Macro Exam 2 Conceptuals

ex-ante real return = ex-ante post return= (formulas)

= nominal return - expected inflation = nominal return - actual inflation

to go from growth in GDP per capita to growth in GDP

add G^L to steady state formula add G^L to growth in capital per capita formula (therefore, take out G^L from formula)

define productivity

production unaccounted for by capital per worker

Why are the rich countries growing slower than poor countries?

*convergence: eventually poorer countries "catch up" to wealthier countries in terms of per capita income -driven by diminishing returns in average product of capital (diminishing marginal productivity of capital) -poorer countries exhibit higher TFP growth -higher investment rates -low population growth

How does an increase in productivity affect labor?

- raises total output for every hour of labor worked and thus increases marginal product of every hour worked -increases labor demanded

How are labor unions just like labor unions?

- they negotiate for higher wages and benefits, and they restrict entry into the union -purposefully restrict entry/employment to get bargaining power to force a higher rate

At the individual level, labor supply is very inelastic. Vs. at the macro level, labor supply is very elastic. What does he mean by this?

-If you look at hours worked per person and how it varies with changes in wage, it doesn't change at all -If you look at total hours worked economy-wide, it varies significantly given smaller changes in the wage -Labor market is driven by individuals choosing how many hours to work; in the real world, we see this doesn't really happen

Barro's Iron Law of Convergence vs. Conditional Convergence

-Iron Law: poor countries grow faster than rich countries. -Then moved to an idea of conditional convergence: GDP per capita matters, but there's a list of many factors (conditional on this list of other factors)

we are creating jobs at a pace to keep up with population growth, but not much more. So, how can unemployment be dropping? Talk about duration also.

-Primary reason: drop in labor force participation -Duration- the reason participation is falling is because the labor rate is going up (how long you expect to be out of work is longer now- again due to shift to service economy) -also, a lot of jobs being created are part time rather than full time

Events affecting the labor market? (6)

-declining productivity -globalization -low skill immigration -automation -union membership decline -consolidation

How does education affect wages?

-rising costs of education- despite this, the IRR continues to rise (future cash flows from expensive investment) -those with college degrees have a higher starting salary, faster growing salary, better job experience, and less chance of unemployment

Wage growth has slowed considerably since the 1970's. Why?

-slowing growth in productivity --however, the IT revolution has caused productivity to outpace wage growth

If we compare the U.S., to the EU, where are we different in terms of growth? With that, why are they not catching up to us?

-the EU is only 75% of us in terms of per capita -almost identical GDP growth rates -declining TFP growth from EU in the past, but today we are growing at same rate. Then what explains lower GDP per capita? It is their employment. The EU has a lower participation rate (labor effort). They fire less people there.

How can the events affecting the labor market be explained assuming perfect competition?

1 .declining productivity- lowers labor demanded 2. immigration- raises labor supplied 3. automation - lowers labor demanded 4. globalization - lowers labor demanded

Barros Laws of convergence are based off?

1. A country's rate of growth is negatively related to the investment rate 2. In per capita terms, it is negatively related to the population rate

some suggestions when looking at real wage, employment, and productivity correlations with GDP

1. Are we valuing labor contracts correctly? 2. Have we calculated real wages correctly? 3. Do wages actually adjust? 4. Does minimum wage affect this analysis/ 5. Is our story correct?

Barro's factors- what else matters besides per capita GDP to increase growth? There are 10 total.

1. HIGH life expectancy at birth 2. LOW fertility rate (births per woman) - because low rate of population growth 3. investment rate (both public and private) 4. government consumption rate 5. openness ratio (net exports / GDP) open to trade 6. male & female years of education 7. terms of trade change -favorable terms of trade 8. law & order indicator -an effective legal system 9. political rights (1 = democracy, 7 = dictator) -politically free up to a point 10. inflation rate

Two problems with household survey?

1. Selection bias- survey is done via phone. Those who are home to answer the phone have a higher probability of being unemployed. 2. Moral Hazard- to collect unemployment benefits, you have to show that you are looking for work, but are you really looking?

Why should we expect/require a positive interest rate? (3)

1. Shouldn't I be repaid an amount of equal value to what I loaned? Commodities retain their value, but money does not necessarily retain its value (i.e. inflation) 2. If I am loaning money to someone that might not pay me back, shouldn't I be compensated for the risk I take on? 3. The interest rate affect choices and the allocation of resources across different uses (i.e. the interest rate coordinates decisions across sectors)

The Key to wealth in the labor market: (3)

1. be the best at something that people value (have high VMPL) 2. be able to clearly identify the high value 3. have the bargaining position to extract that value added (be in short supply)

Why is income inequality existing?

