January 2007 Archives

READING: You were asked to read chapter 4 in Naked Economics for today. We can visit about that for a bit. Your Blog entry #4 will be due by class time on Thursday.

Please read chapter 10 for Thursday as well. Yes, I realize chapter 10 is out of order, but it will work out. Trust me... We won't have you do a blog entry for this one. You are welcome.

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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.

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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 Ben Bernanke. (Alan Greenspan just finished his fifth 4-year term as Chairman. Reagan, Bush, Clinton and Bush all named him to that post.)

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 6.25%, and the prime rate is at 8.5%. 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.

REMINDER: In order to receive credit, these comments need to be posted by the beginning of class time on Thursday. Remember that this is a public site, and you are responsible for the content of your postings.

At this time, you are supposed to have read Chapter 4, “Government and the Economy II.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. Take a crack at the "Goldilocks" question (page 77). "Is the role that government plays in the United states economy too big, too small, or just about right?" Explain.

2. Wheelan writes on page 79 that, "The United States is a richer but more unequal place than most of Europe." Should we be satisfied with that distinction? Why or why not?

3. Wheelan talks a good deal more about taxation and regulation in this chapter. If you'd like to react ot any of those points, you can do that here...

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

READING: You're supposed to have "Government and the Economy II" read for Wednesday's class. That blog entry will be due before class time on Thursday. Please read chapter 10 in Naked Economics for Friday. Yes, I realize chapter 10 is out of order, but it will work out. Trust me.

We can talk about chapter 3 in Naked Economics, "Government and the Economy," for a few minutes. Your Blog Entry #3 is due before class time begins on Wednesday.

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?

Let's start our look at some internet resources with this... 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.

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 $61,300, whereas the 25 percent rate applies to taxable income between $61,300 and $123,700. Here are the more complete 2006 federal income tax rate schedules.

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."

PLEASE NOTE: Obviously, a whole lot that is completely unrelated to our study of economics has happened since we last met. I have concerns about how that will affect the dynamics of our class on this day and moving forward. Please know that I am more than willing to talk to anyone individually or in a small group regarding your concerns. I may, or may not, address questions or comments made to the larger group based on a variety of factors including privacy concerns, my professional obligations and a desire to separate speculation and/or rumor from what is known to be true.

This is still "Economics class," but I recognize and understand that might be in the forefront of everyone's mind come Monday morning. We'll do what we can.

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A reminder that you should read Chapter 3, "Government and the Economy," from Naked Economics before tomorrow's class. We can take some comments on that tomorrow. Your blog entry #3 will be due before your arrival for class on Wednesday. Please have the companion chapter #4, "Government and the Economy, II," read for Wednesday's class time. (We're also going to go out of order and have you read "The Federal Reserve System" chapter before the first exam. That will be the next one to tackle, Chapter 10. Ideally, you'd get that done for Thursday's class, but I'll back up the Blog Entry #5 a bit for that.) I'm thinking we will take the first unit exam next Tuesday if all goes according to plan.

Let's chat about "How Statistics Lie." This chapter from Steven Landsburg's The Armchair Economist has some pretty good example so of how economic data can be distorted or misinterpreted.

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 2007 Budget: These links are from the Federal Government's Office of Management and Budget, and they deal with the most recent 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 portion 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.

REMINDER: In order to receive credit, these comments need to be posted by the start of class on Wednesday. Remember that this is a public site, and you are responsible for the content of your postings.

At this time, you are supposed to have read Chapter 3, “Government and the Economy.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. Using specific examples, comment on the efficacy and/or efficiency of the government taxing externalities.

2. Wheelan says, "Government does not just fix the rough edges of capitalism; it makes markets possible in the first place. (p. 51)" Discuss.

3. React to Wheelan's comments in the footnote on Africa and AIDS drugs (p. 55).

4. Pretend that you are a Nobel Prize winner yourself for a minute: "Answer" the question posed by 1998 Nobel Laureate Amatya Sen on page 60.

There are economists who would tell you to ignore everything that we talked about last time 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...

REMINDER: Your Blog Entry #2 was due at the beginning of class today.

READINGS: Please have "How Statistics Lie" read for Monday. Also, chapter 3 in Naked Economics should be read for Tuesday's class, and Blog Entry #3 will be due before Wednesday's class.

INTERESTING SITE: I've never heard of this before last night, but Business 2.0 magazine apparently compiles this list of the "101 Dumbest Moments in Business" each year. You might enjoy browsing through the list.

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

For quite a while, the ideas we learned about last time 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?

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.

