Growth & Macro Tools

by astanhaus

Originally submitted for an Economic Literacy independent research project with Professor Christopher Ragan at McGill University.

Starring: Barack & Michelle Obama, Santa, my Man, my mother Bertie, my bestie Babe & her boy, my MacBook Air Blair, and an exclusive trip to Bettieland!

GDP & Growth

I’ve been rolling over in my mind how to make an explanation of GDP young & fun, but there are very few things that work with 15 trillion. No closet could hold that # of shoes. My mind was working overtime…

I dreamed that I was gardening with Michelle at the White House and she mentioned the great GDP growth under Barrack’s admin., but I couldn’t get the words out to make an intelligent comment…

My man pulled me from my mortified edge of the bed status, by suggesting I tell everyone about my homemade lemonade stand. What a keeper!

First, Gross Domestic Product (GDP) is a really big # documenting how much stuff & services were produced in a certain country in a specific year.

Second, confession: I supplement my income sometimes by being a lemonade lady at my subway stop.

Now, imagine I’m Queen Bettie of Bettieland. [According to my Man, Bettieland borders Santa’s workshop.]

And Bettieland only produces lemonade.

In one very large equation, the value of final goods (lemonade) are added together and the value of intermediate goods (lemons, sugar, water) are subtracted, then the answer would equal the GDP of Bettieland.

Bettians would all be fabulously skinny on our liquid diets.  Frequent fainting would hurt our productivity though, so I would decide to import cake à la Marie-Antoinette from the Santa’s workshop at the neighboring North Pole. And, in exchange, I would export lemonade to quench the thirsts of Santa’s elves. I know, ek, I’m utilizing my comparative advantage. [pat myself on back.]

The very large equation expands…

GDP equals the amount of lemonade consumed (taking into account the use of intermediate goods), plus the investment of lemon-juicing machines, plus net exports (i.e. how much lemonade Bettieland exports minus how much cake Bettieland imports).

Now we’re all fully prepped to chat GDP while gardening with Michelle. But, let’s keep Bettieland between us.

Business Cycle vs. Long-term Growth

The highest highs…the lowest lows.

While a hopeless romantic, I know better than to deny what goes up, must come down.

I hate to break it to you, but the same is true of the economy. Notably named, business cycles.

After a fateful meeting, my (Mr. Big-esque) Man and I (Carrie-esque) meet for drinks, then share a few dinners, he shows off his dinner cooking skills before I head back to the office, and finally introductions to friends are made. We’ve reached a peak! Our relationship experiences China-like growth of 8%.

Then I learn he smokes on “occasion,” he resents how much I work, his friend makes a sexist comment that goes unchallenged in my presence, and finally family vacation plans are canceled. We’re at the lowest of the low, without being broken up, a trough. Our relationship experiences a great recession-esque drop in growth of 3%.

The breathing room makes our hearts grow fonder, he sends a middle of the night message missing me, I make his favorite oatmeal chocolate chip cookies as a peace offering….

No relationship or economic path is smooth. Bumps are inevitable. But if a couple can compromise or a company can innovate, any trough will eventually be followed by a peak.

Simply, in the long run, if good times outnumber bad, there will be growth of GDP at around 2-3%, the US economy’s usual.

Monetary Policy

My (Mr. Big-esque) Man made a big oops. He missed a two-on-two dinner with my out-of-towner parents, Bernie & Bertie. And didn’t acknowledge that he was missing it till 2hrs in.

He had a good excuse… his company is going public. But IPO…SCHMIPO…it was disrespectful and disappointing. I needed to cool off, went into elusive mode, and cut off contact.

My Man on the other hand went into overdrive to make it up to me and win me back. He knows how I love to bake, but hate to cook.

Every night, I would come home to a love note and a basket with the other half of his homemade dinner. Eventually, the basket would include tomorrow’s lunch. As my radio silence further grew, so did the basket to include breakfast items.

My bestie, Babe, is dating a financier, and her boy named these displays of affections my Man’s monetary policy. Men and their $$ references…but he’s kinda right. Here’s what I understood from her boy’s explanation.

Monetary Policy is used when the economy is in the can (i.e. relationship rough patch) and the economy is not reaching its full potential. To fix this, the Central Bank (the Federal Reserve in the U.S.) prints extra money and uses it to buy government bonds. The result lowers interest rates, puts loans on sale, and creates an opportune time to create a fabulously successful business. In the 1990s, Federal Reserve Chairman Alan Greenspan worked, just as hard as my Man, to lower interest rates to create a hospitable investment environment. Alan may or may not have overdone it, and created the housing bubble that burst in 2008.