1. cheaper, better equipment --> 2. globalization (cheaper labor) --> 3. hurting of labor unions 4. immigration rising 5. automation / rise of machines 6. monopsinies (market power of big box stores) 7. As wages fall and profits rise, the split in national income between owners of labor and owners of capital have shifted toward owners of capital 8. education- rising cost of college and distribution of skills/income is both a cause and effect

qualities of developed countries (after the steady state)?

1. high GDP per capita 2. high capital per capita 3. low average product of capita 4. slow/zero growth of GDP per capita

Household survey categories

1. ineligible to work 2. employee (full or part) 3. unemployed 4. not participating

What is growth in capital per capita affected by?

1. investment rate 2. rate of depreciation 3. average product of capital 4. population growth

qualities of developing countries as they transition towards steady state? (4)

1. low GDP per capita 2. low capital per capita 3. high average product of capital 4. fast growth of GDP per capita

College is really the interaction of three different marketplaces:

1. market for college itself, driving tuition prices 2. market for skilled labor, like college graduate labor 3. market for unskilled labor, like high school

What's driving the wage gap? (This also explains CEO's salary skyrocketing)

1. middle income wages are stagnant 2. upper income wages are growing

So, why is the U.S. slowing down? (8)

1. on the supply side, our ability to produce goods is slowing, which drives productivity 2. Trend of labor force participation slowing 3. It is possible that our quality of workforce has plateaued (Average years schooling) 4. Immigration can be a factor- rising population growth and slowing GDP per capita/ lowering wages 5. Capital investment is stable- yet, it hides the fact that we are building less physical capital (more intellectual property) and businesses are focusing more on financial assets 6. could also be low TFP growth 7. also, the slowdown coinciding with the widening of income distribution 8. rise in overseas investments

What determines your credit score? (5)

1. payment history 2. credit utilization 3. credit history 4. new credit 5. types of credit

Three assumptions that give us a demand curve that slows us down

1. perfect competition 2. maximizing profits 3. diminishing marginal returns to labor (Wages fall)

Which three things are ++ correlated with GDP?

1. real wage 2. employment 3. productivity *Note: as seen in the oil shock example, all four would decrease with an increase in oil price

What are the major drivers of income inequality?

1. the wage gap 2. slowing productivity growth

Three assumptions for our utility functions:

1. utility is increasing in consumption (we like to buy things) 2. utility is decreasing in labor (we don't like to work) 3. utility exhibits diminishing marginal utility

What does a decline in population growth mean for per capita GDP growth?

A decline in population growth would increase the capital per capita. Economic growth (GDP per capita) increases from the increase in capital per capita. No change productivity growth- therefore, no change in steady state.

What is the ADP Survey?

Automated Data Processing report is a measure of non-farm private sector employment obtained by utilizing a subset of roughly 400,000 businesses which are payroll service clients to ADP

Range of credit scores

Best: 800-850 Worst: 300-579 (generally declined for credit) Subprime: 580-669 (may be disqualified from mainstream loans, eligible for loans with significantly higher interest rates)

What would cause a decrease in marginal product of capital?

Black Plague example- half of population disappears, capital per capita doubles

Where does production come from?

C-D equation -real GDP per workers -capital stock per worker

Why is decline in employment growth good for workers?

Capital per worker goes up as a result. From this, GDP per worker rises as well.

Employment rate vs. employment population rate?

E / LF vs. E / L

On the other hand, how are higher tuitions increasing the wage gap?

Enrollment continues to rise, and with that student loan debt rises too. While enrollment rates are going up, graduation rates are not (because college is expensive) High cost of college is acting as a barrier to entry for risk averse, causing supply of skilled labor to go down. This leads to more people in unskilled labor force, and IRR of college goes up

What does the "steady state" imply?

Here, average product of capital is constant. Growth in GDP per capita depends only on productivity growth (grows at a rate proportional to it)

What would the income effect be in the case of higher productivity?

Higher productivity makes us wealthier; therefore, income effect would make us want to work less

main difference between establishment survey and household survey?

Household survey counts people. Establishment survey counts jobs.

Will China take over the world?

If things continue as they are, probably yes. -difficult to address in terms of sheer size -In terms of per capita, China is smaller than us. -China's real GDP per capita growth rate, however, is 3x that of the U.S. -China's investment rates are rising; HOWEVER, their returns to investments continue to fall -largely explained by the difference in investment rates -China also has higher TFP growth and high average return to capital projects

Income Effect

If we have the ability to consume everything, we tend to take advantage of those opportunities.

Overtime premium example- where does substitution effect dominate and where does income effect dominate?

