The sale of a previously occupied house
9. A bottle of French wine, sold in the US
10. A television produced, but not sold.
11. A dinner at a restaurant
12. A computer produced in the US and sold in Canada

2. Calculating GDP: (3 points) - Given the following data (in billions of current dollars), calculate the current level of gross domestic product.

Consumption spending $6,000
Social security payments 1,400
Income tax receipts 1,700
Exports 1,600
Business purchases of new factories and equipment and changes in inventories 2,500
Federal government spending on goods and services 1,700
Construction of new homes 400
State and local spending on goods and services 1,500
Imports 1,200
Wages 13,000

3. Federal Reserve "Tools" and Effects: (3 points) - For each Fed "action," complete the chart of effects on the money supply... Fill in 3a through 3f.

Open Market Operations

3a. The Federal Reserve buys securities
3b. The Federal Reserve sells securities

Discount Rate

3c. Raising the discount rate
3d. Lowering the discount rate

Reserve Requirement

3e. Raising the reserve requirement
3f. Lowering the reserve requirement

Short answer: (20 points - 5 points each) You need to do four of the following "short answer" questions. Choose any four that you would like from the list. Answers should be between 300 - 500 words or so. You can either print them out or submit them electronically to me as an e-mail attachement.

A. You are asked to present an Emmy Award for the category of "The Most Influential Economist". The three nominees, lucky for us, are Adam Smith, Karl Marx, and John Maynard Keynes. Tell me who you think should win the award. More importantly, provide justification for your choice. (This is a carry-over from last year when we also read Explaining Economics. It's certainly one you could easily research, but we didn't really "teach" these guys this time around.)

B. Martians have landed on the earth, and they want to better understand the American economy. You are allowed to teach them about the two (and only two) economic measures or indicators that you believe reveal the most about the economy. Which two would you choose to explain? Why?

C. Assume that the United States needs a new "chief economist". You have been tapped for the job. At your Senate confirmation hearing, you are asked if your macroeconomic "view" relies more heavily on the "demand" approach or the "supply" side. What would you tell them? Why?

D. Taxes are, however unfortunately, a fact of life in America. Assume that you are on the committee appointed to look at "tax reform". What would you recommend as the best system of taxation in America? (You don't need to talk about specific numbers, but be sure that your choices reflect the values you would want to emphasize in our society.)

E. Here's a "softball" for you. What do you believe should be the role of government in managing and/or regulating the economy?

F. The Federal Reserve Board has been responsible for conducting our nation's money supply for decades. Critics charge that it is often ineffective, sometimes making things worse. Based on what you know, should changes be made in the way the Fed operates? Why or why not?

G. Do budget deficits matter? Justify your answer with reference to ideas discussed in class or the readings.

H. You're in charge of preserving the black rhino. In an answer that shows an understanding of the principles of economics, tell me what you'd do. (Remember the rhino from Naked Economics? If not, pick another question.)

If you'd like to propose another question, let me know...

Welcome to the Federal Reserve Board Federal Open-Market Committee Meeting
This group meets eight times a year. The FOMC discusses current and near-term economic and financial conditions, prior to making a decision to raise, lower or keep short-term interest rates the same. We'll go through this in an abbreviated form today. Here is the official "Press Release" issued on March 22nd. The federal funds rate (the one you will consider changing) is currently targeted at 2.75%.

Agenda for the Simulation: The resources that you might need are below...

* Chairman Greenspan calls the meeting to order.

* Federal Reserve District President presentations: (We'll go through the districts in "numerical" order. In your two minutes of fame, try to cover these...)

* provide an overview of current economic conditions in your district
* discuss the prospects for economic conditions for the near future
* identify any economic issues of special concern at the present time
* recommend whether short-term interest rates should be raised, lowered or kept the same.

* Chairman and Board of Governors offer recommendations regarding the direction for short-term interest rates

* Discussion of issues of controversy

* Each member of the Board of Governors and the Bank presidents cast a vote regarding the direction for interest rates, with the decision going to the majority.

* Hypothetical situations (if we have time...)

"The Federal Reserve Districts and Banks" - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

Board of Governors of the Federal Reserve- Here is their home page.

"The FRB Beige Book" - This collection of information is compiled 8 times a year for use at the FOMC meetings. We'll use the April 20th data. (The next real meeting for them is May 3rd.) This link will take you to the overall summary. In addition, the links on the left will take you to "your" district. There, you can find a one "page" overview of recent developments in your district.

REMINDER: Be sure you have read Chapter 10 in Naked Economics by class tomorrow.

Banking and the Federal Reserve System: To fully understand banking, you need to get beyond seeing banks as simply places where people keep money. Only a small percentage of deposits are actually on hand at a bank at any given time. Instead, we operate on the fractional reserve system. Banks keep a percentage of deposits on hand, but they are able to loan out the remaining funds in order to generate profits. Think about how that fits into our macroeconomic model of the economy.

