Chap 10

Can we just compare btw GDP 2013 and 2003? No cause 2

possible reasons GDP went down: prices are higher or production
is higher. We like higher production therefore we want to control
for the price increase. Economists found the way to control rise in
price so they could just compare the rise in quantity.
Dont control => value u get is called nominal
Control for price (taking nominal value and deflating it to get real
value)
From 1230
C. Labor force and E/U
Most mainstream economists think theres a certain rate of U that
is consisting with the normal functioning of labor market: Un:
natural rate of U (it takes time for ppl to find job, ppl graduate
need time to choose job, reentrance, etc)
4.3% - 4.8% - 5% before great depression, now: 5.5%
Heterodox economists dont like this cause they said if u said its
natural, u dont have to worry abt it even if millions of ppl are
unemployed.
Milton Friedman from UChicago came up with NAIRU: non
accelerating inflation rate of U. U rate that is consistent with non
acceleratinf inflation. What is the rate of U at which the rate if non
accelerate? Less than natural rate Ua<Un.
Friedman said if actual rate < natural rate then
Define natural rate is one that is consistent with non accelerated
inflation rate
Robert Pollin said evidence does not support this. In most of
1990s, U was close to 3% or fell below 3%. If Friedman was right,
inflation should have accelerated. Inflation was roughly 2%. This
theory is political, not in economics theory. Economists dont want
gov to do sth abt the high U because they do this they give labors
more leverage than capital.
UR= U/ LB (unemployment rate = unemployment/labor force)

LB = E + U
Whatever the U rate is, they will say its underestimated of the
true U rate because of the way the labor force is defined. It is
anybody at the time the Bureau of Labor statistics call them whos
not working and not looking for work at the time theyre
contacting, they are not considered in the labor force. That means
many ppl get discouraged cause theyve been looking for jobs for
months and finally they drop out of the work force and they are
not counted as part of the work force. If they are counted, they
would have been in U and the U rate is higher.
labor force doesnt include discouraged worker => U rate is
lower than what it should be.

IV. Brief history of macroeconomics

A. The classical case for non-intervention
Within market paradigm, the great debate: the role of gov. One
school of thoughts want more gov (non-interventionist gov) vs
more tolerant of a larger role of gov in the US econ. One aspect of
macro econ is regulations (stabilizing the econ).
When talk abt business cycle, 2 problems:
1. unemployment
2. inflation
Great debate: should gov do anything abt these problems or just
leave it to market to self correct?
Classical political econ: believe market can self correct. Self
correction works: suppose theres surplus in the market, prices fall
=> get rid of surplus. Surplus in labor market, price of labor =
wages drop => clear the labor market. So classical economists
not concern cause market and labor market will self correct. 18201830, Marthur observed labor market didnt work like other
market (not self correct). Cause U persists. His great driver is
Ricardo: we can evoke SCIOD (Supply create its own demand) and
supply is production process. When businesses try to supply
more, they dont have to worry abt demand side cause when they
produce: factors of production go into production process. They

have to pay them to higher these factors of production. What they

pay them become income, ppl spend these income => demand
side will take care of itself. Classical economists dont concern
with supply side (production, growth)
It is possible that the U ure observing is the U in 1 particular
market, but corresponding to that U will be shortage in other
markets. If shortage in some other markets, resources will flow
from where theres surplus to shortage (thats market process)
=> things will stabilize. It may not apply to all markets at any
given point of time (there could be market discrepancy) but it
does apply to the aggragate (overall picture).
Marthur wasnt persuaded. He said theres a flaw: income will be
spent. What if ppl save income? His observation lots of ppl save
and reinvest the profit, but save a lot => could be discrepancy
btw aggregate demand and AS. Shortfall on demand side because
of saving.
Hundred years later, Keynes came on the scene (after Financial
Crisis that led to Great Depression). He revisited classical
economists writing and said Marthur was right. Based on
Marthurs insights, Keynes developed his theory, published during
Great Depression. His concern was like Marthurs: U seems to be
persisting that labor market does not like other markets.
Argument: cause businesses are not investing and consumers are
not spending, during Great Depression, the gov needed to come
in and do sth abt it. Argue: Marthur: we need to state to engage in
public works to hire these ppl. Keynes met Roosevelt and advised
him to engage in public works and this became the basis for the
new deal.
R spent ~10 billion, Keynes thought thiss small change. Want to
push economy out of depression: need to spend a lot more (at
least 10 times more). R said he cant afford more. Eventually the
war effort, economy did go up then fall => ~103 billion was
spent, that was enough (push econ to a level that can get out of
depression).

Economists thought now they have Keynes and they have ability
to use fiscal and monetary policy to moderate business cycle,
they might fai kiu um(try keep U at 2%, get very little
fluctuation, always going around the trend of growth rate) the
economy. Keynes recognized there were so many variables that
its impossible to control economy with these policies. You can use
fiscal and monetary policy to stabilize economy to moderate U
and Inflation, although fai kiu um isnt sth that should be done.
E.
Late 1970s: challenge came because if u look at business cycles,
these peaks associated with inflation, downturns ass with U.
Keynes said u either have to confront a boom or U but u dont
confront both at the same time. But after oil price increases in
1979, economy first want into recession (cost of production in, ppl
produce less) but at the same time oil price cause price level go
up => inflation and stagnation(because econ has recession)
(stagflation). Friedman against, argue that really our concern
should be with inflation, and inflation has the phenomena that is
related to government because gov brind too much money
relative to the amount of g&s avail in economy => price go up.
He shifted focus of attention to monetary policy and the best of
monetary policy was to have a rule that u wouldnt pay more
money than growth rate of econ (keep stable price). No
distraction, no intervention
30-35
New classical economics: beyond Friedman fiscal policy wont work