If you are currently earning overtime, there is a substitution effect because greater reward to working more, but there's also an income effect because you can afford to work less If you are at 40 hours, you are not currently collecting overtime, so there is no income effect. however, there is a substitution effect because there's reward to working more If you are below 40 hours, you are not collecting overtime so there is no income effect. There is also no substitution effect because working a little more than you currently are pays the same as it did before

How does globalization cause labor unions to decline?

In the U.S. the loss of industrial jobs and the rise of a global economy have put pressure on the higher wages that union members have enjoyed. Business leaders say high union wages and benefits are something they can no longer afford in a cutthroat world economy where sellers must keep costs low.

When capital per capita increases, what happens to average product of capital?

It decreases (diminishing margin of productivity)

What does a loss in capital mean for per capita GDP growth?

Loss in capital creates a decrease in capital per capita. On the other hand, it increases average product of capital- the marginal product of capital increases and growth accelerates. GDP per capita also falls. No change productivity growth- therefore, no change in steady state.

Why are labor markets taking longer and longer to recover after a recession?

No perfect answer as to why, but a common answer is that we are moving from a manufacturing economy to a service economy (more skill-specific)

How would the government raising the cap on taxable earnings affect income and substitution?

Now, your entire income is taxed. Because you have to pay more taxes, income effect would tell you to work more because leisure is more expensive. Substitution effect would tell you to work less to escape the tax burden

growth rates in the U.S. right now: real GDP? Capital? Productivity?

Real GDP growth is declining over time capital per worker is growing (capital growing faster than employment) productivity growth is diminishing

What does a rise in population mean for per capita GDP growth? (NOT population growth)

Rise in population creates a decrease in capital per capita. On the other hand, it increases average product fo capital- the marginal product of capital increases and growth accelerates. GDP per capita also falls. No change productivity growth- therefore, no change in steady state.

Establishment survey should be bigger, but its not. Why is that?

The household survey counts people on unpaid leave as employed- establishment does not. Household only counts people over 16- establishment is not limited by age. *MAIN: Household includes self-employed works and private household workers- establishment does not. Also, undocumented immigrants will likely be picked up in household survey

What happens if your non-labor income increases, meaning how does this effect substitution and income

The wage did not change, so there is no substitution effect. This is pure income effect- labor supplied now declines, so labor supply shifts left

How does a wage increase impact substitution effect? income effect?

This makes leisure more expensive, so the substitution effect would tell us to work more. Thus, substitution effect generates a labor supply curve that is upward sloping *usually assume this dominates The income effect generates a labor supply curve that is downward sloping. You can afford more leisure time now, so you work less.

What does an increase in investment rate mean of physical capital mean for GDP growth?

This would increase capital per capita. Economic growth, or GDP per capita increases from this too. No change in productivity growth- therefore, no change in steady state

Substitution Effect

We tend to do more of things that are becoming cheaper and less of those becoming more expensive

What happens from the widening of the income distribution?

a disappearance of the middle class- creates a drop in demand which forces business to produce less. The demand from goods and services primarily comes from the middle class, and we are not going to see this growth in consumption.

correlation between union membership and income inequality

almost perfect -1 correlation -as union membership drops (from globalization), wages drop with it, and corporate profits go up

diminishing marginal productivity of capital

as a country develops and its capital per capita increases, diminishing returns start to kick in and the country slows down because increases in capita are providing smaller and smaller increases in production

Diminishing marginal productivity of labor

as labor expands, GDP goes up by a smaller and smaller amount

marginal utility with leisure and consumption:

as you work more, leisure falls and the MU of leisure increases. as you work more, the consumption increases and MU of that falls.

real wages correlation to GDP

barely pro-cyclical Nominal wages and inflation are a bit out of sync with one another due to timing issues- entirely possible these slight variations are due to measurement issues

What does lower investment rate mean of physical capital mean for GDP growth?

capital per worker growth decreases. because of this, GDP per capita decreases

How do Amazon and Walmart work as monopsonies?

charges a wage well below the value for that hour and below what a perfectly competitive firm would charge -buys less in order to drive prices down -wages of retail employers are therefore lower -pay lower wages and make higher profits Therefore, they buy less, pay workers less, and charge a low markup to make a profit (low margin, high volume)

Why are tuition rates increasing?

conditions in the labor market -wage gap widening, increasing demand for college, pushing wages up -low skill jobs being threatened with automation or with outsourcing/immigration

How would a loss in capital affect labor demand?

creates a loss in income, which pushes individuals to work more to compensate

What happens if college is made free?

demand would skyrocket, which would decrease the opportunity cost of attending college -lowers the return to college as unskilled labor supply falls (raising unskilled wages) and skilled labor supply increases (lowering skilled wages)

