1. Write 2+ items that have gotten more expensive in

your lifetime2. Write 3+ items that have

gotten less expensive in your lifetime

On Slates

2012 Comparison

Argentina GDP: $476 billion

Spain’s GDP: $1.3 trillion

United States GDP: $16 trillion

Factors: population, resources, education, crime

Zimbabwe

Population:13 million

GDP: 10 billionGDP/Capita:$700Unemployment:

66%

Your G3 is advising the President of Zimbabwe on how to improve the economy of his country.

Situation: Many blacks can not afford goods and food in the markets. Business owners are allowed to charge whatever price

they want and since food is hard to find, its very expensive. Local Zimbabwe businesses have a difficult time competing with

imports from the USA, South Africa and England. When Zimbabwe businesses fail, people lose their jobs causing more unemployment.

98% of the farm land is owned by white farmers, which was taken in the 1800’s from native Africans. 90% of this country is black and has no access to this farm land. The white farmers pay low wages

and often do not hire native blacks.

Many people in Zimbabwe do not have much money to buy food with. The Zimbabwe dollar is a strong currency which is difficult to

get much of because the central bank doesn’t print very much money for people to use.

Zimbabwe 1990’s

Fixed prices

Banned importsRedistributed

land

Printed up more money

Gov’tsolution EFFECT

President Robert Mugabe

Shortages

More shortages

Still more shortages

inflation

Technically “hyperinflation”

ProblemHigh food prices

Competition from USA & SA

Blacks have no land

Not enough money

What if I told you?• Million dollars?• 25 Billion dollars?• 100 Billion dollars

• Fiat currency = value only because we think it does

Hyperinflation in Zimbabwe

• Start of 2008– 100 % inflation

• End of 2008-2009– 10,000,000 %!!– 10 X 6th inflation

CurrencyFiatCurrencyAdvantages?Disadvantages?

Why can’t we just print more money?• Quantity theory of

inflation• Test it

Piles of currency in Zimbabwe

Currency

RepresentativeCurrency

Advantages?Disadvantages?

Inflation• Rise in prices

over time• “cost of

living”• “The real

value of currency”

• Deflation

GDP

• GDP = C + I + G + (Exports – Imports)

• Which one is affected most by inflation?• Which affected least by inflation?

Inflation• Rise in prices over time• “cost of living”• Calculate using

Consumer Price Index

• CPI =

New Prices – Old Prices

Old PricesX 100

Always a percentage, But unlike unemployment rate,It can be more than 100, or a negative

1-3 % inflation = normalAnything higher is bad for consumers

3. Sony PS3 Price change %

4. Gas in 2009: $2.502013: $3.12

Inflation calculator

• 1984

• 1994

What else causes inflation?

• Cost push theory- • For example, increase the

cost of gasoline causes and increase in the price of food.

• Graph it

• Demand pull theory • For example: fads or hot xmas

toys• Graph it

Of the 3 theories of inflation1. Which one can the government control?2. McDonalds increases menu prices after

minimum wage increase3. Fry’s increases all prices as gas prices increase

15% in January4. Nike increases price of football jerseys every Fall5. Apple increases price of popular mp3 itunes

downloads by 5%6. In state tuition increases for the 10th

consecutive year7. Xbox games increase in price after programmers

demand higher wages8. Make up your own example

On slates

1. What economic activity does GDP leave out?(multiple answers)

2. What part of the US government printed your money? (look on a $1, $2, $5, $10, $20 bill)

Why don’t some people trust banks?

What if the bank goes out of business?

• $250,000 per US account

District Structure

Federal Reserve System

Who controls “the Fed”?

What does “the Fed” do?

SuppliesMoney

Controls Moneysupply

SetsReserve

Requirements SuperviseBanks

Gov’t Accounting

ClearsChecks

THE FED

Why is the Chairman of the Federal Reserve sometimes thought of as the “second most

powerful person in the US”?

• Cause: increases interest rates

• Effect: ????

• Cause: lowers interest rate

• Effect: ??? 2014Janet Yellen

On slates1. What would you say about a 10% inflation rate?2. Why are banks important to our economy?

3. What is a recession?4. If the US GDP grew by 1.7% last year, were we

in a recession?5. What part of our government prints our

money?

