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Jane Chiavelli
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In this article, economics scholars preform a study on Hungary's economy and the effect of imports. Their research concludes that "imported inputs boost productivity" and furthermore, "the positive effects are particularly strong for foreign-owned firms." To analyze the import effect, they examine quality of the imported inputs and substitution. The more perfect the imported inputs can substitute domestic inputs, the greater effect imports have on productivity. Foreign-owned firms benefit most from the input effect because they are knowledgable about global markets and they have greater access to cheaper international suppliers. In class, we discussed how trade benefits everyone involved. Therefore, limitations to trade such as import tariffs could have an unintended negative effect on a country's economy. While imports decrease GDP, it is evident from the article that imports have a positive affect on productivity in Hungary's economy, which increases GDP at a greater rate according to the data. Therefore, increased imports have the potential to shift the aggregate demand curve outwards, increasing aggregate demand in the domestic economy. This raises the aggregate price level, which will in return, raise the demand for exports from a country's market. All in all, trade is an important aspect of the global economy and should not be limited.
In this article, many economists urge U.S. policy makers, including President Obama and leaders in Congress, that a balanced budget amendment will do more harm than good. Their argument is that a balanced budget every year would deepen the affects of recessions. In class, we talked about how deficits are not necessarily a bad thing. Deficits tend to occur when the economy experiences a recession where aggregate output is below potential output (a recessionary gap). In order to shift the aggregate demand curve so that the economy can return to potential output, one must increase aggregate demand. Expansionary fiscal policy, including an increase in government spending and/or a reduction in taxes, increases the aggregate demand curve and returns the economy to potential output. Expansionary fiscal policy reduces the budget balance. Therefore, it makes surpluses smaller and deficits larger. This is the exact circumstance why a deficit might be necessary to return to the economy to potential output. If the U.S. government were unable to run deficits due to the balanced budget amendment, then the U.S. economy could not control the aggregate demand curve through expansionary fiscal policy. It would only increase the recessionary gap, causing higher unemployment and decreased consumer spending. Therefore, the balanced budget amendment has the potential to put the U.S. economy in a worse position than it intends.
In this article, Brad DeLong argues that this period will be referred to as the "longest depression" in the coming years due to the economy's slow recovery since 2008. He agrees with economist Joe Stiglitz who argues that the only cure to our economy is an increase in aggregate demand through government intervention and a change in political and ideological theory. This political and ideological theory he points to involves the notion that the economy is self-correcting in the long and that government intervention can do more harm than good. While this approach made famous by Adam Smith might be true, the long run could be indefinite. As John Keynes famously said, "in the long run, we are all dead." DeLong and Stiglitz take a more Keynesian approach arguing that government intervention through fiscal and monetary policy can help stabilize the economy and reduce the effects of a recession. To under the economy has a whole, it is important to remember the components of GDP: consumer spending, investment spending, government expenditures, and net exports. Fiscal and monetary policy have effects on the components of GDP. For example, fiscal policy has a direct effect on government spending. As the government increases its spending (or cuts taxes), GDP increases, causing aggregate demand to increase. DeLong is right to argue that increased government spending will have a positive impact on aggregate demand. Monetary policy, on the other hand, has an indirect effect on aggregate demand through changes in the interest rate. As the government increases the quantity of money, consumer spending increases, causing aggregate demand to increase. As consumers are spending more money, interest rates decrease as the bank has less money holdings. DeLong is critical of the Federal Reserve for its fear of low interest rates because it discourages banks to loan and consumers to borrow. Lastly, DeLong and Stiglitz are right to argue that an increase in aggregate demand is the solution. If you look at the AD-AS model, an increase in aggregate demand will increase aggregate price level and aggregate output. This causes unemployment to decrease in our to produce more output. While this causes an inflationary gap in the long run, which the Federal Reserve fears, in the long run, nominal wages will rise in response to low unemployment, which reduces short-run aggregate supply and moves the economy to long-run aggregate supply, moving the economy to potential output. All in all, while the economy may be self-correcting, it takes a long time. In order to push the economy to the point of self-correction, some stabilization policy through fiscal and monetary policy is needed in the short run.
In this article, Susan Kelley discusses the effects of raising the minimum wage in the restaurant industry. While restaurant owners claim that higher minimum wages have a negative impact on their business due to cutting staff and raising prices, Kelley argues that higher minimum wages, in moderation, can increase productivity and and employee satisfaction, resulting in a happier workforce. In class, we discussed the concepts of the marginal propensity to consume and the multiplier effect. The marginal propensity to consume, or MPC, measures the increase in consumer spending when disposable income increases by a dollar. The multiplier effect shows that a small change in spending will created a large change in the economy as a whole. In reference to the article, an increase in minimum wage will increase the disposable income of restaurant employees which will correspondingly increase their MPC. As the multiplier effect shows, an increase in MPC will have an even larger increase in real GDP. Therefore, an increase in the minimum wage can have a large effect on the economy as whole due to an increase in consumer spending.
