Quiz 19: Heterodox Theories in Economics

Business

THE NATIONAL ECONOMY Why do economists pay more attention to national economies (for example, the U.S. or Canadian economies) than to state or provincial economies (such as California or Ontario)?

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National economy Political set-up of each national economy is different. Each national economy has its own rules of the game; own law and order, regulations, customs, and conventions for conducting economic activity. Each national economy's achievement targets are different according to the best interests of its citizens. The indicators of national economy, such as gross domestic product, gross investment, and gross saving, provide a measure of the performance of the national economy and its relation with the other economies to the rest of the world.Economic fluctuation of a state or province may not affect the economic condition of the national economy as a whole to a greater extent because there can be several states or provinces within a nation. The bad economic situation of a state can be counter-balanced with the economic condition of a better-performing state.However, the severity of the reverse phenomena is high, as the bad economic condition of a national economy will affect the economic condition of all states within it. Thus, economists would pay more attention to national economics than to the state or province.

Q 2

THE HUMAN BODY AND THE U.S. ECONOMY Based on your own experiences, extend the list of analogies between the human body and the economy as outlined in this chapter. Then, determine which variables in your list are stocks and which are flows.

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Parallels between human body and an economy: One can describe the parallels between medicines that the human body needs to recover from illness and an Economic mechanism that an economy adopts to overcome the worse economic scenario, such as inflationary pressure or deflationary pressure.Just as medicine is injected into the human body to overcome the alien effects, monetary and fiscal policies play vital roles in the stabilization of an economy. Since monetary policy controls the money supply, it has greater impact on the supply side. However, fiscal policy controls the demand side through tax revenue or public expenditure.The parallels can be drawn between the dosages of medicine administered to an individual after diagnosing his/her illness and administering interest rate hike or cut after assessing the inflationary or deflationary tendency in an economy. While the interest rate over the years is a flow variable, the interest rate for a particular period is a stock variable.

Q 3

STOCKS AND FLOWS Differentiate between stock and flow variables. Give an example of each.

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Stock variables: Stock variables are generally measured at a particular point of time or at a given point of time. Stock variable can be referred to the amount of money at some place, such as deposit of amount $2000 in your bank account. In time series analysis, point estimate of a particular variable at a particular point of time is called stock. Examples: Wealth, deposits , capital stock or inventory of a manufacturing firm, current account balance of an individual and cash in hand, etc.Another example is everything in the balance sheet of a company, such as amount of assets and liabilities, finished and unfinished goods, stock of raw materials are considered as stock variable.Flow variables: Flow variables are measured over a period of time or over an interval. In other words, amount of money, such as income received during a period of time could also be considered as a flow variable.In time series analysis, flow variables are the interval estimates. Examples: Monthly income, savings and expenditure of an individual, monthly or annual budget, interest on fixed deposits or savings, everything in the profit and loss statement is a flow variable.

Q 4

ECONOMIC FLUCTUATIONS Describe fluctuations in economic activity over time. Because economic activity fluctuates, how is long-term growth possible?

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Q 5

ECONOMIC FLUCTUATIONS Why doesn't the National Bureau of Economic Research identify the turning points in economic activity until months or even a year after they occur?

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Q 6

Case Study: The Global Economy How are economic fluctuations linked among national economies? Could a recession in the United States trigger a recession abroad? Reference Case Study: World of Business The Global Economy Years ago what happened in other economies was not that important to Americans. But now many resources flow freely across borders. Technology has also spread around the globe. Though business cycles are not perfectly synchronized across countries, a link is usually apparent. Consider the experience of two leading economies-the United States and the United Kingdom, economies separated by the Atlantic Ocean. Exhibit 3 shows for each economy the year-to-year percentage change in real GDP since 1978. Again, real means that the effects of inflation have been erased, so remaining changes reflect real changes in the total amount of goods and services produced each year. If you spend a little time following the annual changes in each economy, you can see the similarities. For example, both economies went into recession in the early 1980s, grew well for the rest of the decade, entered another recession in 1991, recovered for the rest of the decade, then slowed down in 2001. Both economies picked up steam in 2004, but the global financial crisis of 2008 caused sharply lower output by 2009. One problem with the linkage across economies is that a slump in other major economies could worsen a recession in the United States and vice versa. For example, the financial crisis of 2008 affected economies around the world, increasing unemployment and cutting production. Trouble in seemingly minor economies, such as Greece, can spill over and drag other economies down with them. On the other hand, economic strength overseas can give the U.S. economy a lift. As the Wall Street Journal reported, "Many U.S. companies are finding strength in overseas profits, helping to offset a weak housing market and a credit crunch at home."

