But there are no questions that we are going to ask that depend on this difference. So forget it. If relative prices do change substantially, the base year does matter for GDP growth calculations. The falling price of computers offers a good example. Let us compare with Suppose that your shopping cart had only two items: an automobile and one personal computer, and suppose that your shopping cart had the same automobile but two personal computers.
How much more stuff is there in your basket. For more on this index number problem, see the appendix to this chapter. Believe me, we have much bigger things to worry about than this. We are looking mostly at short-term ups and downs of real GDP in intervals of time in which relative prices do not change enough to cause a big measurement problem.
For longer-term issues, like deciding how much cost-of-living adjustment is appropriate for Social Security recipients, this index number problem is a much bigger deal. Below is an excerpt from a quarterly table with the data for How can that be? Should not the amount we produce in a year be about four times what we produce in a quarter? Yes, that is true, but GDP is not how much we produced.
Its the rate at which we were producing. GDP is the market value of goods and services produced within the geographic borders of the United States per unit of time. Back to seasonal adjustment later. Table 1. This is the BEA telling us that they have been working hard trying to adjust for changing relative prices as discussed in the appendix below. The percentage difference between these two numbers is 2.
That is the rate of growth in Real GDP per year. The percentage difference between these two numbers is only 0. That is the rate of growth in Real GDP per quarter of a year. This is going to get hopelessly confusing unless we standardize on the time interval. In the case of interest rates, a year is the standard time period. We will do the same thing for GDP growth. That is the rate of growth per year. To transform that growth figure of 0. But the annualized rate of growth is just a little bit greater than that because of the effect of compounding.
After four quarters of growth at the rate of 0. That is the annualized compound rate of growth. Look at that scale — the distance between 2 and 4 trillion is the same as the distance between 4 and 8. That is a logarithmic scale. In a logarithmic scale, a straight line represents a constant rate of growth. The two straight lines drawn in this figure identify the narrow corridor in which real GDP has been confined since You can also see in this figure the periods when GDP was dipping down to the floor of the corridor and when it zoomed back up to the ceiling.
This figure gives us our assignment. We need to understand why the GDP occasionally dips down to the floor of the corridor and sometimes rises above the ceiling. We need to know when the next dip is going to occur. Can you see it? We had the Internet Rush in the s, the Bush W. Tax Cuts, the Bush W. If you think this book focuses a lot on recessions and recoveries, the preceding paragraph tells why.
It is the ups and downs within the corridor of growth that call out for explanation and control. The remarkable persistence of the long-term rate of growth leaves the clear impression that the long-term trend is just something we 30 2 Gross Domestic Product have to live with. That long-term growth rate surely cannot depend much on tax rates or interest rates, at least not given the historical variability of these two policy instruments.
But within the historical range, Fig. Remember a theme of this book: pictures, words, and numbers. A persuasive argument requires well-chosen pictures, well-chosen words, and well-chosen numbers. Concentrate on the pictures and words. People do not understand numbers. We already have learned a lot from Fig. There are some other good pictures of GDP worth looking at.
Figure 2. And Fig. Which display is best? Which communicates an important message most clearly? While the first display, Fig. Here you can see the 10 recessions very clearly as the periods in which the growth bars dangle downward. Remember that it is only a panel of economists at the National Bureau of Economic Research who have the official function of selecting the quarters in which the economy was in recession.
Feel free to question their judgments. Were there really two separate back-to-back recessions in early s? Did they miss the onset of the recession by a quarter? The recessions jump out at you from the bar chart Fig. Can you see the rather high volatility of GDP growth from quarter to quarter? This should alert you to the fact that knowing GDP growth in one quarter cannot tell you much about GDP growth the next quarter.
We will come back to this later. What differences do you notice? There are two. We already learned from the first display, Fig. If you look real close you can see the recessions in the long-term display Fig. A problem with the growth bar chart, Fig.
All those wiggles can be pretty distracting. The long-term display, Fig. A good way to eliminate much of the variability but to retain some as well is to display a moving average of GDP growth.
Here the magnitude of the difference between the s and the s is clear one or two percentage points , while the long-term display in Fig. If you need to know the magnitude, the choice of picture is obvious. Next, what about volatility? If you look hard at the corridor of growth, Fig. The dips in the s were about as deep as the dips in the s but pulling the three-year averages down to about 1.
