PRINCIPLES OF MACROECONOMICS

Term: Fall 2004

Course Number: ECO 2013-168

Meeting Times Tuesday/Thursday @ 9:25-10:40

and Location: 042-1020

Course Description No prerequisites. This course cannot be used to satisfy upper-level

and Prerequisites: requirements for a degree in business administration and/or economics.

The course is intended to provide students with an introduction to the

theory of income determination and national income accounting. The

approach to the materials is both diagnostic and prescriptive. A primary

focus of analysis is on the use of monetary and fiscal policy to accomplish

the goals of full employment, economic growth and price stability.

Instructor: L.A. Woods

Office Hours: Tuesday & Thursday – 8:30 to 9:25; 12:15 to 1:30; and by appointment.

Phone: [904] 646-2641

E-mail:

Required Texts: N. Gregory Mankiw. 2004. Principles of Macroeconomics, Third Edition.

Mason, OH: Thomson/South-Western.

Outside Readings: In addition to the assigned reading material in the text, each student is

expected to read a total of ten (10) articles (not editorials or book reviews) from scholarly journals over the term. Time, Businessweek, Fortune, etc. are all popular periodicals and do not qualify as scholarly journals. Several examples of scholarly journals are Harvard Business Review, Business Economics, Journal of Developing Areas, Land Economics, Journal of Marketing. Some students may prefer to read the daily articles found on the Mises Institute website (www.mises.org) or Economic Insights found at the Dallas Federal Reserve Bank’s website (www.federalreserve.org). Each of the articles should be reviewed, summarized or outlined as a written report on 5" x 8" note-cards. These reports are to be turned in on a weekly basis, beginning the week of September 7th.

Additional Each student is expected to be well informed on current economic issues --

Requirements: both domestic and international -- by reading the Investor=s Business Daily

(especially the Monday issues, which are sold on the newsstands on Saturday) or the Wall Street Journal; and by viewing Market Wrap on CNBC, Nightly Business Report (PBS), or Lou Dobbs on CNN on a daily

basis.

Course Outline and

Schedule:

Aug. 24 Introduction/background/housekeeping

Aug. 26- Introduction to economics and key issues:

Sept. 16 What is economics? What are the tools that are used in economics?

What are the critical elements of macroeconomics and of economic

reasoning? Production possibilities, economic growth, benefits of

specialization and exchange/trade. The role of markets, supply and

demand. Market equilibrium. Macroeconomic concepts. Overview of

Gwartney and Stroup’s [What Everyone Should Know About Economics

and Prosperity.1993. James Madison Institute] “Ten Key Elements of

Economics”. Major definitions and relationships. Time – the measure of

many things. National income accounts; inflation and techniques for

adjustment. Mankiw, Chapters 1-4; 10-11. SKIM Chapter 5.

Aug. 27 Last day for Drop/Add

Sept. 7 First of the article reviews is due. One is due each week for the next 10

weeks.

Sept. 21 FIRST QUIZ

Sept. 23 - Preliminary issues and long-run fundamentals

Oct. 14 Changes through time, economic growth, productivity and wealth creation

(as opposed to wealth re-distribution). Long-tern growth and theories of

growth. Savings or consumption, Ah, that Is the question (present vs. future – instant vs. delayed gratification). [See: The Road Less Traveled]. Investment and capital; interest rates and GDP. The underpinnings of financial decisions.The nature and operation of labor markets; employment, unemployment, and wages. Myths and realities – Is it really the worst economy since the Great Depression? [For verification, go to: the U.S. Department of Labor, Bureau of Labor Statistics website: www.bls.gov. Look at the Unadjusted and adjusted unemployment rates for 1986 through 2004 – pay particular attention to 1993-1994; 1996 in comparison with 2002 through 2004] Money supply growth, inflation.

Mankiw, Chapters 12 -17.

Oct. 19 SECOND QUIZ

Oct. 21 Mid-term grades available

Oct. 21 - Aggregate Demand and Aggregate Supply. Short and long term

Dec. 2 fluctuations. Monetary and fiscal policies. Tradeoff between inflation and

unemployment and growth. International issues. Business cycles and cycle

theory. Current policy issues. Spatial specialization (comparative

advantage) and the gains from trade.

Mankiw, Chapters 9; 18-23.

Nov. 8 Deadline to withdraw from Fall term

Nov. 11 HOLIDAY – Veteran’s Day

Nov. 25 HOLIDAY – Thanksgiving

Dec. 3 LAST DAY OF CLASSES

Dec. 4 – EXAM PERIOD

Dec. 10

Dec. 7 FINAL QUIZ [Please note: This is Pearl Harbor Day]

Note: The final quiz will be held in the regular classroom from

9:00 to 10:50.

