Margin also mean edge, think of yourself as sitting on the fence, on deciding what to do. Should I do this or should I do that, then we ask ourselves what is the cost to benefit ratio if I do one or the other (marginal cost vs. marginal benefit), this is what thinking at the margin means.
Before we talk about margin, we have to discuss trade-off and opportunity costs.
Trade-Off - Very simple concept, it's giving up one thing to get something else.
For example: Instead of drinking with friends tonight, I hit the gym or I study.
Instead of buying a new book, I buy a previous edition of a used book.
Opportunity Cost - What you lose (value-wise) in the trade off.
Example: I cut my hours at work to pursue my education.
I lose potential income, so the opportunity cost is the lost potential income to pursue my studies.
Marginal benefit, then would be the positives we get from giving up something and choosing the other.
Example: Although I lose earnings potential for three years, the degree will give me a higher earnings potential.
Example 2: If I study 3 days a week and get a 60% on my test and by choosing to study a fourth day, I get a 70%, then my marginal benefit is 10%
Marginal Cost - The cost of what you give up (think of as cost vs. benefit ratio).
That means if the marginal benefit outweighs the marginal cost, you do it.
If the marginal cost outweighs the benefit, you don't do it.
Example: To upgrade my RAM on my computer only gives me a 5% performance boost, it is not worth me paying the money for a RAM upgrade for such a small performance boost.
Monday, September 29, 2008
Tuesday, September 23, 2008
Lecture 2 Notes, Part 1
To listen (streaming) click HERE
To download the mp3 click HERE
This lecture covers
1. Key Data Variables: There's a need to measure economic output
This is what the National Income Accounting and GDP are all about.
2. Savings & wealth – how they're related.
3. Real GDP
4. Price Index, what is it and how does it move to inflation?
5. Interest Rate.
NATIONAL INCOME ACCOUNT (I will refer to it as NIA hereafter) – It is a counting mechanism for what's going on in the economy.
There are three approaches to calculate:
- Product Approach: Measures how much production/output takes place.
- Income Approach: Tells us how much income is being earned.
- Expenditure Approach: Tells us how much is actually being spent.
If a business produces they of course want to sell the products they sell, therefore the value of what gets produced also has to represent value of income earned in that production.
Everything that gets produced has to be owned by somebody, so that's what gets spent. We find that all spending in the aggregate or production in the current year will equal the income that's earned in that current year which measures our measure of output or production in that year. So all three of these will be the same.
Total Production (aggregate production) = Total Income = Total Expenditures
So it's possible to use the words output, production, income, expenditures, GDP interchangeably.
The event that we try to measure from the product approach is the GDP (Gross Domestic Product)
GDP = The market value of all final goods & services newly produced within a nation in a fixed period of time. (Generally a year), the US measures on a quarterly basis. (Called Gross because it measures before depreciation rather than after).
MARKET VALUE = Think of it as the MSRP (Manufacturer's Suggested retail price), Multiply production by the price (retail) this will tell us the total revenue being generated. For government, calculate everything at its cost.
FINAL GOODS & SERVICES: It's not an intermediate goods & services (leather, rubber, steel, wires that goes into a car), it's the final product.
VALUE ADDED = What's the revenue you get from selling your goods & services minus the value of all the inputs other than labor that goes into it (another word for profit, perhaps? Let me know guys).
Two exceptions of Final Goods & Services:
- Capital goods/capital equipment: Refers to the buildings, structures, machinery (think accounting class people).
- Inventory Investment/Change in Inventories: e.g. unsold house by builder, very small part of overall GDP yet leads to biggest swings in GDP, many recessions aggravated by or caused by excessive inventory investment.
Gross National Product (GNP), GDP is within a country regardless of the nationality of the companies/persons.
- Net Factor Payment – If a foreign company wants to repatriate their funds. This is a representation of the "Where's the income earned outside the country vs. inside the country"
- Net Factor Payment Inflow – When funds (profits) are repatriated to the original country (IBM -> USA). (Country earnings)
- Net Factor Outflow – When foreign companies repatriate their funds.
