Cycles presentation

1. Central problem of macroeconomics
 „Welfare of citizens”
 Looking at „welfare” and different policies
affecting it
 However, the problem is: how to define
„welfare”?

2. The problem of relative and total
welfare
 Which is more important? Relative or total?
 How much „society has” or how much
individuals have?
 The example of Marx and historical laws
connected to increasing poverty of labour

3. Mainstream proposition - GDP
 Gross Domestic Product – the amount of goods
produced within society
 One immediate problem – „society” cannot sell its
own GDP, but it is measured in… money
 Doesn’t matter what is the distribution of GDP
 Simon Kuznets (Nobel Laureate 1971) "for his
empirically founded interpretation of economic
growth which has led to new and deepened insight
into the economic and social structure and process
of development"

4. The first method (Expenditures)
 Consumption
 Investment
 Government
 Net Export (E-I)
 Y=C+I+G+N

5. Second method (value added)
 Value added as the difference between the
value of expenses and value of that what is
sold

6. Third method (incomes)
 The sum of all incomes (profits, wages,
rents) in the economy
 All methods are supposed to give the same
results (… although it does not happen)

7. Inflate GDP by inflation money supply
 The problem of purchasing power and
increasing monetary value
 Solution: real GDP versus nominal GDP
 Measure nominal and deflate it
 Question of deflating becomes problematic
(recent case in United States)
 Opportunity for manipulations

8. Other problems
 Black market is not included
 Product not sold on the market is not taken
into account (charities, Linux etc.)
 Local differences in prices are hidden (e.g.
Norway vs. United States)
 Distribution is not the issue
 Malinvestment also increase GDP (housing
bubble)

9. Problems with GDP (continued)
 Imperial wars and destructions increase GDP
(and does not decrease it in other place)
 Increase in Government Debt is not a
problem (the crowding out effect)
 Free time is not included
 Social values are not part of the equation
(e.g. number of divorces, crimes)
 Waste of environment is excluded

10. Hayek’s point
 "The first fact which emerges is that the amount of money spent on
producers' goods during any period of time may be far greater than the
amount spent for consumers' goods during the same period. It has
been computed, indeed, that in the United States, payments for
consumers' goods amount only to about one-twelfth of the payments
made for producers' goods of all kinds.‘ Nevertheless, this fact has not
only very often been overlooked, it was even expressly denied by no
less an authority than Adam Smith. According to Smith : " The value of
goods circulated between the different dealers never can exceed the
value of those circulated between dealers and consumers ; whatever
is bought by the dealer being ultimately - destined to be sold to the
consumers." This proposition- clearly rests upon a mistaken inference
from the fact that the total expenditure made in production must be
covered by the return from the sale of the ultimate products ; but it
remained unrefuted, and quite recently in our own day it has formed
the foundation of some very erroneous doctrines.' '

11.  The solution of the difficulty is, of course, that most goods are
exchanged several times against money before they are sold to the
consumer, and on the average exactly as many times as often as the
total amount spent for producers' goods is larger than the amount
spent for consumers' goods. Another point which is of great
importance for what follows, and which, while often overlooked in
current discussion,' is quite obvious if we look at our diagram, is the
fact that what is generally called the capital equipment of society-the
total of intermediate products in our diagram-is not a magnitude which,
once it is brought into existence, will necessarily last for ever
independently of human decisions. Quite the contrary : whether the
structure of production remains the same depends entirely upon
whether entrepreneurs find it profitable to re-invest the usual
proportion of the return from the sale of the product of their respective
stages of production in turning out intermediate goods of the same
sort. (...)"

12. Alternatives to GDP
 NEW (Net Economic Welfare) – Nordhaus
and Samuelson
 HDI (Human Development Index) – UNO (life
expectancy, education etc.)
 PPP (Purchasing Power Parity)
– Big Mac Index (The Economist)
 Gross National Output (GNO) more related to
fluctuations

13. Price inflation
 Different goods are priced and their prices
are inflating at different speeds
 Each one of them is a different part in
individual „baskets”
 How to measure the „general movement of
prices”?

14. Consumer Price Index
 Assign different weights to goods bought by
consumers
 Average them out and create CPI
 Changes are supposed to reflect the
measurement of price inflation
 Again: the possibility of manipulation

15. Example of United States

16. Macroeconomics at dead end?
 Macroeconomics as a „science of indexes”
 Differences of opinion as differences in…
indexes?
 Example: lower taxes cause increase in
„welfare”. Whose „welfare”? In which „run”?
 If you cannot measure, measure anyway?

17. Circular flow
 Households and firms
 Financial markets, the government, foreign
trade
 „Stocks” and „flows”

18. Unemployment and macroeconomics
 1929, Great Crash and great problems
 The central problem related to wealth is
employment
 During recession people are unemployment
 Where macroeconomics meets sociology

19. Unemployment rate
 All the people that are capable to work (labor
force)
 Numbers of unemployed divided by labor
force
 Different ways of measuring labor force
 Open unemployment versus hidden one

20. Types of unemployment
 Frictional unemployment (market process)
 Structural unemployment (dynamic changes
in the economy)
 Classical unemployment (real wage rate is
too high) – 1929

21. Unemployment: voluntary of
involuntary?
 Voluntary is obviously used in cases of
personal decision to change the job
 Involuntary – when the decision is set by
socio-economic environment, not made by
the person

22. Classical attitude
 Voluntary – decision to adapt, or not adapt
 If the prospering firm goes bankrupt, one can
find another job, for example by lowering
wage rate
 I prefer to work at Harvard
 Is it voluntary or involuntary unemployment?

23. Keynesian definition of involuntary
unemployment
 „Men are involuntarily unemployed if, in the event of
a small rise in the price of wage-goods relative to the
money wage, both the aggregate supply of labor
willing to work for the current money-wage and the
aggregate demand for it at that wage would be
greater than the existing volume of employment”
 Translated into English – people are unemployed if
we can’t print some money and hire them

24. Costs of unemployment
 Private costs: lack of funds, for credit
payment, for health-care, in extreme cases
for food etc; mental problems
 Social costs: lower production, resources are
not employment to „full” extent, costs of
social programs etc.
 In Keynesian model – „spillover” effects

25. Unemployment and business cycle
 During recession unemployment usually rises
 Downward phase of the cycle is associated with
unemployment
 Cyclical unemployment – is usually considered as
involuntary
 Because it could be reduced with certain policies
 Which ones? It depends…

26. Unemployment and equilibrium
 „Natural rate of unemployment” (Phelps,
Friedman) – there is some necessary
amount of unemployment in the economy
 NAIRU (Keynesian model) – Non
Accelerating Inflation Rate of Unemployment
(Phillips curve)
 Okun’s law

27. Unemployment and taxes
 On the supply side of labor market – more
decisive element is net income
 Lowered taxes increase disposable income
 Increased prices cause the seller of a good
to increase supply
 The same mechanism in the labor market