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Q 7

LEADING ECONOMIC INDICATORS Define leading economic indicators and give some examples. You may wish to take a look at the Conference Board's index of leading economic indicators at http://www.conference-board.org/data/.

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Q 8

AGGREGATE DEMAND AND AGGREGATE SUPPLY Why does a decrease of the aggregate demand curve result in less employment, given an aggregate supply curve?

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Q 9

AGGREGATE DEMAND AND AGGREGATE SUPPLY Is it possible for the price level to fall while production and employment both rise? If it is possible, how could this happen? If it is not possible, explain why not.

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Q 10

AGGREGATE DEMAND CURVE Describe the relationship illustrated by the aggregate demand curve. Why does this relationship exist?

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Q 11

DEMAND-SIDE ECONOMICS What is the relationship between demand-side economics and the federal budget deficit?

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Q 12

STAGFLATION What were some of the causes of the stagflations of 1973 and 1979? In what ways were these episodes of stagflation different from the Great Depression of the 1930s?

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Q 13

Recession of 2007-2009 How did the recession of 2007-2009 affect the economy?

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Q 14

Case Study: Eight Decades of Real GDP and Price Levels The price level grew slightly faster than real GDP between 1947 and 2009. Does this mean that the rising price level masked an actual decline in output? Why or why not? Reference Case Study: Public Policy U.S. Economic Growth Since 1929 Points in Exhibit 8 trace the U.S. real GDP and price level for each year since 1929. Aggregate demand and aggregate supply curves are shown for 2009, but all points in the series reflect such intersections. Years of growing GDP are indicated as blue points and years of declining GDP as red ones. Despite the Great Depression of the 1930s and the 11 recessions since World War II, the long-term growth in output is unmistakable. Real GDP, measured along the horizontal axis in 2005 constant dollars, grew from about $1.0 trillion in 1929 to about $13.0 trillion in 2009-a thirteen fold increase and an average annual growth rate of 3.3 percent. The price index also rose, but not quite as fast, rising from 10.6 in 1929 to 109.8 in 2009- more than a tenfold increase and an average inflation rate of 3.0 percent per year. Note that what matters here is the growth in real GDP, because that nets out the effects of inflation (inflation is mostly troublesome noise in the economy). Since 1983, annual output declined only twice-in 1991 and in 2009. Because the U.S. population is growing, the economy must create more jobs just to employ the additional people entering the workforce. For example, the U.S. population grew from 122 million in 1929 to 307 million in 2009, a rise of 152 percent. Fortunately, employment grew even faster, from 47 million in 1929 to 140 million in 2009, for a growth of 198 percent. So, since 1929, employment grew more than enough to keep up with a rising population. Despite the recessions, the United States has been an impressive job machine over the long run. Not only did the number employed triple since 1929, the average education of workers increased as well. Other resources, especially capital, also rose sharply. What's more, the level of technology improved steadily, thanks to breakthroughs such as the personal computer and the Internet. The availability of more and higher-quality human capital and physical capital increased the productivity of each worker, contributing to the thirteen fold jump in real GDP since 1929. Real GDP is important, but the best measure of the average standard of living is an economy's real GDP per capita, which tells us how much an economy produces on average per resident. Because real GDP grew much faster than the population, real GDP per capita jumped six fold between 1929 and 2009. The United States is the largest economy in the world and a leader among major economies in output per capita.

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Q 15

AGGREGATE DEMAND AND SUPPLY Review the information on demand and supply curves in Chapter 4. How do the aggregate demand and aggregate supply curves presented in this chapter differ from the market curves of Chapter 4?

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Q 16

AGGREGATE DEMAND AND SUPPLY Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve would shift, and in which direction? What happens to aggregate output and the price level in each case? a. The price level changes b. Consumer confidence declines c. The supply of resources increases d. The wage rate increases

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Q 17

SUPPLY-SIDE ECONOMICS One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve?

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Q 18

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase "growth imperative." On the Results page, go to the News Section. Click on the link for the July 31, 2010, article "The Growth Imperative." What did the author David Brooks suggest as remedies for the poor condition of the U.S. business cycle?

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Q 19

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase "leading indicators." Find an article no more than two years old about U.S. leading indicators. Find a similar article no more than two years old about leading indicators in a foreign country. Compare and contrast what the leading indicators in the two countries are forecasting.

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