- Net Factor Payment = Inflow minus Outflow
- GNP – Production that takes place by the country's factors of production regardless of where they're located, e.g. if IBM produces something in Europe, the increment that IBM has provided to the VALUE ADDED (profits) counted in the GNP, not the GDP. Where's the income earned vs. where's the production take place.
EXPENDITURES – Measuring the spending that takes place on FINAL GOODS & SERVICES. There are 4 agents:
- Consumption by households (consumer spending) 70% of US GDP
- Durable Goods – Something that last 3 years or longer.
- Non Durable goods – Things w/ shelf life, less than 3 years.
- Services – Consumed immediately (rent, electricity, transportation, education, medical services)
- Investment by businesses About 1/6 of US GDP
- Spending for capital goods(fixed investments)/software
- Non-Residential (Business Side) Fixed Investments – buildings, structures, machinery, furniture, software.
- Residential – construction of new homes & apartment buildings. Houses fall under the investment category not consumption.
- Inventory Investment
- Government purchases of goods & services by all units of gov't. About 1/5 of US GDP, also excludes some gov't expenditures, e.g. transfer payment, gov't debt.
- Transfer payment – e.g. pension, social security, disability, where one entity to another where no goods & services are exchanged.
- Government debt – e.g. bonds
- Net exports (exports about 10% – imports 16.2%) – Need to subtract them out to get measure of GDP about
This leads to INCOME EXPENDITURE IDENTITY. This is the single most important identity in Macroeconomics.
Y = Income (or GDP), therefore Y = 1+2+3+4 (the above)
NOT AN EQUATION BUT AN IDENTITY, REMEMBER THIS IDENTITY, EQUATION, FORMULA, WHATEVER YOU WANT TO CALL IT.
Monday, September 15, 2008
#6: Macroeconomic Policy
1. Fiscal policy - the decisions the government makes in regards to its level of spending and level of tax rates.
The US is running a huge budget deficit for years.
The question becomes do deficits matter?
The US recently implemented a fiscal stimulus to jump start the economy, does this make good fiscal sense?
2. Monetary Policy - Either the rate of the growth of the money supply, or changes in short term interest rates that are engineered by the central bank.
Philosophy - rate cut leads to cheaper money, in which people will borrow, and when most people borrow money, they spend in most cases, and if people spend money, it will stimulate the economy.
As the current economic situation is unfolding, what effect will it have on the stock market, what is the central bank likely to do and what is fiscal policy likely to do as well.
3. Aggregation - Taking an aggregated view of the economy unlike Micro where it was a disaggregated view. Basically there are four agents:
1. Households (or consumers)
2. Businesses (all aggregated together). - Action of one business is unlikely to affect any other agents.
3. Government
4. Foreigners (or rest of the world) which reflects the international economic transactions.
So whatever one of the agents does will affect all the other agents. Micro is a partial general equilibrium analysis. Whereas Macro is a general equilibrium analysis.
The US is running a huge budget deficit for years.
The question becomes do deficits matter?
The US recently implemented a fiscal stimulus to jump start the economy, does this make good fiscal sense?
2. Monetary Policy - Either the rate of the growth of the money supply, or changes in short term interest rates that are engineered by the central bank.
Philosophy - rate cut leads to cheaper money, in which people will borrow, and when most people borrow money, they spend in most cases, and if people spend money, it will stimulate the economy.
As the current economic situation is unfolding, what effect will it have on the stock market, what is the central bank likely to do and what is fiscal policy likely to do as well.
3. Aggregation - Taking an aggregated view of the economy unlike Micro where it was a disaggregated view. Basically there are four agents:
1. Households (or consumers)
2. Businesses (all aggregated together). - Action of one business is unlikely to affect any other agents.
3. Government
4. Foreigners (or rest of the world) which reflects the international economic transactions.
So whatever one of the agents does will affect all the other agents. Micro is a partial general equilibrium analysis. Whereas Macro is a general equilibrium analysis.