BLOG ENTRY #2: Remember to post on the blog in response to Chapter 2 in Naked Economics before Friday's class.

READING: Let's get through Chapter 3, "Government and the Economy," for Tuesday's class. Your Blog Entry #3 will be posted Friday and due by Wednesday's class time.

Since I'm sure you have all read Chapter 2 in Naked Economics, let's talk some about "Incentives Matter."

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. (I think this material is as potentially confusing as any that we will use this quarter.)

Second, we'll look at a visual representation of this. I have a handout for you.

READING: "How Statistics Lie" is an interesting chapter from The Armchair Economist by Steven Landsburg. (He's the "Everyday Economics" guy.) Please have this read by Monday so that we can discuss this in class.

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.

Anything from last night's State of the Union by President Bush that you want to discuss? We'll take a look at the speech from the perspective of economists for a while here... Here is a transcript from the nice people at Time.

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

Naked Economics reading: Please try and get through Chapter 2, "Incentives Matter," by next class. You'll have until Monday's class to Blog Entry #2 posted for credit.

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 December. 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.

"Inflation" is our topic for today, but we'll do a couple things off the top here first.

Fiscal v. Monetary Policy - Let's make sure you understand the basics of these two concepts, since we'll come back to them again and again.

"Taking Sides: Clashing Views on Controversial Economic Issues" - We'll let you know about this assignment.

"Everyday Economics" - This is your cool site for the day. You can read a good example down below on the "extended entry."

Discussion - The other day, I posted the question on the board about whether MPA should pay its teachers based on something else in addition to experience. I am curious as to your thoughts.

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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.

Naked Economics reading: Please try and get through Chapter 2, "Incentives Matter," by Thursday's class. Your "Blog Entry #2" should be submitted before class begins on Friday.

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 15 %
Recreation 6 %
Housing 42 %
Education 3 %
Clothing 4 %
Communication 3 %
Transportation 17 %
Medical care 6 %
Other goods and services 4 %

Inflation Update - December 2006: This is the text of the relatively recent inflation report from the National Council on Economic Education.

"The consumer price index (CPI) did not change during the month of November. The rate of increase in the consumer price index over the past twelve months has been 2.0 percent.

In November, the core consumer price index, which excludes energy and food prices, did not change. The core index has increased by 2.6 percent over the last twelve months."

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. [This is simply copied from the EconEd web page...]

* 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.

* 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.

* 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.

I'VE COPIED THE SAMPLE "EVERYDAY ECONOMICS" ARTICLE I WANTED TO SHOW YOU ON THE BLOG'S "EXTENDED ENTRY" BELOW...

NOTE: As of now, there is a lag between your submitting a post and its appearance on the blog. I have to "approve" them by clicking on them. Don't resend. I'll try and get that preference changed.

REMINDER: In order to receive credit, these comments need to be posted before class time on Monday. Remember that this is a public site, and you are responsible for the content of your postings.

You are supposed to be reading/have read Chapter 2, “Incentives Matter.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. "What should be done to save the black rhino? (Your answer should show an understanding of the concept of incentives.)"

2. "On page 28, Wheelan writes 'The pay of American teachers is not linked in any way to performance...'. My question is this: How should teachers be paid? (Your answer should show an understanding of how students and teachers (and others?) are affected by incentives.)"

3. "Do you agree with Wheelan's assessment of the process of 'creative destruction?' (page 36) (Use specific examples in support of your answer.)"

4. "Assume you were in charge. What would you do (if anything) to change America's system of taxation? (This question is more philosophical than specific in nature. React to what Wheelan has to say about taxes.)"

Welcome back. We'll spend the first part of the hour talking about your impressions from Chapter 1 of Naked Economics. We'll also take a quick look at what people posted on the blog for the initial comments.

READING ASSIGNMENT - Please have Chapter 2, "Incentives Matter," read for Thursday's class. Blog entry #2 will be due before the start of class time on Friday.

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.
* 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 next time if you have questions.

SITE OF THE DAY: Wachovia College Budget Calculator

As I mentioned earlier, we'll do some "personal" or "consumer" economics throughout the course 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 at some time 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 this 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.

READING: Hopefully, you've had a chance to look at the Forward and Introduction to Naked Economics by now. We can talk about what you've read there and in "The Power of Markets," chapter 1 of Naked Economics. Remember that your first blog entry must be posted before class begins on Monday in order to receive full credit for that.

"A Bird's Eye View of the Economy"- Our primary focus will 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 2006?
2. What was the annual percentage change in personal consumption expenditures for 2005?
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 2004?
6. At what rate did Gross National Product increase or decrease in the 4th quarter of 2001?