It was the double-dip recession of the early s that really knocked down the three-year average growth. Homework problem: Explain why Fig.
To do better on volatility, we need a numerical measure of volatility. I suggest the standard deviation. The standard deviation is a measure of dispersion of a group of numbers. That is all we need to know for now. Here you can see the sharp drop in volatility in the early s, but there was a similar drop in the early s. This decline in volatility is potentially important for business decision-making and for forecasting.
Can we expect this stability to continue, or get even better? This matters a lot for inventory policies. Lean inventories and low ratios of inventories to sales work fine in a stable economy, but not well in a volatile one. New Economy advocates in the mid s were promising steady growth forever and indeed there was a significant decline in volatility, which can be seen in Fig.
GDP volatility bumped up again with the onset of the recession of , but subsequently volatility has fallen to an all-time low standard deviation of 1. How small is that standard deviation of 1. Are recessions a thing of the past? We need to answer this important question. Now I ask you to stop looking at these four graphs, and try to remember each of them. Work hard to find a display that sends the message you intend.
It is just a number with a bunch of zeroes. A number has meaning only when we can compare it with something familiar. If you are going to use numbers to persuade, be sure that your audience has a basis for comparison. Dividing GDP by the number of workers does the trick quite nicely. Now you have a scale of reference. How are you doing? Are you producing more than the average worker? Real GDP per worker is displayed in Fig. We are producing more than twice as much per worker as we did a half-century ago!
Here, in Fig. This is an extremely important fact for thinking about the future. Was your shopping basket more full? Not necessarily. Maybe you have the same stuff, and it just cost more a year later.
How are we going to figure out if you have more stuff in ? Specifically, consider the following details about prices and volumes in the and baskets: Shopping Baskets in and Apples Oranges Total Number Price Value Number Price 60 40 1 1 60 40 45 60 1. In , the price of apples rose quite a bit and the price of oranges fell. You wisely decided to buy more oranges but fewer apples.
You spent more in , but I am not so sure if you bought more. Sure, you have more oranges but you also have fewer apples. How can we compare apples to oranges? I am not so sure but I have an idea. I can compute what it would cost to buy those goods in if the prices were the same as That is using constant prices to value the basket. That is a good way to compute the real value of the goods, and that is exactly how real GDP is computed.
The problem with the calculation is it depends on which prices you select. If you use prices it may look like there is more stuff in the basket in , but if you use prices it may appear to be the opposite.
Next do the same calculation with year prices. So which is it? Is the basket fuller than the basket, or the other way around?? Boy that seems alarming. Never mind. It is a cooked up example with wild swings in prices and quantities. Forty five apples and 60 oranges is 0.
This chain compromise makes the problem even less. Especially for our purpose of finding out if the US economy is in recession or not, this measurement issue is virtually irrelevant. The annualized rates of growth of GDP nominal not real from to are displayed separately for each quarter in Fig. Though on average, nominal GDP has grown at the rate of 9.
Note the apparent change in the seasonal pattern over time. You can see this best in Fig. The seasonal pattern stabilizes after with only a first quarter effect, and an effect that is relatively mild. From to , we had strong fourth and second quarter growth, little growth in the third and a large negative in the first. Before , the fourth quarter was exceptionally strong.
I am wondering how the Department of Commerce does their seasonal adjustment. I hope they are not using that old data. If the Commerce Department were not aware of the changing seasonal, then their seasonally adjusted data would have one seasonal pattern for part of the data and an offsetting pattern for the rest. As we learned in the previous chapter, GDP is the market value of goods and services produced during a particular time period in a particular geographic area.
Now that we know how GDP is defined, we have to think about how it might be measured. Suppose you were hired to devise a way to measure the value of goods and services produced in the United States in Could you do it? If you are an attorney, your legal earnings are the market value of the legal services that you produced.
Did you make some money some other way? Do not count selling that old car of yours. You did not produce that. When you sell that car, record the transaction as a change in the way you hold your assets: cash not car. That is not income. Its merely a change in the way you hold your wealth. You do need to count the honorarium you earned for giving a speech.