My Man’s monetary policy did work–a bit. His homemade meals mended my broken heart enough for me to lower my defensives and leave a note where the basket would be inevitably placed.

TBD.

Fiscal Policy

I’ve lost count of how many times my Man has said he misses me. I am a packrat and have kept each one of his notes, so I guess I could count. [add to intern’s to-do list]

None of my Man’s notes had asked anything of me, until last Friday’s. He asked me to take a walk in the park….and I would be free to strut away at anytime.

We walked for an hour up and over the hills, around the pond and I realized how much I had missed him too–which I obviously kept to myself!

He wanted to show me his new favorite place, knowing I would love it too. What we ended up walking into was a fabulous building with an extra smiley doorman…my Man showed me around the lobby…and stopped at the very last mailbox…labeled with both of our names…he was on one knee holding an open box with a ring.

“Fiscal Policy works every time,” interrupts Babe’s Boy when I relay the story to them, later that day.

I know: what a weirdo. I’m in the middle of rehashing the biggest moment of my life and he interrupts me–about economics–again! But I won’t forget his explanation.

Fiscal policy is when the government intervenes in the economy with direct spending or taxation. Obama invested in America’s future by building roads and bridges. My Man invested in our future by buying us a condo and me a ring. Nothing close to Obama’s $800 Billion in fiscal stimulus in 2009, but it was enough for me! The spark is back!

My Man and I don’t have definite plans (are there ever definite plans?), but his grand gestures or perhaps “policies” have made our future together brighter.

Debt vs. Deficit

Confession: I went a tiny bit crazy with my credit card this month…and last month too.

Last month, I replaced my surprise-shutdown computer with Blair, my new MacBook Air.

(VCs: please fund a startup that is attempting to make everlasting batteries.)

By the end of the month, my deficit was $400, as I spent much more more than I had earned.

As for this month, I prepped for winter by purchasing a snazzy statement coat to replace my deflated puffer jacket.

At the end of this month, I will have an extra deficit of $200 from my coat and it needs to be added to my previous deficit of $400.

Next month *fingers crossed* I will not have another deficit, but will still have the accumulated debt of $600.

See how deficits become debt?

Now don’t the Republicans look silly when they refuse to raise the debt ceiling? After consecutive deficits, America has a hefty debt to repay. With each deficit, our government borrowed to finance the difference between spending and revenues. And now our lenders would like their money back, please & thank you.

(FYI: a government’s deficit time frame is a year.)

Personally or federally, the money has already been spent and the debt needs to be repaid…eventually.

Michele Bachmann, let’s host a tea party soon and I’ll fill you in. Tweet me @XOBettie!

Inflation vs. Unemployment?

Bernie, my daddie, and I had a tiff at Thanksgiving dinner.

We disregarded the weather talk and dove into the details of the Phillips curve (Psst: it’s named after its creator, William Phillips). It has the same status of Santa; the Phillips curve may or may not exist.

I’m a staunch Santa-believer-inner and at Thanksgiving dinner I took the stance that the Phillips curve does exist.

Bernie is never a yes-man. Plus, my father experienced the stagflation of the 1970s (AKA inflation was at 12%). So, he begged to differ.

As the downward-sloping Phillips curve shows, inflation is negatively related to unemployment.

Here’s the story of the Phillips curve. More output is produced by using more workers. Workers then have the upper hand and can demand extra cushy wages. As companies have to pay more per worker, those costs are passed to the consumer and the price of everything goes up. So inflation naturally accompanies the higher output.

Now the 1970s makes this argument awkward; all major developed countries experienced a growth slump. Somehow there happened to be high inflation and low output growth.

Most likely due to the shocking embargo by OPEC (AKA Organization of Petroleum Exporting Countries). OPEC is not a fan of my people, so the embargo was payback for the U.S. supporting Israel. With oil extra pricey, everything else’s price went up accordingly. It cost companies way more to produce goodies, did not hire many workers, and not a lot of goodies were actually produced. The U.S. government did not really intervene and print money, so the price level only adjusted a bit. Main street (including Bernie) was bitten badly!

Bertie, my mommie, had to negotiate a truce. Bernie and I had to agree to disagree. And Bertie made us pie-promise to tone down our talking points for future events.

Here’s hoping Bernie still believes in Santa–for my stocking’s sake.

Gobble Gobble!

 

 

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