Graph 16 - Other Market

Graph 15 - 15 Dollar Market Graph (International Supply & Demand)

Unit 6 - Economic Growth & Productivity (From Ms. McCartney's Powerpoint)

Economic Growth

• Sustained increase in Real GDP over time.
• Sustained increase in Real GDP per Capita over time. 

Grow - leads to greater prosperity for society. It lessens the burden of scarcity and increases the level of well-being.

• Conditions
• Rule of law.
• Sound Legal & Economic Institutions.
• Economic freedom.
• Respect for private property.
• Political & Economic stability -Low inflation expectancy.
• Willingness to sacrifice current consumption.
• Saving.
• Trade.

Physical Capital - product of investment (sensitive to interest rates and expected rates of return).

• Tools, machinery, and factories.
• Takes capital to make capital.
• Capital must be maintained.

Technology & Productivity

• More technology = Increases productivity.
• Productivity - output per unit of input.
• Labor productivity - output per worker.
• More Productivity = Economic Growth.
• Research + development and innovation + invention = Increases in technology.

Human Capital - people are the most important resources, so they must be developed.

• Education.
• Economic Freedom.
• The right to acquire private property.
• Incentives.
• Clean water and stable food supply.
• Access to technology.

How to show Economic Growth Graphically

1. LRAS shifts to the right.
2. PPC shifts outward. 

Obstacles to Growth

• Economic and Political Instability – such as high inflation expectancy.
• No of the rule of law.
• Diminished private property rights.
• Negative incentives.
• Lack of savings.
• Excess current consumption.
• Failure to maintain existing capital.
• Crowding out of investment – government deficits & debts increasing long term interest rates.
• Restrictions on free international trade.

Unit 5 - April 3

Supply Side Economics / Reaganomics - tends to believe that the AS curve will determine level of inflation, unemployment, and economic growth.

• To increase economy - AS shifts right.
• Companies benefit - AS.
• Consumers benefit - AD.
• Focus on the marginal tax rate - amount of tax paid on additional dollar of income.
• By reducing the marginal tax rate, it will encourage more people to work longer.
• High marginal tax rate reduces saving because saving money taxed at a higher rate on profit/interest.

Laffer Curve 

• Tax Rates and Government Revenue have an inverse or a trade off relationship.
• High tax rate = Low government revenue.
• There is a U-shaped, because it always tries to maximizes government revenue.
• As tax rate increase from 0, tax revenue increases from 0 to some maximum number then they decline.

3 Criticisms of the Laffer Curve

1. Where the economy is located on the curve is difficult to determine.
2. Tax cuts also increase demand, which can fuel inflation and demand may exceed supply.
3. Research state that tax rate impact people's incentive to work, invest, and save.

Graph 14 - Laffer Curve

Unit 5 - April 2

Supply Shock - rapid and significant increase in resource prices, which cause the SRAS to shift which results in producing a shift in the SRPC curve.

• Examples
• Oil embargo.
• Increase in input prices.
• Wages heights
• Could be positive or negative, depending on what it is.
• Could lead to stagflation - simultaneous increase in inflation and unemployment.

Disinflation - reduction in inflation rate from year to year, which can be seen in the LRPC.

Graph 13 - Phillips Curve

Unit 5 - April 1 (Phillip Curve)

The Phillips Curve - deals with inflation and unemployment. 

3 Generalizations of Inflation and Unemployment.

1. Inverse relationship.
2. AS Shocks can cause both higher rates of inflation and rates of unemployment.
3. There is no significant trade off between the two in the long run

If inflation persists and the expected rate of inflation rises, then the entire SRPC move upward (Stagflation possibility or probable).

If inflation expectation drops due to new technology, then new SRPC moves downward. 

Movements of Short Run Phillips Curve (SRPC)

• Increase in AD (C, Ig, G, Xn) - Up/Left along the SRPC. 
• Decrease in AD - Down/Right along the SRPC. 
• Increase in AS - SRPC moves Left (<---). 
• Decrease in AS - SRPC moves Right (--->). 

Long Run Phillips Curve (LRPC) - vertical at full employment (Natural Rate of Unemployment - seasonal, frictional, and structural).

• Major Assumption : More workers benefit creates higher natural rate of unemployment. Fewer workers benefit creates lower natural rate of unemployment.
• Example - Jobs that pays less = More stable people.
• Shifts - same as LRAS (technological advances).

Misery Index - combination of inflation and unemployment in any given year.

• Single digit misery - Good.
• Example - Unemployment rate = 4% ~ 5% 

Unit 5 - Mar 31

Short Run AS - time too short for wages to adjust to the price level. Reason being workers may not be aware of the changes in their real wages due to inflation. Therefore they adjust their labor decisions accordingly as well as wage demand.

Nominal Wages - the amount of money received per hour, per day, per week.
 *People brings home real wages, which is adjusted with inflation, not nominal wages.

Long Run AS - time long enough for wages to adjust to the price level.

• Key Assumptions
• Wages in price - Flexible.
• Changes in wage and price - Offset each other.
• LRAS is represented by a vertical line.
• Shifts in LRAS - Same as PPG (left = technological advances).