Grading: Three, equally weighted quizzes will comprise 86% of the final grade. The

remaining 14% of the final grade will be determined by the outside readings and summaries. The following aggregate grading scale will be used:

350 to 323 (100% to 93%) ...... A

322 to 298 (92% to 86%) ...... B

297 to 270 (85% to 77%) ...... C

269 to 242 (76% to 70%) ...... D

Less than 242 (69%) ...... F

Things to

Ponder:

James D. Gwartney and Richard L. Stroup. 1993. What Everyone Should Know About

Economics and Prosperity. Tallahassee, FL: The James Madison Institute.

Purpose of using this book – eliminate economic ignorance! Many notions that people hold about economics are in error, largely because they have been given the theoretical mechanics, but not the broader rudimentary concepts that form the structural framework, e.g., the ‘law of demand’ vs. ‘incentives matter’. It also adheres to the military’s KISS [Keep It Simple, Stupid] principle.

The authors’ open with a simple statement that incorporates one of the ‘key elements of economics’ – “there’s no such thing as a free lunch’ (TANSTAAFL). “We realize that your time is valuable.” (iv) Embedded in this statement is the recognition that: (i) resources, including your time, are scarce (the ‘law of scarcity’; and (ii) they can be put to alternative uses (they have an alternative or opportunity cost). One of the primary reasons that learning the ‘basic’ economic principles outlined in the book is that they: “…enhance your ability to differentiate between sound arguments and economic nonsense, i.e., separate the truth from the BS that constantly presented in the media. Often the media elite make misleading statements such as: “Gasoline prices are at an all time high.” Which is true, if you fail to discount prices for the influence of inflation, brought to us by the government’s ability to print (create) money without constraint. Ask yourself, what has happened to the five-cent Hershey bar. Equally misleading is their confusion over Revenue and Profit when reporting “Oil companies profits are up 350 percent!”, when the true metric was Gross Revenue. And, again, “Health care costs (prices) are too high in the United States,” implying that this is a result of greedy businesses and medical professionals, without inquiring further about WHY they are high! Without too much effort, it is possible to deduce several reasonable reasons that account for the high costs, though not necessarily in order of importance:

(i)  the role of Medicare;

[by setting reimbursements to doctors, hospitals and other

medical professionals at below market clearing

(equilibrium) prices, the unfunded costs are shifted

onto consumers with insurance or who pay cash.

This raises the premiums on health insurance, as

well.]

(ii) the ‘greed’ of tort lawyers (Fast Eddy Farah and John Edwards);

[skimming-off 33%, PLUS costs from the gross award,

results in higher premiums paid by doctors for mal-practice

insurance, translating into even higher bills to health

insurance companies and consumers. Transfer wealth from

those that have to themselves.] and

(iii)  a gradually aging population:

[the need for medical care increases with age, placing greater demand on the healthcare system.]

Economic ignorance seems to stem from a concentration on the theoretical mechanics rather than focusing on the basic principles. This results in a tuning-out of students. The key principles have been provided to people from the cradle onward, but without simple approaches to the messages, e.g.,

Aesop’s fable of the ‘Grasshopper and the Ants’ – what is the message of the

fable? Simply, it is self-reliance and self-responsibility! Rather than

accepting responsibility it is easier (more convenient?) to seek self-

absolution by passing the blame or responsibility onto others or society

as a whole, e.g., the old Flip Wilson character (Geraldine) – “The Devil

made me do it!” Place reliance on some third party to take responsibility –

the government, disregarding its inability to effectively/efficiently solve

real human problems because of its propensity to distort markets and to

create unintended consequences.

The child’s story, “Chicken Little,” has a message, too: THINK, don’t be

stampeded into life-(changing) threatening decisions on the basis of faulty

information, no matter how loud the message is shouted or how often!

“The sky is falling! The sky is falling! Would Turkey Lurky and Ducky

Lucky and all the other barnyard critters have been better-off had they just

sat down and thought Chicken Little’s foolishness through. But, what did

they do? They followed a self-appointed false prophet (Foxy Loxy) to

there doom. Are there many ‘self-appointed false prophets’ out there?

Count on it! Global warming, the population bomb has exploded (Thomas Malthus and Paul Ehrlich) genetically modified (GM) foods (Jeramy Rifkin), and vaccines will harm children, to name a few!

