AAEC 2305 Fundamentals of Ag Economics

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AGEC 220
Macroeconomics in Agriculture
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Micro vs. Macro

• Micro is small scale focus
• our focus thus far
• Ex Deciding the profit maximizing level of
  fertilizer for a producer
• Macro is large scale focus
• Deals with totals or aggregates
• Entire economy
• Ex Total employment, total consumer income,
  prices levels in the economy

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National Income Accounts

• National Income Accounts basic data measures
  that allow performance of the economy to be
  measured

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Gross Domestic Product (GDP)

• GDP total market value of all the finished goods
  and services produced in the domestic economy
  whether by foreign or American resources in a
  given period of time.
• Measured
• Expenditure method
• Income method

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Expenditure Method

• GDP CIGXN
• Most of GDP from C
• Consumer confidence reports important!

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Income Method

• GDP
• Payments to employees and managers
• Net interest (interest paid interest earned)
• Depreciation
• Business taxes
• Net rental income
• Profits and proprietors income
• Net foreign factor income earned in the U.S.

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GDP Exclusions

• Value of work done by homemakers
• Undesirable side effects of pollution
• (things that do not entail market transactions)

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Other Income Concepts

• Gross Domestic Product (GDP)
• - Foreign Factor Income Earned in U.S.
• American Income Earned Overseas
• Gross National Product (GNP)
• Depreciation
• Net National Product (NNP)
• -Indirect Business Taxes
• National Income (NI)
• -Payroll Taxes, Corporate Profit Taxes, and
  Retained Earning
• Transfer Payments
• Personal Income (PI)
• -Personal Taxes
• Disposable Personal Income (DI)

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Nominal vs. Real Values

• Nominal Values dollar values of goods and
  services at current prices (amount you pay at
  check-out)
• Inflation or deflation changes the purchasing
  power of the dollar
• Real Values dollars expressed in constant
  dollars (remove inflation or deflation that
  occurs through time)

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Aggregate Demand Curve (AD)

• Aggregate Demand Curve shows the amount of real
  goods and services that households, businesses,
  and government are willing to purchase at various
  price levels.
• Price level on vertical axis
• Real GDP on horizontal axis
• Inverse relationship

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Shifts in AD

• Increases (rightward shift)
• Increase in gov. defense spending
• Reduced personal income taxes (increase DI)
• Increase business investment spending
• Increase in nominal money supply
• Decreases (leftward shift)
• Decreases in gov. spending
• Increased taxes
• Decrease in money supply
• Changesin consumer expectations

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Aggregate Supply Curve (AS)

• Aggregate Supply Curve shows the amount of real
  goods and services that businesses are willing to
  supply at various price levels.
• Same axis as AD
• Equilibrium Output is where ADAS

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Shifts in AS

• Increase in AS
• Improved technology
• Increased labor productivity
• Good weather
• Lower input prices
• Decreases in AS
• Shift in worker preferences (more leisure time)
• Decrease in productivity
• Bad weather

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Shape of AS Curve

• Normal conditions reflect upward sloping supply
  curve
• This rules out possibility of an increase in
  price level without an increase in output or vice
  versa
• These phenomenon have occurred in the economy

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P
AS
AD
Real GDP
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Full Employment

• Not 0, but natural rate of unemployment
• Contracts and labor unions cause sticky prices
• Stagflation simultaneous high unemployment and
  high inflation
• Shift AS to left to increase prices (inflation)
  and decrease Real GDP (lower output from fewer
  workers (unemployment))

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Policies

• Monetary Policy deals with money supply
• Fiscal Policy deals with tax and spend

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Linkages to Agriculture

• Increase in Money Supply
• HOW?
• Reducing reserve requirement for banks
• Lower the discount rate
• EFFECT?
• Lower interest rate
• Ag. Exports increase
• WHY???

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Linkage to Agriculture

• Decrease in Money Supply
• HOW?
• Sell bonds
• Increase the discount rate
• Increase reserve requirement
• EFFECT?
• Increase interest rate
• Ag. Exports decrease
• WHY???