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Monday, June 14, 2010

Macroeconomics Post 2: Real Wages

So, I had my first class.  Our professor is something of a surprise.  He apparently directs some sort of hedgefund.  He didn't share that with the class.  I learned that through the infamous series of tubes.  To shield myself, and him, I won't say much--other than that he managed to offend me in the first class.  That said--so far I've been pleasantly surprised by Macro.  There seems to be general agreement (at least between my professor and his textbook, Baumol) that certain social welfare programs are actually very helpful.

Unemployment insurance is definitely one of those things.  As Baumol defines it, "a government program that replaces some of the wages lost by eligible workers who lose their jobs"  these economic outflows help prop up aggregate demand in times of recession, and help even out swings in the economy.   Baumol also points out that on the chart of Growth rate of real GDP the tempermental swings in growth are much mitigated after Keynsian use of monetary and fiscal policy take over post 1950.

These are all things I've heard economists talk about extensively, usually negatively.

But what I really wanted to talk about was real wages v. inflation.  This isn't the chart in the book, just the best I could find on the internet.  Now reading this in the book, I admit I was a bit offended--I misperceived what Baumol meant.  The implication of the chart is that in the last decade, wage growth has largely kept up, and, even surpassed inflation.  I was all set up to get mad because I've talked about minimum wage economics and how the poor keep gettin' poorer.  It took me a minute to remember, well, duh.  That's not economics--its common sense.  My point about prices rising is that the scales have tipped to favor the apocrophyal 1%.  That's the 1% of the population making 90% of the money.  All that chart is saying that prices rise--afterall, one man's wage is another man's cost.  Wages are prices.  Now, this chart doesn't actually address purchasing power-though Baumol infers that it does by referencing the fact that inflation can reduce purchasing power.  Granted--but that's not what I've been on about in this blog.  Ravingleftatic is all about the income disparity between the upper-middle and lower class.  That chart doesn't say a thing about that.  Having just finished statistics, I'm guessing that the data on income distribution is probably left skewed, meaning that the mean is greater than the median.  There are fewer outliers, but they're making so much more money than the median income is lower. 

The other interesting thing to point out is that since inflation rates differ between different items, then I wonder if its possible to practice arbitrage on price inflation.  Probably not--I suspect that inflationary price changes tend to work in particular market baskets and industries, which might make it difficult to find enough commonalities to trade based on that inflation.  Then again--why not?  That's what stock speculation is all about, buying high and selling low isn't it?  Speculators bet that the current price of an object is undervalued.  Before the Great Depression it was fairly common for traders to falsely sell a product to extreme levels just to raise the price of a bad stock.  Securities lawyers call that inflation, why shouldn't Macroeconomists

Friday, June 4, 2010

Macroeconomics, Post 1, GDP

After a disappointing semester at B-school, I've decided to spend more time blogging about my classes.  I hope that this will encourage my thinking about topics in class, and applying them (hopefully correctly!)

So our Macroeconomics text is posted here by Amazon Associates.  It's William J. Baumol's Economics: Principles & Policy, 11th edition.

So while reading on my lunch hour, I learned some pretty interesting things about the GDP which I didn't know before.  I'd definitely heard about it, and had a very vague sense of what it was, but I never looked too closely at the definitions, which are interesting.

Nominal v. Real GDP.  This is the same definition from Micro.  Nominal is priced in today's dollars, Real is priced in terms of change over previous years, adjusted for inflation.

GDP:  "The sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time, usually a year."

Some interesting things to note:  Products that are sold on the secondary market, are not counted in the GDP!  I found that to be astonishing given that so much of our income goes to second hand items.  We spent 600 dollars on a used couch last year.  There are some good reasons for this, and some that I don't understand.  No one but me will ever know about the used couch.  It was bought with cash, and no record of the transaction exists with any official source.  So it's impossible to track.  However, a used car dealership doesn't add to the GDP?  That seems a bit extreme, because they do track those sales, and they do report income to the IRS, and they are taxed on that income.  No, GDP just includes goods that are made in the current period.

The other huge thing I didn't know was that GDP only counts final goods.  The example Baumol uses is computer chips.  Computer chips are components, not final goods.  So does that mean, a chip manufacturer and distributor like Celestica doesn't contribute to the GDP?  That might be a bad example because I'm not sure if Celestica is American or Canadian.  Baumol uses Intel.  Intel's goods are not considered final, but are intermediate, and so to not double count their sales, they are not included in GDP at all!

The Celestica thing brings up another key point about GDP.  Geographic boundaries are important, but complex.  Any product produced in the U.S. regardless of whether or not it is a foreign company, gets counted in GDP.  Says Baumol "if your family owns a Toyota or a Honda, it was most likely assembeled ina factory here.  All that activity of foregin firms on our soil does count in our GDP." (It would be excluded in GNP however, Gross National Product.)

So I have some questions for the professor:

1)  If companies like China, India, Taiwan, are all producing a ton of foreign goods, does it mean that their GDPs reflect that?

2)  Much of what the above mentioned countries produce are intermediate goods, in other words: parts.  Does that mean they are not counted?

3)  GDP is a governmental statistical measure.  Governments are different.  If the U.S. Government says the GDP of Greece is X billion dollars, and the government of Greece says the GDP is 4X billion dollars, who's right?