The Federal Reserve System (FED) was created in 1913 to strengthen the nation's banking systems. You can learn more about how it works by consulting "The Federal Reserve System."

The nation is divided into twelve districts, and most banks within each district are members of the system. Each district has a Federal Reserve Bank. These twelve banks are governed by the seven members of the Federal Reserve Board in Washington DC. These members are appointed by the President to serve fourteen year terms, so they are designed to be the "independent" authority for monetary policy. The Chairman of the Federal Reserve system is also a Presidential appointment, and that is currently Alan Greenspan. (Greenspan is currently in his fifth 4-year term as Chairman. Reagan, Bush, Clinton and Bush all named him to that post.)

Federal Reserve Board simulation: Tomorrow, we'll do a simulation of the Federal Reserve Board and a Federal Open Market Committee (FOMC) meeting. You'll each play a role as either a representative of one of the Federal Reserve districts or a member of the Board of Governors.

"The Federal Reserve Districts and Banks" - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

"The FRB Beige Book" - This collection of information is compiled 8 times a year for use at the FOMC meetings. We'll use the April 20th data. This link will take you to the overall summary. In addition, the links on the left will take you to "your" district. There, you can find a one "page" overview of recent developments in your district.

Preparing for the simulation: 12 of you will represent each of the districts. Figure out who you "are" by consulting "your" district's home page. Browse around there for a while. In addition, go to the "Beige Book" above, and be sure to read both the overall summary and the page for "your" district. (Read an interview with "yourself.")

Come prepared to speak for maybe two or three minutes on conditions in your district. Be ready to make recommendations as to whether the Federal Reserve should take action to either "speed up" or "slow down" the economy.

One of you will represent the Federal Reserve Board of Governors itself, and another of you will be Alan Greenspan. You might brief yourselves on the summary information, and you might browse the homepage of the Board of Governors of the Federal Reserve. Al, check out your homepage.

By the way, only five Reserve Bank Presidents at a time actually serve on the FOMC, but we'll let you all come to the meeting...

The "Tools of Monetary Policy" - The Fed has three main tools at their disposal.

Reserve requirements: These are the percentages of deposits that banks need to keep on hand in their vaults or on deposit at a Fed bank. (The Fed last changed this rate in April of 1992, and it is a rarely used tool of monetary policy.)

* If the reserve requirement were raised, banks would have less money available to lend.

* If the reserve requirement was lowered, banks would be able to increase lending.

Discount rate: This is the interest rate that the Fed charges banks for loans. Member banks can borrow from the "discount window" at this lower rate. This is now rather symbolic, as the Fed considers itself to be the "lender of last resort." Banks are encouraged to borrow from other banks.

* When the discount rate rises, it would typically slow economic activity.

* When the discount rate is lowered, it would typically stimulate economic activity.

Open market operations: This is when the Fed buys or sells previously issued government (Treasury) securities.

* If the Fed wants to expand the money supply (boost the economy), they buy Treasury securities. That puts additional money into the banking system, and that should influence interest rates downward.

* If the Fed wants to tighten the money supply (slow the economy), they sell Treasury securities. That removes money from the system, and that should influence interest rates upward.

As of today, the discount rate is at 3.75%, and the prime rate is at 5.75%. These drive a wide variety of interest rates for different types and durations of borrowing.

SITE OF THE DAY: FED 101 is great. Check it out.

Between mortgages, credit cards and car wrecks, we didn't even GET to the taxes information scheduled for yesterday. Let's go back to the blog entry for DAY #11 - The Government and Taxes to take care of that...

Let's talk about anything you found interesting in Chapter 4 from Naked Economics.

Remind me to give you a copy of the study guide for our first unit.

We're about to make our transition from macroeconomics to microeconomics, but we need to look at the role that money plays in all of this.

What is money? I know, dumb question. However, the reality is a bit more complicated.

Money is something that we can use to make purchases with. Generally speaking, there is a continuum of ways to make purchases, but some are clearly easier than others. Liquidity refers to the ease with which an instrument can be used to buy things.

What is considered "money"? Certainly, the currency and coins in your pocket are money. What about checks? Credit cards? Savings accounts? Bonds? Well, the answer depends on just who you are asking.

The Federal Reserve holds that money has three functions:

* serves as a medium of exchange - People will accept money in exchange for goods and services.

* serves as a standard of value - Money is a unit of measurement that can be used to specify the value of other things.

* serves as a means of saving or storing purchasing power - Money is a form in which wealth can be held.

Various definitions of "Money Supply": These are the most common classifications. They get "bigger" as you go down the list.

M1: currency (in circulation), demand and checkable deposits (banks and thrifts)

M2: M1 and savings accounts, additional (small time) deposits, and retail money-market funds

M3: M2 and additional (longer time) deposits, and eurodollars, and institutional money-market funds

"Money Supply for Dummies" - If you can get past the demeaning title, this is a really informative article.