#5: The International Economy
When in relation to the US economy, there are two types of economies:
1. Open economies: It means that one country has many economic and financial transactions with another country. Open to international trade and capital flows.
2. Closed economies: North Korea, Cuba are 2 examples. They have very limited economic and financial transactions with other countries.
Most countries in North America, East Asia, Western Europe are open are increasingly becoming open (especially many parts of Asia).
Most countries worried about US economy, because what happens there will affect what happens over there.
Trade Balance - The difference between imports and exports.
If imports < exports = trade surplus
exports < imports = trade deficit.
Before 1980 the US were in a trade surplus to trade deficit now.
What significance does trade surplus/deficit have? Why? And how does a country go from a trade deficit to trade surplus, or vice versa? Let's discuss.
1. Open economies: It means that one country has many economic and financial transactions with another country. Open to international trade and capital flows.
2. Closed economies: North Korea, Cuba are 2 examples. They have very limited economic and financial transactions with other countries.
Most countries in North America, East Asia, Western Europe are open are increasingly becoming open (especially many parts of Asia).
Most countries worried about US economy, because what happens there will affect what happens over there.
Trade Balance - The difference between imports and exports.
If imports < exports = trade surplus
exports < imports = trade deficit.
Before 1980 the US were in a trade surplus to trade deficit now.
What significance does trade surplus/deficit have? Why? And how does a country go from a trade deficit to trade surplus, or vice versa? Let's discuss.
#4 Inflation
Inflation - rate of change of prices (basically how fast or slow a price of items go up)
Refers to the persistent increases in the general price level. In Micro, we are interested in prices of individual items such as goods & services like soap, burgers, etc. In Macro, we are interested in the Price Index on lots of goods and services. Calculations to come later.
Once again inflation = persistent increase in the general price level.
Types of inflation:
A) Hyper inflation - where prices rise extremely rapidly. The US inflation rate in 2007 was 3.5%, inflation in Zimbabwe in 2007, was 7,000% (yes, seven thousand!) PER MONTH!
B) Deflation = persistent decline in prices.
i) persistent decline in prices also lead to persistent decline in wages.
In the US, from 1800 to 1940, there was no real change in prices. (No inflation)
Since 1940, a sharp increase (persistent rise) in the general price level.
Why do we care? Well, the Federal Reserve cares. Inflation fears may lead to a rate cut. A rate cut may support the economy but it may push inflation even higher then again, higher interest rates may cause the economy to slow down even further. So how to deal with these issues? These are the things that the Fed worries about.
C) Core Inflation Rates - Also gives Fed the worries, because they don't want inflation to rise.
Refers to the persistent increases in the general price level. In Micro, we are interested in prices of individual items such as goods & services like soap, burgers, etc. In Macro, we are interested in the Price Index on lots of goods and services. Calculations to come later.
Once again inflation = persistent increase in the general price level.
Types of inflation:
A) Hyper inflation - where prices rise extremely rapidly. The US inflation rate in 2007 was 3.5%, inflation in Zimbabwe in 2007, was 7,000% (yes, seven thousand!) PER MONTH!
B) Deflation = persistent decline in prices.
i) persistent decline in prices also lead to persistent decline in wages.
In the US, from 1800 to 1940, there was no real change in prices. (No inflation)
Since 1940, a sharp increase (persistent rise) in the general price level.
Why do we care? Well, the Federal Reserve cares. Inflation fears may lead to a rate cut. A rate cut may support the economy but it may push inflation even higher then again, higher interest rates may cause the economy to slow down even further. So how to deal with these issues? These are the things that the Fed worries about.
C) Core Inflation Rates - Also gives Fed the worries, because they don't want inflation to rise.
#3 Unemployment
The definition of unemployment = the number of people who do not have jobs, who are available for work, and looking for work. Simply put, a person that wants a job but can't find a job is classified as unemployed.
During the US Great Depression the unemployment rate hit a peak of 25%.
*To note: Unemployment rate always (historically) rises during a recession.
Slow economic growth or negative economic activity probably pushes upward pressure on the unemployment rate.