Include also the rent that you received for that second home that you own. Do not forget your primary home. It is producing housing services too. Now you have E. There is a line for legal services, and a line for public speaking, and a line for rental income. There could be a line for legal services, and a line for public speaking and a line for the rental value of the housing stock, a line for building automobiles and a line for selling at a retail store, and so on and so on.
The natural categories are paid productive activities. Table 3. Details are in an Appendix. I am distressed though not surprised that only But I am astonished that That seems like a distressingly small fraction in manufacturing where they actually make stuff, and a surprisingly large fraction in FIRE where they just fill out the paperwork.
Not so fast. Can you see those earnings anywhere in Table 3. They are in FIRE. Though perhaps not so dramatic as the income numbers in Table 3. Figure 3. Is that the future? We would not make anything anymore, but instead will celebrate our genius in a gigantic parasitic bonFIRE? Remember that the rest of income accrues to owners. The capital in the mines and in utilities is very large compared with the workforces.
Though the accounting system used in Table 3. It was James Meade and Sir Richard Stone, working for the British Central Statistical Office in the early s, who suggested the four subaccounts that are now the norm.
Most of the data are collected by governments at tax time when individuals file personal income taxes and businesses file sales tax receipts. This pushes the government accounts toward what is now the standard, displayed in Table 3. GDP is the sum of the sales to consumers plus the sales to business plus the sales to government.
There are two problems. Some of that decline in manufacturing share of compensation is due to outsourcing. You count as GDP the equipment when it is made and again when the equipment is operated to produce consumer goods.
This is the very best 3. We need to subtract imports and add exports. After I thought about the answer, here was my reply. What do you think of my answer? Suppose the equipment can produce shirts at the touch of a button, using no electricity and no labor except that effortless touch. Then the equipment is really just a box full of shirts. It is the same as inventory. Thus this clever student seems right — there does seem to be a double-counting problem.
But before we claim to have uncovered a fundamental problem with the National Income Accounts, we would better think long and hard about it. A lot of very smart people have spent a lot of time thinking about these kinds of issues.
Surely someone noticed the double counting problem before us. Actually, the solution to this puzzle was discussed in the previous chapter. There is an offset to GDP when the equipment is operated.
Can you recall what that was? If you need to, go to the footnote. From Table 3. These shares of GDP vary over time as can be seen in Fig. The consumption share of GDP has been on the rise since the s.
Since the shares have to add to one, the increasing consumption share must be offset by declining the shares of something else. Which components? Take a look. It is G for government and X — M for exports minus imports. Wait a minute, I thought the government is on the backs of the people. How can G be a declining fraction of GDP? G does not include transfers; a transfer occurs when the government takes your tax contributions and merely shuffles the money off to someone else, not for work performed but only because the recipient is worthy.
When the government shuffles your tax contribution to a government employee, that is production. That is part of GDP. Likewise, all those smart bombs that we have been dropping on Afganistan and Iraq are part of G. But the tax contribution that I make that is passed on to your elderly parents in the form of Social Security is a transfer and not part of GDP. Bottom line: G is mostly the salaries of government employees.
Oh dear! I shall be too late! One of our goals is to understand what causes the recessions when real GDP falls. If we get that understanding, we should be able better to predict when the next recession will occur. Here you can see which is the largest GDP share. It is consumption, C. The driver of the recession is not necessarily the largest share; more likely it is the most volatile. During a recession, there are some components of GDP that decline more sharply than the others.
These are the ones that have the greatest volatility. These are likely the drivers. It is not consumption; the investment. As a share of GDP, investment is the component that varies the most. Investment is a rising share of GDP when investment spending is driving the growth; it is a falling share of GDP when investment spending is slowing the growth. Do not be too quick to draw conclusions here. This is just a start. Investment includes spending on new homes and remodeling. Homes could be the driver.
It could also be that small changes in consumption spending C could be enormously amplified by swings in business investment. Thus we would see the volatility in investment I even though the driver was C, consumption. We will return to this question, I promise.
But in the meantime, maybe you should take a look at Fig. Generally, the peaks in these figures occur near the ends of expansions and the troughs sometime after the beginning of the expansions.
What can you see in these figures? Pause a moment and reflect on those last several words. It is not the inventory level that is a component of GDP: It is the change in the level of inventories. When inventories are falling, some of the sales are satisfied from inventory, not from the current production.
