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