>

Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Lecture One

Introduction
(Economics 100b; Spring 1996)

Brad DeLong

January 19, 1996 [originally scheduled for January 17, 1996; postponed due to chicken pox]


Chicken Pox
Who I Am
Who You Are
Logistics
Black Lightning
Long-Run Growth and Business Cycles
Unemployment
Inflation
What We Are Going to Do This Semester



Chicken Pox

We are meeting now, Friday, rather than then--last Wednesday--because I have the chicken pox. Let me urge you to get any children you have or may have in the future vaccinated--or at least exposed--to the chicken pox when they are relatively young: adult-onset chicken pox is a much less friendly disease than is childhood chicken pox. Let me reassure you that the doctors say that I am no longer contagious. And let me apologize: this course is still "looser," in terms of organization and in terms of how it has jelled in my mind than I would want it to be.


Who I Am

I am Brad DeLong. This is my first year here at Berkeley as an Associate Professor in the Economics Department. For the previous two and a half years I worked in Washington, as part of Laura Tyson's decimation of the Berkeley economics department to staff the Clinton Administration. In fact, we just lost another one last December: industrial organization economist Joe Farrell went on leave to become Chief Economist at the Federal Communications Commission. We still have somewhere between five and ten economist in Washington.

When you wonder at the number of economics courses that are mysteriously not being offered, reflect on the fact that the Berkeley powers-that-be allocate about one-fifth of the salary of the professors on leave back to the department to hire visitors: if we have ten people on leave in Washington, the powers-that-be allocate us enough money to hire two visitors. Not a good situation.
But I am back. And I may be the best person at Berkeley to teach this course because of what I did in Washington. Most of my job there--as Deputy Assistant Secretary of the Treasury for Economic Policy--was the subject matter of this course: business cycles, inflation, effect of economic policies on the stability of the economy, determinants of long-run growth and income distribution, effect of economic policies on long-run growth, and on income distribution. What is for you the subject matter of a course was, for me, the principal component of my job for two and a half years.
Who You Are

About one-third of you should be economics majors...
Logistics


Black Lightning

The "Black Lightning" people have asked permission to take and distribute lecture notes for this course. Talking to other faculty I get two streams of advice. The first is "no"--that the Black Lightning people have not been competent and thus that the notes produced in the past have been incoherent. You take a ten percent hit on lecture attendance if you let the Black Lightning system establish itself; and the ten percent who do not attend are the ten percent who need to attend, and who are very badly served by trying to puzzle it out afterwards from incoherent lecture notes.

The second stream of advice is "yes"--it provides money to buy pizza for us professors and teaching assistants during the grading marathons that take place in a course like this one. You are adults. Economists believe in enhancing choice--that giving extra options to responsible adults who understand their situation can never be bad, and that people who choose to sleep through the lecture and try to catch up afterwards from notes have good reasons for choosing to do so.

So what I am going to do is to deny Black Lightning permission to make and redistribute notes, but to put my own lecture notes up on the world wide web, at:

http://www.j-bradford-delong.net/macroeconblecturenotes.html

and the associated sub-pages. The bad will be that you will have to read them off the computer using something like Netscape. (Or print them out.) The good is that I cannot complain about their inaccuracy or incoherence should you rely on them. And that they are free.

If demand for Econ 100b notes via the internet turns out to be unexpectedly high, my world wide web server may begin to choke and die, in which case I will move everything over to a more powerful computer like the Economic Department's Emilies. So problems obtaining internet access--I want to know about them as fast as possible.
Long-Run Growth and Business Cycles

This chart shows U.S. real GDP per worker in 1995 prices over the past century. Let's unpack the chart title, because there is a lot going on in it: "U.S." and "1890-1995" are relatively straightforward. "GDP" is an abbreviation for gross domestic product. "Gross" means that we are not correcting for depreciation--the reduction in value of economic capital as it slowly wears out and approaches the end of its useful life. Four years ago my wife and I got a Volvo station wagon costing some $22,000. Today the current value of this station wagon is only $11,000--four years' worth of wear-and-tear that have brought it four years closer to the end of its useful life have also reduced its economic value by half.

"Domestic" means that we are looking at all marketed and government production taking place inside the boundaries of the United States. We don't care that New York's Rockefeller Center is owned by people who live in Japan--the services provided by Rockefeller Center to those who rent office space there, and the income generated by the rental are part of domestic product. Conversely, income generated abroad by factories located in Malaysia owned by U.S. citizens does not enter into domestic product.

"Product." Finally, a noun. The economic product of a country, a region, an individual is the market value of goods and services produced over the course of a year. For example, my mother the psychologist "produces" some $80,000 of therapy each year. She works. Patients feel better and more well-adjusted--and find it worthwhile to pay her, or their insurance companies do. That $80,000 is her income, and it is also value-added for the economy as a whole: something produced over the course of a year which consumers were willing to pay for.

"Real" and "(1995 Prices)". Measured economic product could change because the volume of economic activity changed, or it could change because the prices at which goods and services sell changed--either because of general inflation or deflation, or because of shifts in relative prices. We want to ignore shifts in measured economic product caused by shifts in the price level. So we look at real GDP at 1995 prices. The idea is to take a representative slice of what was produced at some other date, and ask "what would this sell for if we brought it forward in time to 1995?" This way we manage to--imperfectly--control for shifts in price levels and in relative prices. Seasonal adjustment you do not have to worry about yet.

"Per Worker." Real GDP is a measure only of economic activity that passes through the market--is bought or sold (with a few exceptions). Within-the-household-production is counted in GDP if it is bought or paid for, and if not, is not. As the share of the American adult population in the paid labor force has risen, so measured GDP has risen even though part of what has been going on has been the shifting boundary between categories of work that used to be outside, but are now inside the market. So we divide real GDP by the size of the American labor force to attempt to control for the shifting boundary between market and non-market work, and also to control for the overall growth of population. So there is the unpacked title of the graph. It is a measure of the average productivity, controlling for inflationary and deflationary shifts in the price level, of the American labor force.

"Average" in the sense that we have taken the market value of all goods and services produced in the U.S. and divided by the number of workers. It is a gross measure in that it doesn't take account of depreciation and capital consumption--the fact that this year's production has placed wear-and-tear on the nation's accumulated capital stock. When we look at this graph, what do we see? It has gone up a lot over the past century. In 1890, real GDP per worker (at 1995's prices) was only some $12,000 a year. Take what the average worker produced in 1890, bring it forward in time to 1995, and sell it--and you will get some $12,000 for it. By contrast, real GDP per worker crossed $50,000 a year sometime early in this decade, and continues to rise.

The second thing to notice is that the pace of growth is not all that smooth:

The third thing to notice is that the graph has wiggles. These wiggles are this country's "business cycles": expansions and recessions, episodes of rising and falling unemployment, and so forth.


Unemployment


Inflation

The other major feature of the macroeconomy that you read about in the newspaper is inflation:
Inflation upsets a lot of people a lot more than most economists think that it should:


What We Are Going to Do This Semester


>

Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/