If you want to look at changes in the money supply (M1) over recent years, you can manipulate this data from "Economagic" to produce graphs.

The Government and the Public Sector: Last time we were together, we looked at the "numbers". Today, we'll try to make some sense of them...

Office of Management and Budget: Budget Highlights: You were asked to identify some points of interest here. Let's chat.

The Budget Deficit: You were asked to read the handout on "The Mythology of Deficits", from The Armchair Economist. Let's hear what you thought of that.

The National Debt: You were asked to look around the Grandfather Economic Report by Michael Hodges. What did you found interesting there?

On to the new stuff for today...

Taxes: There's an old saying that, "there's nothing certain but death and taxes." Today, we'll spend some time looking at the less depressing half of that adage... Hopefully, you've been convinced by now of the economic necessity of some form of taxation. (If not, contemplate life without roads, schools, police, and national defense for a while...)

So, if we work from the common assumption that taxes are a necessity, there remain several questions:

* Who should be taxed?

* What should be taxed?

* How (at what rate) should the tax be levied?

* What should happen to the money collected from the tax?

The history of taxation: Of course, the history of taxation is long. If you want more information than you can ever use, consult "The History of Taxation" at the "Taxworld" website.

Types of taxes: There are several broad categories of taxes. Economists generally classify taxes as progressive, regressive, or proportional. (Another type of tax is called a "head" tax. Everyone pays the same amount.) Let's make sure we understand the differences.

Discuss: Which type of tax do you think is most fair? Are there any that you strongly oppose? Is the sales tax regressive?

The Federal Income Tax: This, of course, is the "big one". It has been in place since 1913, and it is the single largest source of governmental revenue.

One of the legacies of the Reagan years was a period of tax reform. Now, there are six federal income tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

For married couples, the 15 percent rate currently applies to taxable income up to $56,800, whereas the 25 percent rate applies to taxable income between $56,800 and $114,650.

Discuss: Do you think it is fair to tax higher levels of income at a higher rate? Would you like to see a more or less progressive income tax?

Of course, Minnesota gets its share of income as well. You can learn more about that at the "Minnesota Department of Revenue Home Page." You can also browse around here to find a copy of the tax forms you would need to file as well.

For comparisons, here are State Income Taxes for the rest of the nation.

The "Flat" Tax: One of the "new" movements in tax reform has been the call for a flat tax. Here are two articles to consider...

Christian Science Monitor: "US already moving toward a flat tax."
Economist: "The flat-tax revolution."

BLOG ENTRY: Would a flat tax be an economically sound idea?

Taxpolicy.com invites you to "Build Your Own Tax Policy." It asks you a series of questions and then sketches out your broad views on taxes as derived from those answers.

READING: Please read chapter 4 in Naked Economics for tomorrow and chapter 10 for Wednesday. That's it for the week from the book.

Remember that the first part of the exam will be on Friday.

We'll start with a news story, a discussion of chapter 3 and the choosing of topics for a series of "mini-debates" on economic issues.

The Government and the Public Sector: Today, we'll focus on the numbers. These numbers, of course, will vary from year to year...

Where does the federal government get its revenue from?

44% from individual income taxes
36% from Social Security payroll taxes
11% from corporate income taxes
4% from excise taxes
2% from customs duties

Where does the federal government spend its money?

22% is spent on Social Security
20% is spent on defense
9% is for other "direct" spending
10% on Medicare
6% on Medicaid
15% on interest on the national debt
other areas are smaller
about 2% is spent on welfare
less than 1% is spent on foreign aid

The largest single source of revenue for state governments is the sales tax. Local governments depend most heavily upon property taxes.

The Fiscal Year 2006 Budget: These links are from the Federal Government's Office of Management and Budget, and they deal with the most current budget proposal.

Office of Management and Budget: Budget Highlights: DO THIS: Look through this overview and find three budget priorities that you support and three that you disagree with. Make note of these for discussion in class.

The Budget Deficit: There is a great deal of diagreement about just how important budget deficits are, as well as about the specific ways in which they impact the economy. Assessing the desirability of deficits requires a balancing of these costs and benefits:

* Lower unemployment: Keynsian style fiscal policy would recommend risking a budget deficit to keep the economy closer to full employment.

* Public investment: Deficits allow the government to borrow for projects with a high social payoff; perhaps education or infrastructure.

* Lower national saving: Deficits require the government to bid up the interest rate to obtain financing for the deficit. This may crowd out private financing and decrease growth.

* International implications: Higher interest rates attract foreign investors. They need to obtain dollars to purchase bonds, and that tends to increase the value of the dollar. This makes our exports relatively more expensive to foreigners and their goods relatively more inexpensive to us.

* Debt monetarization: Deficits create a risk that government will choose to finance them by printing money, or monetizing the deficit. Inflation is the clear risk.