Great Depression

1929-193327% drop in GDP25% Unemployment36% drop in World trade43 straight months of

declining spending !!!!

“Great Recession”

Housing Crisis2007-20095 % drop in GDP10% Unemployment20% drop in World trade18 straight months of

declining spending

Source Yoram Bauman, World Bank

Monetary PolicyFed’s Tools

Open market operationsReserve Rate (%)Discount Rate (%)

Lender of last resort

What about other countries?

What should The Fed do with interest rates in 1955?

What should The Fed do with interest rates in 1921?

1914 1915 1916 1917 1918 1919 19200.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

US CPI 1914-1920

What should The Fed do with interest rates in 1982?

What should The Fed do with interest rates in 1982?

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 19820.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

US 1970- 1982 CPI

What should The Fed do with interest rates in 1991?

What should The Fed do with interest rates in 2010?

What should The Fed do with interest rates in 2010?

What should The Fed do with interest rates in 2014?

Fed Chairman game

Trade opener1. Where was your shirt made?

(Have your neighbor check)2. What type of labor makes t shirts?

3. What type of labor designs cellphones?

Comparative Advantage Activity

Absolute Advantage

Whoever can do the job the fastest

• Total hours to finish jobs

Comparative Advantage

Whoever can do the job with the lowest opportunity cost

Another way of looking at Comparative Advantage

• Should Lebron James clean his house?

Another way of looking at Comparative Advantage

• Should Jason Terry clean his own house?

Specialization of labor• Firms & countries

figure out more efficient methods of production

• Effect on concept of trade?

Honduras

• 100 tons of sugar/year

OR• 100 tons of

bananas

Cuba

• 600 tons of sugar/year

OR• 200 tons of

bananas

Cuba & Honduras• Scarcity of farm

land• Who has absolute

advantage?• Who has the

comparative advantage of trade?

• Why is this better?

Cuba:

600 tons of sugar/yearOR200 tons of bananas

Honduras:

100 tons of sugar/yearOR100 tons of bananas

Who has comparative advantage: T shirts, financial, medical services, new movies, shoes, oil production

• Land, labor and capital in Honduras• GDP per capita: $2,200 / Population: 8 million• Literacy rate: 85%, 2 universities

• Land, labor and capital in USA• GDP per capita: $48,000 / Population: 300 million• Literacy rate: 90%, 800+ universities

Trade• Free trade = absence

of restrictions of goods/services

• List 3 winners & 3 losers if all countries

had free trade

• Winners:

• Losers:

Benefits of FREE TRADE• Lower prices for consumers• More competition leading to better

products• Job opportunities for producers• Job opportunities in buyer countries• Opportunity costs?

Source: World Bank

Drawbacks of FREE TRADE• Structural unemployment• Lower union membership• Ethical problems

Types barriers to FREE TRADE• Tariffs• Tax on imports• Result: higher price for consumers, job saving

– Opportunity cost

• Quotas• Limit on imports• Result: high prices, less choice• Examples: Japanese full sized trucks• Lexus, Infinity, etc

Other crazy import tariffs• Japan: 700% tax on rice• European Union: orange juice (31%), peanut

butter (132%), and tobacco products (350%)• South Korea: 100% automobiles• Canada: 28% leather shoes• United States: 249 % solar panels, Waterproof

shoes with a metal toe cap 37.5 %• Brazil: 60% tablet computers

Types barriers to FREE TRADE• Embargos• Banning imports• Result: less exports for

embargoed country

• Subsidies• Gov’t help for industries• Result: higher taxes locally,

other countries retaliate

Let’s consider some systems• EU, WTO, Trading blocs, NAFTA

NAFTA• 1994-present• US, Canada, Mexico• Eliminated thousands of

tariffs

• Expanded to CAFTA in 2005

European Union

• 1954- Present• Free

movement of goods, services and people

• Euro-zone

• Contrast with US/Latin Am.

World Trade Organization• 1995-present• 152 countries• Goal = Global free

trade

• Closely related to IMF

• controversial

Free Trade Assignment• Letter to John McCain

• 2-3 paragraphs considering:

Should the US expand its free trade zone to include all of the Western Hemisphere? Consider both sides, but choose the better one.

Use evidence from the reading

75M/C questions SCAN TRON90 MIN, ½ PAGE HANDWRITTEN NOTES