This gets really confusing when we talk about the growth of GDP, and virtually incomprehensible when we discuss a change in the growth of GDP. Let us see if we can understand it. Remember that it is the change in inventories that contributes to GDP. What about the growth of GDP? For GDP to increase because of inventory, we would need a bigger change in inventories.
That is a change in the change. Wow, my head is already hurting, but it gets worse. That is a change in the growth of GDP. For inventories, that is a change in the change of the change. Wow, that seems hopelessly confusing. Fortunately, the Bureau of Economic Analysis does the hard work and reports a number that is the 3. Maybe it is best just to work with those numbers. The change in inventories as a fraction of GDP is charted in Fig.
The average is only 0. And inventory declines are a feature of every recession. That leaves only services and nondurables depicted in Fig. This figure has two features that deserve comment. First, consumer spending neither on nondurables nor on services seems to contribute much to the recessions.
Do you wonder what exactly is in that service category? The rest is a very mixed bag. Take a look and see if you can find your favorite services. Gross Domestic Product does suffer this double counting problem but it is fully corrected by subtracting depreciation and maintenance and repair of existing equipment to create Net National Product.
Homework problem: What about housing? Do the government statisticians allow for depreciation of the housing stock when they compute Net National Product? The consumption component of GDP, C, tells us if we sold a lot of consumer goods and services, but production is different. Some of what was sold was produced elsewhere — imports.
In addition, we produced consumer goods here that were shipped to foreigners — exports. So to C we need to add the consumer goods and services that were exported and we need to subtract the consumer goods and services that were imported. But we do not have X and M broken down by product. We only have the total exports and total imports. It would be much better if X and M were allocated separately to C and I and G, creating an accounting system that includes the domestic production of each of the components of GDP.
That can easily lead policy makers astray. Suppose for the sake of argument that US manufacturers make machinery to be sold to other businesses, but make no consumer items at all.
That is not so far off, by the way. Then all of the consumer spending C would come from imports M. In that case, changes in the spending of consumers C would have no effect at all on US GDP, since that spending would be exactly offset by the changes in imports M. If you did not understand what was happening, you might conclude that tax reductions that stimulate consumer spending C would increase US GDP when all they do is to increase the demand for foreign goods M, keeping C-M constant.
While that stimulus to foreign production might eventually wash back on US shores in the form of higher sales of US-made business equipment, in the meantime we would be waiting impatiently for the effect of a tax cut to show up.
GDP measures what we are producing. Employment measures the number doing the work. Like GDP, employment moves up and down with the business cycle. Unlike GDP, the employment numbers help to predict where the economy is headed. There is a good reason for this. An employment contract is a forecast. When a firm decides to hire or fire, that is a forecast of good times or bad times ahead; it is not a perfect forecast, but often it is a pretty good one. Neither GDP nor employment are easily defined or easily measured.
Corresponding to each component of GDP, people are making the products or providing the services. Those are the folks who are counted as working. But GDP is what some of us produce. Many of the rest of us are working hard too. Some of us produce goods and services that are missed by the government statisticians, such as childcare and work around the home.
Some of us are working hard at school. The human capital that we are producing is not included in GDP, though it should be. A few of us are gainfully employed as trophy husbands for rich and powerful women. Those critical services are not part of the recorded GDP either.
Some of us are too young or too old or too ill to hold jobs. What remains are those who are not working, some looking for work and others living off savings, either their own or their parents.
Are you getting the point: employment status is a pretty complicated question. The US government collects a vast amount of information about working and not-working Americans. We do not need to know about all the details, but we need to acquaint ourselves with the surveys used to compile the employment data on which we will rely heavily to track the ups and downs of the economy.
Here is the current list: E. We will also discuss the widely cited weekly figure on Initial Jobless Claims that is provided by the Department of Labor.
The CES collects seven data series for each industry: 1. All employees Female employees Production workers PW Average weekly hours of PW Average hourly earnings of PW Average weekly earnings of PW Average overtime hours of PW Keep in mind that the workers with more than one job are counted more than once, and understand that the geographic reporting is by location of work and not by location of residence.
When you see payroll jobs in San Jose plummeting, many of those jobs were held by folks who were commuters and did not reside in highpriced San Jose. Some of these folks who lost a job still had another one.