Establishment survey

department of labor surveys businesses and asks how many people are on their payrolls -can lead to double-counting

marginally attached workers vs. discouraged workers

discouraged- specific reason in that they believe there is no job available marginally attached- any reason cited for lack of job search

Why is perfect competition important?

easy to solve, even though we recognize that it doesn't actually exist -can provide us with a macro model -with perfect competition, we do not have to worry about complexities with wages

Why would we be getting negative real interest rates?

either because inflation is underestimated or if risk-averse individuals are seeking to avoid excessive risk

ex-post and ex-ante with inflation

ex-ante: uncertainty ex-post: certainty •If inflation is under-predicted enough, the purchasing power will be less than we thought it would be

Monopolies

face the entire demand curve because only company in industry -must restrict sales in order to push price up -just like a labor union

"natural rate of employment" =

frictional unemployment (those in process of applying, interviewing) + structural unemployment (those in process of retaining)

To be considered unemployed, you must...

have looked for work over the last 30 days

indifference principle

if you are an average person, then you should be indifferent between any possible choice, and prices will adjust to make you indifferent -example: IRR from college was too law- people would stop going and lower the demand. Supply of unskilled labor increases and supply of skilled labor falls. This would push IRR higher, and this trend would continue until more people continue to postpone college to the point where the average person would become indifferent.

If we plot out capital per worker to GDP per capita, what do we see?

it is increasing but at a decreasing rate (diminishing marginal productivity of capital)

How would a decrease in prices affect the labor market demand curve?

lowers value marginal product of labor, which causes labor demand to fall (with a constant nominal wage)

Marginal rate of substitution measures...

maximization of utility with equating costs and benefits at the margin: (wages per hour / pizza) * MU consumption = MU leisure

The unemployment rate can fall for two reasons:

more of us working OR less of us looking -In the U.S.'s case, it is a decline in LF participation

Gini Coefficient

often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population a ratio of areas 0= perfect equality 1= perfect inequality about 0.49 in the U.S. highest is South Africa with 0.63

important takeaway to remember: wages stagnating and productivity growing in the U.S.; with that, income inequality

ok

At the steady state, what are fast growing characteristics?

only high growth rates in TFP because that is the only factor the steady state relies on

Unemployment rate is a composite of what two rates?

participation rate and the employment population rate

What is interest? It is distinct from ______?

payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above the amount borrowed at a rate decided beforehand •It is distinct from a fee which the borrower may pay the lender or some third party. •Itis also distinct from dividend which is paid by a company to its shareholders fromitsprofit,but not at a particular rate decided beforehand

Labor Supply curve

plots leisure against consumption (wages / product)

Lorenz Curve

plots the cumulative distribution of US income -current Lorenz curve has stretched out compared to 1969 -plots national income against population

total employment's correlation to GDP

pro-cyclical. When the economy is in expansion, employment is growing at a pace above trends and vice versa.

How does productivity affect labor demand?

productivity growth raises the value of labor at margin- increasing labor demand -increase in employment and real wages, which increases GDP a decline in productivity causes a decline in labor demanded, and with that, a loss in income. From this, real wages fall and employment falls. GDP declines because we are working less and are less productive

Shareholder primacy theory

rising out of the economic stagnation of the 1970's, companies began tilting decision making towards returning money quickly and predictably to investors rather than building long term production capabilities

Why does 26 weeks matter?

stop getting paycheck - unemployment benefits stop

Labor Market Equilibrium

when number of jobs available = number of people looking *If real wages are too high, we have excess supply of labor, and this puts downward pressure on wages *If real wages are too low, we have excess demand for labor, and this puts upward pressure on wages -does not mean employment is 0; rather, it has the potential to be 0

Why do we not want unemployment rate to be zero?

when the jobless rate is low, there are enough (and more than enough) jobs available than the availability of labor force. In order to allure the limited labor force, employers may have to jack up wages, which in turn increases wage inflation. If jobless rate is 0 percent, frictional unemployment can't exist, forcing us to hold onto the job we have, however undesirable it is means little technological advancement- structural unemployment arises from the lack of demand for employees who are available, with technological advancement being the most common cause of it.

how to calculate optimal number of hours to hire?

where MPL = real wages where vMPL = nominal wages

Labor Market demand curve: x axis: y axis:

x axis : total employment (Labor Hours) y axis = real wages *Upward supply line states that households choose how much to work. *Downward demand line states that businesses choose how many hours to hire

As a company, ifI were to expand my work force a little bit, how would this benefit me?

•Can produce more àincrease in revenue •Marginal product labor measures how much more can be produced with an increase in labor