In the last year, the US unemployment rate went from 4.4% to 5%, a 0.6% jump, every single time it has happened since WW 2 there was a recession.
During the US Great Depression the unemployment rate hit a peak of 25%.
*To note: Unemployment rate always (historically) rises during a recession.
Slow economic growth or negative economic activity probably pushes upward pressure on the unemployment rate.
In the last year, the US unemployment rate went from 4.4% to 5%, a 0.6% jump, every single time it has happened since WW 2 there was a recession.
2. Business cycles/fluctuations
These are short run movements in the economy along the rising broad longer term trend.
Recession - a) when the economy goes down
b) Consumer spending shows a sharp drop off, consumers account for over 70% of economic activity in the United States. If consumers spend less, then overall economic growth rate will be affected.
Recession - a) when the economy goes down
b) Consumer spending shows a sharp drop off, consumers account for over 70% of economic activity in the United States. If consumers spend less, then overall economic growth rate will be affected.
Sunday, September 14, 2008
#1 Long Term Economic Growth
Economic Growth determined by two factors:
1. How fast the population grows - Number of workers growing more quickly so economic output should grow more quickly.
2. Productivity per worker/unit of labor - As the productivity of each worker increases, even if the work force is not growing very quickly, then it can be expected that economic output to grow rapidly also.
The question to ask then is:
What causes an upward trend in an average labor productivity? And how important is that in increasing long term economic growth?
One fact to note: (US economy)
From 1950 to 1973 labor productivity 2.5% average annual rate.
From 1973 to approximately 1995, the growth rate of labor productivity dropped sharply to 1.1%
From 1973 to present day, it has been growing at close to a 2% rate.
What caused this sharp slowdown and this sharp acceleration? And what are the implications of this in terms of living standard and economic growth?
Hope you guys leave your comments so we can discuss this.
1. How fast the population grows - Number of workers growing more quickly so economic output should grow more quickly.
2. Productivity per worker/unit of labor - As the productivity of each worker increases, even if the work force is not growing very quickly, then it can be expected that economic output to grow rapidly also.
The question to ask then is:
What causes an upward trend in an average labor productivity? And how important is that in increasing long term economic growth?
One fact to note: (US economy)
From 1950 to 1973 labor productivity 2.5% average annual rate.
From 1973 to approximately 1995, the growth rate of labor productivity dropped sharply to 1.1%
From 1973 to present day, it has been growing at close to a 2% rate.
What caused this sharp slowdown and this sharp acceleration? And what are the implications of this in terms of living standard and economic growth?
Hope you guys leave your comments so we can discuss this.
Macroeconomics, the most basic of what it's aobut
Macroeconomics = Structure, dynamic adjustment and performance of national economies, in other words, the big picture. Also looking at government policies that affect the national economic performances
6 major issues of macroeconomics:
1. Long term economic growth - what determines, how fast a country can grow over a long, sustained periods of time.
2. Business cycles/fluctuations - ups & downs of the economy.
3. Unemployment - Why are people unemployed, what determines whether the unemployment rate goes up or down.
4. Inflation - high/low, what causes it to move up or move down?
5. International economies - Does it make a difference whether we have economic linkages/connections to economies in other parts of the world?
6. Macroeconomic policy (government policies) - What can the government do to influence all of the above vaiables.
6 major issues of macroeconomics:
1. Long term economic growth - what determines, how fast a country can grow over a long, sustained periods of time.
2. Business cycles/fluctuations - ups & downs of the economy.
3. Unemployment - Why are people unemployed, what determines whether the unemployment rate goes up or down.
4. Inflation - high/low, what causes it to move up or move down?
5. International economies - Does it make a difference whether we have economic linkages/connections to economies in other parts of the world?
6. Macroeconomic policy (government policies) - What can the government do to influence all of the above vaiables.
Monday, September 1, 2008
Economics Lectures from UC Berkeley w/ video
Hey guys, just discovered a microeconomics lecture from UC Berkeley, it has video too woo hoo, that means we can see the examples being worked out
The Audio & Video Lectures
The Audio & Video Lectures
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