Principles of Macroeconomics - Irvine Valley College

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Macroeconomics, March 30, 2009, Martha
Stuffler

Principles of
Macroeconomics

Economic Crisis

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



Recession



Textbook definition



NBER definition



NBER


Peak December 2007

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


BEA Data


www.bea.gov



Quarterly Real GDP Change


1Q 2008 + 0.9 %

2Q 2008 + 2.8%

3Q 2008
-

0.5%

4Q 2008
-

6.2%


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



What does this data mean?


Determination of the

December 2007 Peak

in Economic Activity



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


UNEMPLOYMENT RATE



IRVINE 5.6%


CA 10.1%


7 US STATES > 10%


US 8.1% (Feb. 2009)



Discouraged workers

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Difference between recession and depression



Why Recession?



SHORT ANSWER






Consumption and Investment


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



Economy: 4 sectors: H, B, G and EX
-

IM





GDP = C + I + G + EX


IM



100% = 72% + 14% + 20%
-

5%

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


DJIA = Measure of wealth



DJIA High was 10/9/07 14,165


Today about 7600



What is the % decrease?



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Estimates say US wealth fell 18% last year
when net worth fell by $11 trillion



From 1990
-
2000 US wealth
doubled



From 2000
-
2007 grew 50% to $50T



2008 fell 18%

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


How do falling stock prices and falling
household wealth affect the economy?



Why is their overall decline important?



Stock prices are a Leading Economic
Indicator

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Stock prices are an indicator of


EXPECTATIONS



Harbinger of future economic activity



What is happening to US expectations?



Look at the LEI


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


FINANCIAL INSTITUTIONS



Comptroller of the Currency


National Banks Administrator



4
th

Q08 Report: Banks lost $3.5B in


derivatives = 7 times more than their


previous highest lost



Econ 105 or 210

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


BAILOUTS



FINANCIAL INSTITUTIONS



Who Are They?



INSURANCE COMPANIES



HOMEOWNERS



AUTO MANUFACTURERS


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Low interest rates



Low inflation



Re
-
fi mania



Fed supplying money and
encouraging lending



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Jobless growing



Negative expectations



State budgets in trouble



CA $8B shortfall

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



College Grads



Negative expectations

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


PERSONAL

SAVING RATE



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


Why is the saving rate important?




How do business get $ to invest?



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


INVESTMENT in economics




When Saving < Investment


we
require “capital inflows” = borrow
from abroad



US shortage of saving and not
alone worldwide shortage of saving
in many high income nations

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


US DISTINCTION


World’s Biggest Debtor Nation



Who is the World Biggest Creditor
Nation?



Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

INTERNATIONAL TRADE



Economist view



WTO, GATT, NAFTA passed 1994



Crisis


Protectionism





Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


NAFTA
-

transnational border program



President just cancelled a pilot program
allowing Mexican truckers to transport cargo
in the US




Pilot program affects 29 Mexican carriers and
about 100 trucks


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


March 17
th
, 2008 Mexico released list of 89
US potential products and threatened new
tariffs from 10
-
45% on March 17th



New stimulus bill has some kind of “buy
American” provision



Our trading partners are feeling threatened
and are not happy with us

Brazil just sent us
a stern warning.


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



Trade wars may develop from strong
nationalism to protect domestic industries

undo GATT & WTO accomplished



How do tariffs affect the ability for domestic to
compete with foreign companies in
international markets?

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


How much does the US
economy rely on
International Trade?

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


IT’S NOT
ALL


ABOUT US!

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



Dubai construction stoppage



Dubai in 2008 bailed out one of
their biggest banks

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

DUBAI’S LEADING LENDER



Tightened lending requirements



50% down to finance a home

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

EU


Confidence Declining



Banks not lending



How do EU unemployment rates
typically compare to US
unemployment rates?

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

2008 EU average unemployment
rates rose from 6.8% to 7.4%


What was the rate of increase in
EU unemployment rates?

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

China



Don’t know unemployment rate



56% of 1.3B people live in countryside



Went into cities



Now, no jobs in the cities

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON



Return country to live on yearly average
income of $700



Shortage of good or high paying jobs



How will crisis affect US trade relations
with China?

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


China and Russia


Recommending US Dollar

no longer serve as the

international reserve currency

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

AFRICA



Tourism



National Parks

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

ASIA



Tourism



Manufacturing

Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

US CHALLENGES
BEFORE


CURRENT CRISIS



Trade Deficit



Budget Deficit


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON

US CHALLENGES
BEFORE


CURRENT CRISIS



Low saving rate



Rising consumer debt


Macroeconomics, March 30, 2009, Martha
Stuffler

WHAT’S GOING ON


PARADOX OF THRIFT



Now when we need

consumer spending,

consumers are saving