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Introduction to Macroeconomics: Markets, Efficiency, and Market Failures, Summaries of Macroeconomics

Summary of Introduction to macroeconomics

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G. Mankiw,
Introduction to
macroeconomics
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G. Mankiw,

Introduction to

macroeconomics

August 29, 2019

Introduction to Macroeconomics

Markets : means by which resources are allocated

  • What gets produced
  • Which firms produce
  • Who gets to have those goods and services Types of Macroeconomic Markets
  • Goods o Quantity: GDP o Price: aggregate price level (and inflations)
  • Labor o Quantity: employment o Price: wage rate
  • Credit/financial o Savings and investment o Real interest rates Economists concern about efficiency , to get the most out of inputs for outputs Short-run fluctuations and long-run growth
  • Over time economy produces more and more per person = 2% per capita o Each generation becomes richer than the last
  • Recession o Economy produces less than it optimally produce Long-Run Growth
  • Measure: real GDP per capita
  • Determinants o Physical capita per worker o Human capital o Innovation/technological growth Short-Run Fluctuations
  • Shocks o Cause temporary movement of output away from long-run growth trend o 2007 – took 10 years to get back on track o Fiscal and monetary policy shocks will relieve economy’s return ▪ Housing price and credit market shocks: Great Recession ▪ Monetary policy shock: caused 1982 recession ▪ Monetary policy shocks in 2008 initiated to help economy return to long run trend

Insurance Markets

  • Insurance firms usually has imperfect information about each individual that purchases insurance
  • Pool of individuals insured must be diverse
  • Adverse selection problem: those who need insurance the most may be more likely to purchase Market Interventions
  • Large employers offer subsidized health insurance to everyone
  • One reason why states most often require ALL drivers to own insurance
  • It is also the rationale behind the controversial mandate in the Affordable Care Act o Everyone must have insurance Market for Lemons – sucky cars
  • Used car market
  • Buyers have imperfect information about the used car o This uncertainty drives down the price of used cars
  • At low prices, the only sellers willing to sell are those with “lemons” Market Solution
  • Carmax Too Little Competition
  • Competition drives production to the low cost (most efficient) firms o Lack of competition can ▪ Diminish the incentive to be efficient ▪ Generate prices that are higher than competitive prices o Electricity monopoly (natural monopoly) ▪ VA state regulates prices Dominion can charge o Internet service (oligopoly, monopoly in some regions)
  • Federal Trade Commission (FTC) and Department of Justice (DOJ) regulates mergers and acquisitions Distorted Prices – externalities
  • Externalities: cost or benefit accrues to a 3 rd^ party not involved in the production or purchase of the product – a spillover
  • price does not accurately reflect value of the good and production is often sub-optimal
  • Negative & positive externalities Negative Externality
  • Pollution as a by-product of production o Cost of pollution accrues to those who haven’t purchased the product o With no intervention, the cost of pollution will not be reflected in the price of the good

Positive Externality

  • Education o The benefits of an educated individual accrue to those who haven’t purchased that individual’s education o Vaccinations o Basic research
  • Products that produce a positive externality that is not corrected will be under-produced
  • To correct the government could regulate or subsidize Trade War with China
  • Tariff – tax applies on imports
  • Tax is paid by imports (US company) o Revenue goes to federal government o The cost comes either from lower profits and or higher price to consumer
  • Tends to make the foreign good less competitive in the domestic market ▪ China does not pay the tax – US pays the tax ▪ Chinese good are expensive to us 2 Key Points
  1. We had a large and growing trade deficit with China
  2. China does not enforce US intellectual property & often imposes mandatory technology transfer for foreign investment a. They copy movies & software b. Chinese demand US firm to transfer technology: let them how things are done Impact
  • 2018 – trade deficit with China increased
  • Steel, washing machine prices increased
  • Uncertainty is the real evil