“The Little Red Hen” provides an additional example of a child’s story with a

profound message – the role of incentives and property rights (physical/ intellectual and individual/group) in a well-ordered barnyard or society. We are always and everywhere constrained by scarcity, whether of resources or of time. This reality means that ALL human needs/wants cannot be satisfied at a moment in time, consequently some individuals have more than others – an uneven distribution of looks, income, wealth, land…. Those that have less would always like to have more. Hence laws and their enforcement are necessary. An unspoken truth of the tale, expressed by the Little Red hen is a property right to her and her children’s labor – ‘we worked to produce the final product, and it is ours to use as we see fit.’ Keep in mind the Three Inalienable Rights espoused by the Founding Fathers – ‘Life, Liberty and Pursuit of Happiness,’ remember they were barrowed from John Locke’s ‘Life, Liberty and Property’. Contrast this with the nonsense that everyone should have ‘equal shares’ à la Karl Marx, “From each according to his ability, to each according to his need,” and Stalin’s re-write, “From each according to his ability, to each according to his work’!

Gwartney & Stroup point out the fact that “political rules and policies” affect the economy – largely as a result of the ‘law of unintended consequences’. Decisions are made and policies implemented with utter disregard to potential future outcomes, which have probabilities that must be estimated and the consequences calculated. Consider their admonition:

…we are a nation of economic illiterates. In a democratic setting, the consequences of economic

illiteracy can be disastrous. People who do not understand the sources of economic prosperity are

susceptible to schemes that conflict with the attainment of that prosperity. (v)

Ten Key Elements of Economics

1. Incentives Matter. In simple terms, if you want more of a certain activity or behavior,

reward it, if you want less, the penalize it. The ‘reward’ may be profits (sales), an

ice cream cone (a child minding his/her parents), or a kindly word (a ‘Thank

you’) for a good deed done. The penalty may be a higher tax on the activity, a

spanking, or deprivation of a pleasurable activity (watching a favorite TV

program for a naughty child) or a rebuke for bad behavior. Responses are not

instantaneous, but require time for behavioral adjustments (a lagged effect). Uses

market adjustment to a change in price (buyers/sellers). A change in tax rates

behaves the same way, households must adjust their expectations and spending

behaviors to both higher and lower rates. Please note the comment (4):

….market prices will coordinate the actions of both buyers and sellers.

The example provided of ‘higher gasoline prices of the 1970s is both timely and telling. The connection between voters and political candidates is also worthy of comment – see: Robert L. Formaini. 2003. “James M. Buchanan – The Creation of Public Choice Theory,” Economic Insights, 8 (2); available at:

www.dallasfed.org/research/ei/ei0302

The insight that incentives also matter in socialist/communist societies is significant in avoiding wishful thinking and the belief that certain economic laws may be repealed by caring politicians – ‘Let’s impose price controls’ – in the mistaken belief that there will be no consequences! [SHORTAGES]

Gwartney & Stroup field a common notion: “…economic analysis only helps explain the actions of self-centered, greedy materialists.” (5) By observing that “This view is false.”

2. There is No Such Thing as a Free Lunch. (or, more crudely: TANSTAAFL) The factor

underpinning this statement is the so-called ‘law of scarcity’, which gives rise to

the principle of alternative (or opportunity) costs. These costs are associated with

the facts that we must contend with limited resources and unlimited wants (and,

perhaps, needs). Money spent on lighting bridges for the Super Bowl are no longer available to add classrooms to public schools. This means that if we want more of one item, it will be necessary to forego or give up alternative items as we transfer resources into the production of the item desired. We must make choices between/among various alternatives because of scarcity. This principle applies to government, as well as individuals. You may remember this basic idea from the Production Possibilities Curve found in all Principles of Economics texts. Of all costs, it is the costs that reflect ‘lost alternatives’ that are most frequently ignored by individuals (if I go partying tonight, how will it affect my grade on tomorrows test?), businesses (if we allocate investment dollars to this product, what alternative investments must be give-up?) and government bureaucrats (if we provide public housing to this group, what services must be foregone by other groups?) The Congress consistently ignores this principle (TANSTAAFL)! They can always raise taxes, impose user-fees, impose price-controls, and, thereby, distort markets, i.e., divert spending on PRIVATE sector goods and channel it into the production of PUBLIC sector goods. This does not reflect the desires of consumers, but the wishes of special interest groups, i.e., it represents rent-seeking behavior. (go to: www.dallasfed.org/research/ei/ei0302 ) Such costs are a critical force in directing scarce resources to their ‘highest and best uses’ and avoiding mal-investment! See: Robert L. Formaini. 1999. “Hayek – Social Theorist of the Century,” Economic Insight, 4 (1); also available at: www.dallasfed.org/research/ei/ei9901; Mises ei; Roger W. Garrison.2001. Time and Money: The Macroeconomics of Capital Structure. London: Routledge/Taylor & Francis Group, esp. Chapter 3; Ludwig von Mises, 1998. Human Action: A Treatise on Economics. Auburn, AL: Ludwig von Mises Institue, esp. Chapter XX.