* Growing national debt: Deficits will increase the national debt. This means growing interest payments on that national debt, potential tax raises, and a burden on future generations.

DO THIS: Read the handout, "The Mythology of Deficits," from The Armchair Economist. Give careful consideration to the "parable," and then read through the "myths" and determine whether you agree with the authors.

The National Debt: This is simply the sum of all outstanding government deficits.

Here's the Debt Clock that we saw earlier. See what your share is today...

Grandfather Economic Report: Michael Hodges had put together this large site concerned with presenting information on the national debt. You're directed to the prtion of the site concerning economic issues, but you may want to look around further.

DO THIS: Browse through this report. The pictures and graphs are very user-friendly. Find five things (statistics, graphs, comparisons) that are of interest to you, and make note of them to share in class. Then, make at least two "policy recommendations" for the US government based on what you have learned.

There are economists who would tell you to ignore everything that we talked about yesterday. They would argue that the economy is best understood from the "supply" side of things. They are in the minority, but their opinions are certainly worth considering...

Supply, Supply, Supply: We'll look at the competing theory to yesterday's "grand explanation" of the economy.

For quite a while, the ideas we learned about yesterday were almost completely accepted in economic circles. Keynes' analysis, even though it focused almost completely on demand, was accepted as economic "gospel".

By the early 1970s, serious questions emerged about relying solely on this explanation:

* Supply "shocks", such as the OPEC oil embargo of 1973, hit the economy, but the Keynsian model alone could not offer advice for dealing with these crises.

* For the first time, America was facing rising unemployment and rising inflation. The Keynsian approach alone couldn't explain these type of departures from the "business cycle" model.

* This approach tended to be short-term in its focus, and that diverted attention from longer term issues like economic growth and standard of living.

It was out of these concerns that a new approach, supply-side economics, emerged. It had its strongest impact during the Reagan years. (Many called it "Reaganomics".) Although the overall approach doesn't find as many supporters among economists today, looking at its approach still helps fully understand macroeconomic theory.

Here it is; a brief tour of the "supply side"...

The first key idea was found in the early 1800s when a French economist named J.B. Say got a law named after him...

Say's Law: "Supply creates its own demand..." This idea held that overproduction and underproduction would never be problems since production itself generated enough income to purchase what is produced. "Gluts" or shortages would lead to price adjustments until the glut or shortage disappeared. According to the theory, full employment would soon reappear.

The experience of the Great Depression, and its sustained, high unemployment, led to an acceptance of the ideas of Keynes and discredited "Say's Law".

Modern "supply-siders":

The key to understanding this approach is the idea of incentives. Keynes assumed that an increase in demand automatically meant an increase in supply unless the economy was at "full capacity". Supply-siders disagree, saying that the production won't happen if the costs are too high.

What could make the costs too high? Things like taxes and interest rates.

The "solution"? Incentives- particularly in the form of lower taxes.

* They argued that reducing costs will lead to more production by business.

* Also, lower taxes would encourage household savings, creating more funds for investment.

* Further, some claimed that decreasing tax rates would lead laborers to work more, furthering the cycle.

The second key difference is the effect of government deficits, or the theory of crowding-out.

Here's the argument: When spending exceeds taxes, the government borrows money in financial markets. (States and locals also sell revenue bonds to finance projects.) The federal government also sells treasury bonds.

Supply-siders say these actions pull money (capital) out of the private markets and raise interest rates. These actions "crowd out" private investment, lowering output and employment.

You may have noted a potential contradiction here. How can you hope to both cut taxes to stimulate the economy and avoid budget deficits that might crowd out investment? What do you think?

Remember, although relatively few economists still hold these ideas, the concepts of "supply-side" economics still influence public policy decisions today.

The Debate over Government: What do you think? An introductory discussion...

* Is the US government responsible for ensuring that all its citizens have an adequate standard of living? If so, how should they go about doing that? If not, why not?

* To what degree should the US government pursue policies of "income redistribution?" How?

* What "transfer payments" (welfare, social security, unemployment, etc.) do you support? Why? Are their changes that you would make?

* Should recipients of welfare be required to work in order to receive benefits?

* What would be the fairest system of taxation in this country?

* Should the inheritance tax be abolished in the United States?

READING: We'll discuss chapter 3 from Naked Economics today if we get a chance. If not, tomorrow.

Remember that you were asked to make two comments to "THE BLOG." One should be on your reaction to some or all of "How statistics lie." The other should reflect on what you found with the college budgeting exercise. A good paragraph for each is fine.

SITE OF THE DAY: Time 100 - John Maynard Keynes. This feature is from Time's list of the 100 most influential people of the 20th century. Your new favorite economist is one of them.

A shorter entry today... For those of you who missed yesterday, we'll be going back to that entry on unemployment. We didn't get through a lot of that. Be sure to check out the announcements as well...