And some may have lost more than one job. Frequency of collection Frequency of publication Major data types published Geographic detail smallest to largest Demographic detail Benchmarked? Think , Figure 4. You can see two recessions very clearly here — that is when the bars dangle down. You can also see that, ignoring the negatives, it looks like payroll jobs have been increasing at the rate of about , per month. Just to confirm, Fig.
Here you can see the recovery in the early s, with job increases exceeding , per month. In the aftermath of that recession, job growth is now around , a month. What is not typical? What is news? Should we jump down with glee if we get ,, or is that pretty normal too? This could be a good homework question: Define what is news?
It is not the only one. News is something that substantially changes the forecast. The best prediction depends on the average of three months data.
The figure also has a best-fitting curve in the midst of all these data points. In other words, overheating is not something to worry about.
Cold streaks continue, but hot streaks do not. We are all looking for a better situation, are we not? For example, what about the self-employed who are promoting their businesses, but who currently have no customers and no revenues? I guess they are employed as they are working for pay, though not receiving any.
With all those concerns, we need to look carefully at some of the data collected by the household survey illustrated in Fig. In the period depicted from to the present, the fraction employed hit its high point of Also in April , the fraction unemployed hit its low of 2. April was about as good as it gets for working Americans.
Best to keep in mind that the unemployment rate that is usually reported by the Bureau of Labor Statistics is the ratio of the unemployed divided by the workforce. But to make this figure, we are dividing by the total number of adults, not just those who claim to be in the workforce.
I am not trying to confuse. I am trying to make sure that you understand that some of the movement in the unemployment rate is because of the changes in the labor-force participation, rather than jobs and population. The denominator total adults moves slowly because of births, deaths, and immigration.
It is the numerator where the action lies. You can see in Fig. The majority was in the unemployed category. The fraction unemployed rose from 2. The fraction not-in-the-labor-force rose from Not healthy, no matter how you look at it. The shaded region in Fig. Discouraged workers must be the reason.
The fraction not-in-the-workforce increased from I would not call that a healthy labor market, even though the rate of unemployment was constant. McGovern and John M. Bushery, U. As labor force participation is an important issue in measuring the health of the labor market, we should take a look at some of the details in Fig.
Can you tell a story about that? Are they working as hard as they used to? Might we expect them to do more? The hottest most recent number is the weekly initial claims for unemployment insurance reported by the Department of Labor with only a week delay.
The shaded regions represent the official US recessions. We are going to discuss these carefully soon, but for now just think of them as periods of economic malaise. That is a lot of Americans getting laid off every week. When you hear that Chrysler is laying off 12, over the next year, remember that is a tiny drop in the bucket.
Maybe they got that date wrong. That view is wrong. The terrorist attack occurred in the midst of an ongoing recession and did not materially affect its course. It was not until that things got back to normal. That was also true of the recession. The labor market did not get back to normal until The numbers remain at elevated levels of , but are far below the recession numbers as or Table 4. Postal Service U. Postal Service State government State government education State government, excluding education Local government Local government education Local government, excluding education 21, 2, 1, 4, 2, 2, 13, 7, 6, In , there were million nonfarm jobs.
Seventeen percent of those jobs were in the goods-producing sectors, principally construction and manufacturing but also a few in natural resource extraction. Most of these government jobs were at the local level. Federal government employment, excluding the Postal Services, was only 1. Health care was These two employment totals are illustrated in Fig. Though there is double counting in the payroll jobs, there are still more people at work than there are payroll jobs covered by unemployment insurance.
The difference, which had Employment Household Survey Payroll Jobs Establishment Survey 50 55 60 65 70 75 80 85 90 95 00 Fig. The household and payroll numbers usually move in the same direction, but they sometimes diverge, as they did in the aftermath of the recession, when the recovery of payroll jobs was notably slower than the recovery of the household employment estimates. This divergence is all the more clear in Fig.
Viewed this way, the puzzle is not why payroll job formation was weaker than household employment in the wake of The puzzle is why payroll job formation was so strong in the Internet Rush from to ?