In this article, Krugman argues against the idea that the root cause of unemployment during the Great Depression was due to structural unemployment. Though he does not mention it directly, Krugman eludes to the fact that unemployment during the Great Depression was caused by cyclical unemployment. According to this argument, unemployment during the Great Depression was caused by the recession and decrease in production, not a mismatch in skills and jobs. Structural unemployment occurs when the skills of workers in the economy are incompatible with the jobs provided in the economy. If this were the case in the Great Depression, there would be a decrease in demand for low-skilled jobs, causing a decrease in wages for low-skilled jobs. On the other hand, there would be a corresponding increase in demand for higher-skilled jobs, causing an increase in wages for higher-skilled jobs. The corresponding increase in wages for higher-skilled jobs did not occur during the Great Depression, so therefore, it is unlikely structural unemployment occurred. Krugman uses evidence from World War II to provide a reason as to why unemployment during the Great Depression was cyclical, not structural. At the end of World War II, a fiscal stimulus helped the unemployment rate to decrease with a corresponding increase in GDP. This leads Krugman to believe that the unemployment was related to the business cycle, not the types of jobs and workers in the economy.
This Washington Post article discusses how global warming, a negative externality, is a problem about which the U.S. economy should be more concerned. Rubin argues that climate change will have a negative impact on aspects of the economy such as damage from natural disasters and increasing temperatures, creating additional costs, forcing unemployment and causing a reduction of economic output. Rubin states that a larger portion of government spending should be spent on limiting the effects of climate change. He goes further to say that in order to cover these costs, the government should cut spending on current aspects such as public investment in education. Based on our discussion in class, human capital is a critical component of long-run economic growth, and more specifically, production. If the government cuts investment in public education, the economy will suffer in the long-run as human capital decreases. On the other hand, if the government ignores climate change, it runs the risk of irreversible changes in the environment that could affect the lifestyles of individuals. Rubin is right that the U.S. needs to address the issue of climate change, but cutting spending to education will have an even greater negative effect on the economy as human capital, which has a positive relationship with education, increases production.
Toggle Commented Feb 5, 2016 on ECON 102 at Jolly Green General
This New York Times article discusses the Bank of Japan's decision to cut the interest rate to negative numbers in order to relieve the country from its deflationary period. When a bank has a negative interest rate, savers must pay to have their money in the bank instead of receiving money on deposits. Likewise, consumers and businesses have an easier time borrowing money from the bank. Therefore, the intended purpose of a negative interest rate is to increase consumer spending as a means of economic growth. This could also have a positive effect on employment, as well, as businesses have more money to invest. This rational can be represented in the equation for GDP that we discussed in class on Thursday. The equation for GDP is Y = C + I + G + (X - IM) with C representing consumer spending, I representing investment, G representing government spending, and (X - IM) representing net exports. By lowering interest rates to below zero, the Bank of Japan is trying to increase consumer spending and investment, which will ultimately increase the country's GDP, indicating that the size of the economy is expanding. In my opinion, this is an unrealistic policy; negative interest rates indicate that the country's economy is struggling. Therefore, businesses are unlikely to make investments if they know the economy is in trouble. Likewise, it is possible that consumers will save their money in other banks other than those in their country. This could cause even more problems for Japan's economy.
Toggle Commented Feb 1, 2016 on ECON 102 at Jolly Green General
This Washington Post article talks about the plummeting oil prices and its effects on the global stock market. According to the article, the current U.S. oil price has reached its lowest level since 2003 at $26 per barrel. This is due to an overall decrease in demand for oil. This is an important issue because oil is central to the global economy; oil is necessary for many construction and manufacturing projects which drive the economy. Therefore, if demand for oil has decreased, consumers and investors are worried that this is a sign that the economy is slowing down. In addition to oil, other companies have also fallen in the market, including Apple, Facebook, and Netflix. This current event is very relevant to the discussion we had in class on Tuesday about recessions and the paradox of thrift. Paradox of thrift is a macroeconomic issue in which individuals decrease their spending and begin to save money when they think the economy is entering a recession, resulting in a decrease in aggregate demand and economic growth. In the case of the plummeting oil prices and falling stock prices, individuals and investors are worried about the economy, which may result in less spending and more saving. In reality, individuals and investors should not engage in such behavior since it will have negative consequences on the economy. Likewise, they should also look at other indicators of economic health such as the labor market, which has added over 200,000 jobs over the past few months. All in all, individuals and investors should avoid making sudden decisions, and they should not rely just on oil prices to determine economic health.
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Jan 21, 2016