Remember to read Chapter 3 in Naked Economics for Thursday. Those two blog comments should be made by the end of Friday as well. (One on "How Statistics Lie" and one on the college budgeting website.)

Demand, demand, demand: We're starting to put the "big picture" together here in our look at the macroeconomy. Today, we'll look at flows in the economy, particularly as they originate on the demand side. We'll largely be looking at work pioneered by John Maynard Keynes. This is clearly the dominant theme of chapter 6 from Economics Explained. We'll make use of that in class.

We're going to try and work through this a couple different ways.

First, we'll literally try and walk through the explanations from the reading.

Second, we'll look at a visual representation of this. I have a handout for you. (NOTE: I deleted the reference to AmosWEB. I swear I accessed it for free last night. I guess it's the "invisible hand" at work.)

SITE OF THE DAY: If you want the "real thing," here's the home page of The New York Stock Exchange. There's some interesting information here to browse through.

Here's the list of "Current Events / Economics in the News" for the next two weeks:

Thursday, April 21: Kevin
Friday, April 22: Nicole

Tuesday, April 26: Hayes
Wednesday, April 27: Zander
Thursday, April 28: Mollie
Friday, April 29: Mekaela

Here's the list of snack volunteers for the next two weeks...

Wednesday, April 20: Mollie
Friday, April 22: Sam

Monday, April 25: Mekaela
Tuesday, April 26: Kevin

Welcome back from the last four-day weekend of your high school careers... A couple of updates and reminders:

Let's have "Government and the Economy" (pp. 43 - 62) from Naked Economics read for Thursday, April 21st.

The "Current Events/ Economics in the News" stories start tomorrow. I'll post the schedule online here. Remember that you do this twice, and you can receive up to 10 points for each of them. You don't need to have anything on paper, but feel free to make copies or provide a link if you think it would help.

I'm looking at taking the "Macroeconomics" unit exam next Friday, April 29th. More info to follow on that one...

Happy Tax Freedom Day. In case you missed it, that occurred on Sunday. We'll talk about what that means.

Hey, Gorgeous, Here's a Raise... Here's a weird coincidence. I wanted a reason to link to a example from Steven Landsburg's Everyday Economics. I was looking at The Week (great periodical if you're busy but want to stay informed), and the work of Daniel Hamermesh and Jeff Biddle was mentioned. Here's Landsburg's take on the topic... Read it. We'll talk.

Let's also get your reactions to the chapter from The Armchair Economist, "How Statistics Lie: Unemployment Can Be Good for You." Let's try "blogging" our "Economics Journals," beginning with an entry for this article. I'll explain what that means...

Why not stock market simulation? Let me explain...

Unless anyone has anything else to chat about, we'll move on to the topic o' the day...

Employment and Unemployment Today's topic, in many ways, is the flip side of what we did Thursday with inflation.

Defining "unemployment": The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.

The Current State of Unemployment: The most recent figures we have take us through March. This is a lot of numbers, but just browse it for a couple minutes.

Since I can't figure out how to get charts onto the blog, follow this link to my old page and scroll down to the charts... Here are the newest charts from the Bureau of Labor Statistics.

Questions to consider and discuss:

* What surprises you (if anything) about the statistics and graphs above? What explanations do you have for the discrepancies?

* In January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?

Unemployment in your backyard (or anyone else's)... You can go to the Bureau of Labor Statistics website and check the Local Area Unemployment Statistics for your city and/or state.

Answer these questions:

1. Is unemployment in our area higher, lower, or roughly the same as the national average? What about your favorite vacation spot? Your grandma's hometown?

2. What factors contribute to our area's unemployment rate? (Think about recent news...)

Which industries have expanded?

Which industries have contracted?

3. Will the recent changes affect you?

4. If avoiding inflation were your highest concern, where should you move? If you like the idea of unemployment, what cities would you recommend for your next move?

Unemployment Insurance: Go to the website for the Minnesota WorkForce Center. Browse through the links and see what kind of benefits are available in this state.

* Do you think unemployment benefits are appropriate in Minnesota?

* What changes, if any, would you make?

* Do you think these benefits are a disincentive to work?

The Relationship between Inflation and Unemployment: The Phillips Curve- Economists have long claimed an inverse relationship exists between unemployment and inflation. This "Phillips Curve" quickly gets very technical, but you can see the basics at this link. Browse around for a bit.

We'll begin with a news story and a look at Chapter 2 in Naked Economics. Then, it's inflation. I'd like you to read the article, "How Statistics Lie," from The Armchair Economistby Steven Landsburg. Remind me to tell you about the economics "journal" thingy. No big deal. (Maybe we can blog it.)

Inflation: We'll be looking at inflation today, since it might be the economic issue of most concern to policymakers and consumers. This topic will come up several times, but we'll get some of the basics out of the way.