As we shall learn soon enough, what is unique about the Internet Rush is that the US economy was driven by business investment spending, not by consumer spending. That means more business-to-business transactions where the payroll coverage is virtually complete, as opposed to sales to consumers where the payroll coverage is much less think, for example, of the difference between gardeners working at business sites as opposed to gardeners working at your home.
It was not only the aftermath of the recession. If you look hard at Fig. So which is better? Some argue that the payroll numbers miss an important and vibrant part of the economy, and it is the household survey that is superior.
But speaking as a statistician, it is the payroll numbers that are most informative — they do a better job of predicting GDP growth than do the household data. You can see this in the two scatter diagrams in Fig. Chapter 5 Inflation and Interest Rates The subject of macro economics is intended to help us understand the movements of five variables: 1. We now turn to the inflation and the interest rates. We will do the exchange rates and the external deficit later when we turn to long-run issues like the adequacy of savings to fund our retirements.
If our focus were any other country than the United States, the exchange rates and the external deficit would be front and center, but, looking backward, there is very little volatility of the US economy that has come from our economic interrelations with other countries.
In that regard, the future is quite likely to be different from the past. As I write these words at the end of , a huge US external deficit that has persisted for almost a decade and an apparently over-valued dollar constitute the greatest threat to the stability of the US economy.
GDP and employment are the measurements of a physical reality: you can touch your new car and you can hug the gal who made it. Prices, inflation, interest rates, and exchange rates are different from GDP and employment.
These measure the rates at which the products trade one for another. You cannot see or touch or hug these prices. These are feelings. These are what we think collectively about the relative values of goods and services. We begin discussing measures of the level of prices at a given point in time, next inflation, which is the rate of change in the level of prices, and next interest rates.
None of these alone matters at all. What matters is the real interest rate: the rate of interest minus the rate of inflation. I will explain why. If you told me that the price of Coca-Cola is 9, Ghanaian cedi that would be utterly meaningless to me. That does not tells me whether Coke in Ghana is cheaper or more expensive than in LA. It does not tells me whether Coke in Ghana is cheaper or more expensive than a cup of tea.
If I know that the exchange rate is 9, cedi to the dollar, then I can do some math to translate the price into US dollars. Still, I am not done yet. Now I know something. The Coke costs about twice as much in LA as in Ghana.
The CPI takes on the value 29 in I am making a point, which I will make again by asking the following rhetorical question: Tell me one value that a price index takes on at some point in the series. Can you do this for the GDP of Norway? I do not think so. But you can do it for the CPI of Norway.
Yes you can. The title in the chart in Fig. Sure enough, look at the data and you can see that the numbers are about at that point in time. A comparison. Now that we know better, we can adopt a much better definition than the one offered by the BLS: The Consumer Price Index CPI is a measure of the prices paid by urban consumers for a market basket of consumer goods and services.
This index is normalized to equal in the base year and is designed to compare price levels at one point in time with price levels at another point in time. For more about the details, take a look at the Appendix to this chapter.
How much higher were prices at the end of than they were at the end of ? The percent change per year in the CPI is a measure of the rate of inflation. It looks like there have been three bouts of inflation — in the roaring s, during the war years in the s and during the oil shocks of the s. We also can look for these three episodes in Fig. This figure uses exactly the same data but they sure look a lot different when displayed this way. Those three episodes we see in the levels display Fig.
You can see the inflation in the s but both the s and the s have two mountains of inflation, with much less inflation in the middle of the decades. And then there is the smaller mountain in the late s, leading up to the two larger ones in the s. You can also see clearly in Fig. I wonder if we can expect some of that ahead. We are going to need to try to figure out what is causing the ups and downs in this figure. Foreshadowing: inflation is one of the hardest variables to explain and to predict.
NOTE: This is the second time we contrasted two different displays of the same data. When discussing GDP growth, we also looked at a display of the level of GDP with a logarithmic scale and a display of the quarter-by-quarter rate of growth. Make a mental note of the fact that while these two displays are based on exactly the same data the messages they convey are very different. What is the difference between the behavior of the prices of medical care, bananas, and new vehicles, and why?
Make sure you explain why the price of bananas is so wiggly. We have taken two steps so far: The CPI and the rate of inflation. The next step in the journey is the rate of interest. Figure 5. Why do their interest rates move so closely together? More than the answers to these questions, you need a way to find the answers. Also, excess reserves lent by banks to each other.