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 came out almost two years back and has been a New York Times bestseller for months.

As an example of the type of "current events" we might look at in here, I've got an editorial printed in Tuesday's StarTribune that we'll take a look at to get things started.

Today, 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.

Naked Economics reading: We'll start with talking about anything you found puzzling or interesting from the Foreward and/or Introduction to Naked Economics. You'll be asked to have read chapter 1, "The Power of Markets," for Friday's class. In addition, your first blog entry is due by the beginning of class time on Monday. (After that, it will be considered late and penalized accordingly.)

NOTE: As of now, there is a lag between your submitting a post and its appearance on the blog. Don't resend. I'll try and get that preference changed.

We can use the blog to hold “conversations” about reading in Naked Economics. We’ll certainly talk about some of the readings in class, but this gives you another chance to share your ideas.

Here’s how we’ll do this. I’ll post several questions by the day a chapter is “due” to have been read. Each of you will be expected to post a comment before the NEXT session. You may respond to one or more of the questions, and you can also react to comments posted by others. I’ll expect a comment of one good paragraph or more. (To me, that means 5-6 sentences at a minimum.) You do not need to worry about perfect grammar, spelling and punctuation, but they should be understandable. Remember that this is a public site, and you are responsible for the content of your postings.

Assume that each comment is worth 5 points. If it’s a batch of comments I’m evaluating, I’ll give people credit for having posted by that next class session. (5 points for solid or better comments, 4 for comments somewhat short of expectations, 3 for last-minute, little to no effort postings, and no points for those who have not posted.)

So, let’s get started… By Thursday, you are supposed to have read the Foreward, Introduction and Chapter 1, “The Power of Markets.” You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

From the Foreward by Burton Malkiel:

A. “Why should we study economics? In other words, why do you believe an understanding of economic principles and theories is or is not necessary in our world?”

From the Introduction:

B. “Charles Wheelan uses a number of interesting examples here to begin his case for ‘naked’ economics. React to one or more of these examples.”

From Chapter 1, “The Power of Markets”

C. “To what degree do you agree or disagree with this quote from page 7: 'Maximizing utility is not synonymous with acting selfishly.' Give an example to support your position."

D. “On page 11, Wheelan writes that ‘Firms … attempt to maximize profits.’ What are the ethical and/or moral limits (if any) that you believe apply to firms in this pursuit of profits?”

E. “Do you believe Wheelan is too positive in his defense of the role of markets? Use specific arguments and/or examples to explain why or why not.”

Today we'll do the Economics class version of the MPA "5 x 10s." We have 5 chapters from Sex, Drugs & Economics: An Unconventional Introduction to Economics to learn from. Your job will be to share the basics of the chapter you read with the rest of us. Try to show economics concepts in action and get us thinking like economists...

We'll do the chapters in the order they appear in the book... 5 chapters at 10 minutes each... You get participation credit for making some contributions when "your" topic comes up.

Sex
Illegal Drugs
Sports
Music
Food Fights

READING ASSIGNMENT - Please read Chapter 1 in Naked Economics, "The Power of Markets," for Thursday's class. Your first required blog entry is due no later than the START of class time on Friday, January 19th. (There's a separate entry for that.)

Welcome to the “blog” for the Economics course at Mounds Park Academy. This is my fifth time teaching the course here at MPA, and I think we've done it under a different format/time period each time. 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 few 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? You can expect it to look something like this... Give me a few days to iron out all the specifics.

Attendance and Participation
Economics Exams
Required Blog Entries
Required Assignments
* Current Events
* Activities "Journal"
* "New Ideas from Dead Economists" Panel
* Economic Issue Presentation/ Discussion
* "Taking Sides" Presentation
Optional (Choice) Readings and Assignments

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

FOR TOMMOROW'S CLASS: We'll pay tribute to the MPA "5 x 10 program" with our own "Economics 5 x 10s." You will be asked to read a short chapter from Sex, Drugs & Economics: An Unconventional Introduction to Economics. Your job for next time will be to share the basics of the chapter with the rest of us. We're looking to see economic concepts in action and to begin to use some of the vocabulary of economists...

Your group's "presentations" should include each of the following:
* summary of interesting information
* questions or topics for discussion
* use of "economics" vocabulary
* attempt to use a supply/demand graph
Don't panic. Your group will have about 10 minutes total, including questions and discussion.

The chapters deal with these topics. (You may not get your first choice...)
Sex
Illegal Drugs
Sports
Music
Food Fights