Defining "inflation": Inflation is a sustained increase in the overall level of prices. (The most widely reported measurement of inflation is the consumer price index (CPI).) You can go online to EconEd and read all about how you calculate CPI if you'd like...

The Consumer Price Index measures prices of goods and services in a market basket of goods and services that is intended to be representative of a typical consumer's purchases. The percentages that are currently used to describe the categories of goods and services that market basket are as follows.

Food and beverages 16 %
Recreation 6 %
Housing 41 %
Education 3 %
Clothing 4 %
Communication 3 %
Transportation 17 %
Medical care 6 %
Other goods and services 4 %

Inflation Update - April 2004: This is the text of the relatively recent inflation report from the National Council on Economic Education.

"The consumer price index (CPI) during the month of April increased by .2 percent (two-tenths of one percent). The rate of increase in the consumer price index over the past twelve months has been 2.3 percent."

Much of the following information is simply copied from the EconEd website for our convenience in class today...

Causes of Inflation: Over short periods of time, inflation can be caused by a decrease in production or an increase in spending. We get the names for the two major types from this: demand-pull and cost-push.

Inflation resulting from an increase in aggregate demand or total spending is called demand-pull inflation. Increases in demand, particularly if production in the economy is near the full-employment level of real GDP, pull up prices. It is not just rising spending. If spending is increasing more rapidly than the capacity to produce, there will be upward pressure on prices.

Inflation can also be caused by increases in costs of major inputs used throughout the economy. This type of inflation is often described as cost-push inflation. Increases in costs push prices up. The most common recent examples are inflationary periods caused largely by increases in the price of oil. Or if employers and employees begin to expect inflation, costs and prices will begin to rise as a result.

Over longer periods of time, that is, over periods of many months or years, inflation is caused by growth in the supply of money that is above and beyond the growth in the demand for money.

The Costs of Inflation: Here's one short summary of some of the costs of inflation.

* High rates of inflation mean that people and business have to take steps to protect their financial assets from inflation. The resources and time used to do so could produce goods and services of value. Those goods and services given up are a true cost of inflation.

* High rates of inflation discourage businesses planning and investment as inflation makes the forecasting of prices and costs more difficult. As prices rise, people need more dollars to carry out their transactions. When more money is demanded, interest rates increase. Higher interest rates can cause investment spending to fall, as the cost of investing is higher. The unpredictability associated with fluctuating interest rates makes customers less likely to sign long-term contracts as well.

* The adage "inflation hurts lenders and helps borrowers" only applies if inflation is not expected. For example, interest rates normally increase in response to anticipated inflation. As a result, the lenders receive higher interest payments, part of which is compensation for the decrease in the value of the money lent. Borrowers have to pay higher interest rates and lose any advantage they may have from repaying loans with money that is not worth as much as it was prior to the inflation.

* Inflation does reduce the purchasing power of money.

* Inflation does redistribute income. On average, individuals' incomes do increase as inflation increases. However, some peoples' wages go up faster than inflation. Other wages are slower to adjust. People on fixed incomes such as pensions or whose salaries are slow to adjust are negatively affected by unexpected inflation.

Questions to consider: We'll get to them in a few days...

How does the US government work to prevent and/or control inflation?

What level of inflation should we aim for?

For one perspective on that issue, here's what Alan Greenspan had to say at a 1989 Congressional hearing:

"Maximum sustainable economic growth over time is the U.S. Federal Reserve's ultimate objective. The primary role of monetary policy in the pursuit of this goal is to foster price stability. For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions."

Maybe a "non-answer," but it seems to translate into a 2 or 3 percent rate in practice.

The Gross Domestic Product:

What is GDP (Gross Domestic Product)? GDP is the total dollar value of all final goods and services produced in a country during a year.

Things to note:

* Both goods and services are included.
* Current market prices are used to aggregate outputs. Government purchases, many of which do not occur on markets, are valued at their cost of production.
* Only final goods and services are included. This avoids "double counting".
* US GDP measures production by US citizens and foreigners alike inside the borders of the United States.
* GDP is an annual flow, a rate of production for the economy.

What's the difference between GDP and GNP (gross national product)? Many people, including your teacher, grew up discussing GNP. In 1992, the United States joined the rest of the world in using GDP as its national economic accounting system. GDP measures output produced inside the United States, whether by foreigners or US citizens. GNP, by contrast, meaures output of US citizens, no matter where they are located in the world. As a result, US GNP tends to be about .3% higher that GDP, but that gap has been shrinking.

What other names are used to refer to the nation's annual output of goods and services? Some you will find in the media include: output, total output, national output, income, total income, national income, and aggregate supply.

How do we estimate GDP? A formula created by John Maynard Keynes is used to total the four categories that make up the Gross Domestic Product.

GDP = C + I + G + NX (or X-M).

or Gross Domestic Product = Consumption + Investment + Government Expenditure + Net Exports

Don't forget the difference between nominal and real GDP values. Real GDP takes inflation into account.

