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Let?s think: Macroeconomics.

Dr. Zaus

Oct 16, 2008
Today, let?s think about Macroeconomics. To start, economics isn?t about money, it is about the trade offs we make because we have limited resources. The value of what it is we trade in order to do something, which is not always money, but also the opportunity to do something else.

Since we?re thinking about how things work on the large scale let?s start with the national scale. The nation as a whole has limited resources.

We can think of these resources as the stuff we get from the earth, the equipment we use to change the form of that stuff and people. Or as has been the basis of our understanding sense we figured out that gold is just a shiny metal: the wealth of the world is the sum of its resources: land labor and capital.

The reason that doing something by using fewer resources is better is that we have limited resources, so the more efficiently we do a job the more ?free? resources are available to do other jobs.

Let?s think about what money is. Currency is a means by which we hold physical abstractions of wealth. A dollar is just a green slip of paper just like gold is just a shiny meddle, that we agree that goods and services should be exchanged for these ?limited? objects is what gives them value.

So what gives these objects worth? The same thing that gives gold its worth, or changes the value of any commodity: scarcity. Cash is worth something because it is rare and its value is directly proportional to how rare it is. This has some major implications.

The less money is spent, the more it is worth. The more money spent the less everyone?s money is worth. That is, unless the money is spent in such a way that it either utilizes previously un-utilized resources or reduces the resources being utilized. Spending money makes the economy give you stuff, unless you spend it in a way that makes new stuff.

To figure out government spending let?s think about an extreme example. So, even if there are no tax changes, if the government goes from spending zero dollars one year to spending as much as was the total GDP the year before what happens?

Do we have more land? Do we have more capital? Do we have more labor? The answer to all of these questions is maybe.

If government spending puts more people to work or makes them more efficient workers, then it is good for everyone, If government spending creates more efficient capital it is better for everyone and if government spending gets more raw-materials out of the earth it is good for everyone.

Some examples: If government spending creates roads that make commerce more efficient or if it focuses on science that makes it so that half as much oil has to go into the same amount of plastic or if it trains a work force to accomplish twice as much in the same amount of time or if unemployed laborers are put to work... then it?s done something that will not hurt the value of our money, but rather has created a long-term benefit.

If, on the other hand, government spending doubles the GDP and allocates half of it in such a way that resources are simply reallocated, then the resources to make all those private sector products just got cut in half or to look at it another way, from the laborer?s point of view, the cost of everything just doubled.

When the government spends money on ear-marks that have no economic benefit other than increasing spending it does little else but create inflation. These ?inputs? or the ?supply side? of the market are what can allow someone to start spending more money without reducing the value of everyone?s money.

But is this the ?supply side? economics of the Regan years? No! This is the real supply-side economics employed during the Clinton years of prosperity.

Later we?ll go over how taxation, interest rates and the national debt work against this frame work.

Having only touched on basic ideas, with little to argue about, this required no references in order to give multiple sides of the issue.

It should be stated though that other schools of though believe that these systems are much more complex and that there is really no use to doing any quantitative study of them, leading to the qualitative work of people in the fields of sociology, marketing, political science and similar disciplines.

So until next time, think about it for yourself!