Federal funds market The market where banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves. The Fed Funds rate, as it is called, often points to the direction of US interest rates.
Maturities for T-bills are usually 91 days, days, or 52 weeks. Treasury bonds Debt obligations of the US Treasury that have maturities of 10 years or more. Treasury notes Debt obligations of the US Treasury that have maturities of more than 2 years but less than 10 years. So there you have it. Banks are required to hold a certain fraction of their deposits in reserve at one of the 12 Federal Reserve Banks how much?
These reserves stand ready to pay back depositors in the event that there is a significant and rapid withdrawal of funds. Some banks may have more reserves than are required, others not enough.
The Federal Funds market is where banks go to borrow or lend excess reserves. The bond market is where the US government goes when it needs to borrow. There the US Treasury issues bills, notes, and bonds, different only in their maturities: bills mature soon, notes later, and bonds latest of all. The bond market is also where you and I and private banks and foreign central banks, and corporations actively trade these bills, notes, and bonds, and establish the market rates of interest — just the right interest rates to get us to be willing to hold all those securities the Treasury has issued, in other words to fund the Government debt.
The Federal Funds rate is also a market-determined rate, balancing the supply of reserves with the demand. This increases the availability of reserves, which, through the normal market reaction to an increase in supply, lowers the market-determined Fed Funds rate.
To raise the Fed Funds rate, the Federal Reserve sells US Treasuries, reducing the reserves in the system, which increases their scarcity value. Better pause a moment to get this straight: What happens to the interest rates when the Fed buys bonds?
If you like, you can call this an increase in the demand for bonds, which, if the usual logic applies, comes with an increase in the price of bonds.
What does that mean about interest rates? Do you know that prices of bonds and interest rates move in opposite direction? If you prefer, we can tell a story about loanable funds instead of bonds.
When the Fed buys bonds it is loaning money to borrowers. An increase in the supply of loanable funds brings down the interest rate.
Take a look at Fig. Here you can see that the interest rate on 3-month Treasury bills is virtually identical to the Fed Funds rate. Why is that? Why does control over the Fed Funds rate imply control over the market-determined rate on 3-month Treasuries? Hint: When you deposit your paycheck in your bank, the banker can use that deposit either to buy Treasury bills or to deposit the cash at the Federal Reserve. What might that do to the supply of reserves? Neither a price index, nor the rate of inflation, nor the rate of interest by itself is useful for any decisions.
What matters is the real rate of interest — the interest rate minus the inflation rate. Think about giving up that cup of tea today and buying some tea a year from now.
Put the dollar that you are about to spend on the cup of tea into the bond market instead. Do you think that you can have more tea at the end of the year? Not if the price of a cup of tea has also doubled. Then the real interest rate is zero. Then there is no compensation to you for waiting patiently for that cup of tea.
But if the price of tea did not change, you can get two cups at the end of the year if you give up one now. The real rate of interest is equal to the nominal rate of interest minus the rate of inflation. Durability is cheap when the real interest rate is low. It will help understand why the interest rate is the price of durability. It was not just cloth that was shoddy in America — it was virtually everything. In contrast with the British, Americans used structures and equipment with shorter service lives, which were run and depreciated more quickly; Americans adopted organization forms that reduced inventories per unit of output and per unit of labor.
American farmers concentrated on grain farming rather than livestock. Does that reflect some deep British cultural superiority? Maybe, but maybe there is a better explanation. Most economists would suspect that the British bought more durable goods because the British price of durability was lower than the American price of durability.
So what is the price of durability? It is the real rate of interest. Think about the choice between buying a shirt that lasts two years vs. Assuming no inflation Which shirt is the better buy? That depends on the rate of interest.
The story of this book began with my dif? On the basis of 20 years of apparent teaching success in Ph. The Craft of Economics.
A review of the Heckscher—Ohlin framework prompts a noted economist to consider the methodology of economics. In this spirited and provocative book, Edward Leamer turns an examination of the Heckscher—Ohlin framework for global competition into an opportunity to consider the craft of economics: what economists do, what they should do,. Sources of International Comparative Advantage. This is the first book to present a clear empirical picture of the international exchange of goods and of the resources that account for the exchanges that occur.
0コメント