Is it the "Gross Deceptive Product"? Here are some potential weaknesses in using GDP.

* Some things are produced but never sold, so they are not included in GDP. What examples can you think of?
* Some expenditures are hidden from data gathers, so they are unrecorded transactions. Examples?
* Some items are included in GDP that do not reflect net benefits to society. Consider the Exxon Valdez.
* Government expenditures are based at cost, despite the fact that market forces might value them differently.
* Cross-country comparisons are made difficult because of climate, cost of living, and other differences.

Let's test your understanding: Which of the following raise GDP by $500?

* A steel company sells $500 of steel to an auto manufacturer.
* You are hired by the government to shuffle paper uselessly for $500.
* You are hired by General Motors to shuffle paper uselessly for $500.
* A antique dealer sells a $5000 painting, pocketing her 10% commission.
* You receive $500 in an unemployment insurance check from the government.
* Your company's stored inventories of widgets falls by $500.
* You win $500 betting on the Mounds Park Academy soccer team.

The Gross Domestic Product - A Case Study This is from a lesson produced by the National Council on Economic Education.

This site is extremely informative, and it is worth a close examination. Check out the graphs closely. In particular, make sure you read "Explanations of GDP and its Components". Drop down to "GDP as a Measure of Well-Being." We'll discuss what you find there.

Finally, be sure to try and answer the "Questions" sections at the bottom. We'll go over them tomorrow or later in the hour if time permits.

Here is your ROSTER for US ECONOMIC POLICYMAKERS. You could certainly add more names and agencies, but this covers many of the major ones.

These web sites will provide you with the necessary information:

"Your Government": This is from the official White House web site.

"The President's Economic Security Agenda": This is specific to Bush's plans.

"President Bush's Cabinet": This is pretty self-explanatory...

"The Federal Reserve": This introduces the members of the Board of Governors of the Federal Reserve.

"The United States House of Representatives Committee Office Web Services"

"United States Senate Committees"

One "missing" piece here would be the types of regulative and executive agencies and commissions like the Environmental Protection Agency, Federal Communications Commission, and others very linked to the functioning of our macroeconomy.

SITE OF THE DAY: Educaid College Budget Calculator

As I mentioned earlier, we'll do some "personal" or "consumer" economics throughout the quarter at different times. Sometimes, it will match up perfectly with what we are doing in class. Other times, I'll just stick it in when I feel like it. (This is one of those times...)

Since MPA's promotional literature touts our 100% college acceptance rate, I'll assume that most of you plan on doing that in the future. Let's take a closer look at the costs. You can do this in a number of places on the web, but I thought the Educaid Budget Calculator was pretty user friendly.

Before you begin: You may need to make some assumptions. For example, if you have applied to several schools, run the program with the various numbers. Or, try it each way depending on whether you do or don't get that "big scholarship". In many cases, you'll have to make estimates, but maybe I can help with those.

Remember, if you come up with "scary" answers, that is want college loans and other sources of financial aid are for. Don't just decide not to go...

DO THIS: Run through the activity first doing your best guesses on college you'll attend, costs, and income. (If you don't know the exact costs, the page says "you can use the 2001-2002 CollegeBoard average costs as a guideline: $12,771 for a public college and $26,093 for a private college".)

Now, do it for another of your college choices, or change another significant variable (live off campus, get a job, whatever). Share that new figure if you would like. We can discuss any of this today if you'd like. Alternatively, we can come back to it in the future.

I'll start us with an example of what I'm looking for in the "current events / economics in the news" assignment that you'll each do twice. We'll also go over some of the course requirements and finish up that last "Food Fights" chapter.

READING: Please have "Incentives Matter," chapter 2 of Naked Economics, read for class on Thursday.

"A Bird's Eye View of the Economy"- Our primary focus wil be to start looking at the "big picture" of the U.S. economy. We'll use a short chapter from Economics Explained, the textbook that I formerly used with this course. The figures are getting kind of old, but the point will still be clearly made. We'll divide up the chapter and then look at the main points together.

"Economic Indicators" activity: The National Council on Economic Education has done some very good lesson plans that we will make use of in class. Sometimes, we'll go to their site. Other times, I'll do some cutting and pasting as I did here.

First, let's take a look at what economic indicators are used to understand and explain the US economy. This note guide on ECONOMIC INDICATORS should be useful for you.

Information is a scarce resource. Hopefully, this practice will help you become more efficient in finding and interpreting macroeconomic information. Try this "scavenger hunt" activity using these four data sources:

Economy at a Glance

Gross Domestic Product (current and past figures)

Debt Clock

Economic Statistics Briefing Room

Use the above sites to try and answer the following questions:

1. What was the unemployment rate in February 1999?
2. What was the annual percentage change in personal consumption expenditures for 1998?
3. What is the amount of public debt as of today? To whom is the debt owed?
4. What has been the recent trend in the personal saving rate?
5. How much of a problem was inflation in 1998?
6. At what rate did Gross National Product increase in the 4th quarter of 1998?

A good general rule of thumb... When in doubt, consult DataLinks to start your search for economic information.

SITE FOR THE DAY: Here's the official website for Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. The book comes out today.

Welcome back. We'll pay tribute to the MPA 5 x 10 program with our own "Economics 6 x 8s." You were asked to read the short chapters from Sex, Drugs & Economics: An Unconventional Introduction to Economics. We'll give you 15 minutes to prepare, and then we will go in the following order...

Sex
Illegal Drugs
Risky Business
Sports
Music
Food Fights

I'll give you some "terms" from your chapter, and you can basically share, diagram, teach whatever you would like from the reading.

With remaining time, we can go over some future requirements and talk about information from Chapter 1 in Naked Economics. I'll ask you to have chapter 2 read in that book for Wednesday.

SITE OF THE DAY: U.S. National Debt Clock Hit "reload/refresh" a couple times to watch what happens...

We'll start with talking about anything you found puzzling or interesting from Foreward and Introduction to Naked Economics.

First, I want you to take 3 minutes and draw on the blank piece of paper. (I'll give you more directions in a minute...) I'll then ask you to brainstorm a couple of lists.

Second, I want to equip you with some of the most basic "tools" of economics. You can download a sheet containing the "Top Ten Economic Questions" to guide you during this conversation. Add whatever notes that you feel are appropriate.

Finally, I'm going to leave you with a short excerpt from the book, Sex, Drugs and Economics: An Unconventional Intro to Economics. You'll get a chapter from this British book about a "non-traditional" economic market. Your job is to read it and prepared to "teach" the rest of the class three interesting or important economic "lessons" specfic to what you read. We'll start there on Monday.

Naked Economics reading: Please read chapter 1, "The Power of Markets," for Monday.

Welcome to the “blog” for the Economics course at Mounds Park Academy. This is my third time teaching the course here. This is easily the shortest time I’ve had to teach the course (due to Senior Seminar), so we’ll be doing some revising and combining. I would definitely suggest bookmarking this site, because we will refer to it almost every day.

Course philosophy: Thomas Carlyle once described economics as "the dismal science." Too often, the way the subject is taught only reinforces this characterization. There can be a mind-boggling amount of math and graphing in advanced economics, and the vast number of terms and concepts can take years to fully understand. We'll try to avoid both of those pitfalls in the next two months. This course will aim to introduce you to the basics of economics with an emphasis on understanding the world around us. This study does not need to be "dismal." In fact, the study of economics can be interesting, controversial, and (hopefully) entertaining.

Course goals: Students will:

* understand the basic concepts of economoics
* learn key ideas in macroeconomics, microeconomics, and international economics
* use problem-solving skills to approach economic issues and problems
* investigate more deeply economic topics of interest to themselves
* better understand the role of economics in the world around them
* become more informed economic decision-makers

Resources: We will use a variety of resources in this course.

* An encouraging trend in recent years has been the publication of more books on economics aimed at general audiences. One of those books will be our required reading. Naked Economics: Undressing the Dismal Science is the resource we will use. I actually laughed out loud a couple times as I first read it. (Keep your comments to yourself about what that says about me...) You’ll need to have your own copy of this book and bring it with you each day.

* We’ll do some supplemental readings from Economics Explained: Everything You Need to Know About How the Economy Works and Where It's Going, by Robert Heilbronner and Lester Thurow. This is a very readable and informative introduction to economics.

* There is a wealth of economic information on the Internet. Some is simply raw data. Government, industry and particular businesses or interest groups sponsor others. Educational institutions and other teachers generate still more. We'll use simulations, "games," and other resources when appropriate.

* Of course, economics is happening all around us. To track current developments, we'll make extensive use of newspapers, magazines, and television news.

* Additional resources such as guest speakers, presentations, and debates will be incorporated.

On what will you be graded?

Attendance and Participation: (100 points)
Economics Exams: (100 points) - We will have two exams, each worth 50 points
Required Assignments: (125 points total) -
Current Events: (20 points)
Activities "Journal": (20 points)
"New Ideas from Dead Economists" Panel: (20 points)
Economic Issue Presentation and web page: (40 points)
"Taking Sides" Presentation: (25 points)
Optional (Choice) Readings and Assignments: (75 points required/ more available) - To get 100% on this item, you will need to earn 75 points. You are, however, allowed to do more to offset other scores you are not satisfied with. (You cannot, however, simply skip any of the required assignments. They are prerequisites to getting credit for the class. I make the call on this, so don't push your luck...)

Getting started… We’ll do more introductory activities tomorrow, but I’ve got a couple things to kick things off.

Reading assignment – Please read both the Foreward and the Introduction in Naked Economics for tomorrow. Be prepared to discuss main points.