Business Cycles, Unemployment, and Inflation

The following is a summary from my Economics textbook, of Business cycles, Unemployment, and Inflation:

1. The United States and other industrial economies have gone

through periods of fluctuations in real GDP, employment,

and the price level. Although they have certain phases in

common—peak, recession, trough, expansion—business

cycles vary greatly in duration and intensity.

 

  1. Although economists explain the business cycle in terms of

underlying causal factors such as major innovations, productivity

shocks, money creation, and financial crises, they generally

agree that changes in the level of total spending are the

immediate causes of fluctuating real output and employment.

 

  1. The business cycle affects all sectors of the economy,

though in varying ways and degrees. The cycle has greater

effects on output and employment in the capital goods and

durable consumer goods industries than in the services and

nondurable goods industries.

 

  1. Economists distinguish between frictional, structural, and

cyclical unemployment. The full-employment or natural

rate of unemployment, which is made up of frictional

and structural unemployment, is currently between 4 and

5 percent. The presence of part-time and discouraged workers

makes it difficult to measure unemployment accurately.

 

  1. The GDP gap, which can be either a positive or a negative

value, is found by subtracting potential GDP from actual

GDP. The economic cost of unemployment, as measured

by the GDP gap, consists of the goods and services forgone

by society when its resources are involuntarily idle. Okun’s

law suggests that every 1-percentage-point increase in unemployment

above the natural rate causes an additional

2 percent negative GDP gap.

 

  1. Inflation is a rise in the general price level and is measured

in the United States by the Consumer Price Index (CPI).

When inflation occurs, each dollar of income will buy fewer

goods and services than before. That is, inflation reduces

the purchasing power of money.

 

  1. Unemployment rates and inflation rates vary widely

globally. Unemployment rates differ because nations have

different natural rates of unemployment and often are

in different phases of their business cycles. Inflation and

unemployment rates in the United States recently have

been in the middle to low range compared with rates in

other industrial nations.

 

  1. Economists discern both demand-pull and cost-push

(supply-side) inflation. Demand-pull inflation results from

an excess of total spending relative to the economy’s capacity

to produce. The main source of cost-push inflation is

abrupt and rapid increases in the prices of key resources.

These supply shocks push up per-unit production costs and

ultimately raise the prices of consumer goods.

 

  1. Unanticipated inflation arbitrarily redistributes real income

at the expense of fixed-income receivers, creditors, and

savers. If inflation is anticipated, individuals and businesses

may be able to take steps to lessen or eliminate adverse

redistribution effects.

 

  1. When inflation is anticipated, lenders add an inflation

premium to the interest rate charged on loans. The nominal

interest rate thus reflects the real interest rate plus the

inflation premium (the expected rate of inflation).

 

  1. Cost-push inflationreduces real output and employment.

Proponents of zero inflation argue that even mild demand-pull

inflation (1 to 3 percent) reduces the economy’s real

output. Other economists say that mild inflation may be

a necessary by-product of the high and growing spending

that produces high levels of output, full employment, and

economic growth.

 

  1. Hyperinflation, caused by highly imprudent expansions of

the money supply, may undermine the monetary system and

cause severe declines in real output.

As a Latino, I think a basic understanding of these concepts would greatly benefit Latinos because it will help us to understand the economic world around us better. If we can understand the world around us we can understand how to make better financial decisions that would cause our Latino economy to grow more rapidly and more uniformly.

For example, a (Latino) relative of mine has owned a business for 38 years, and over the course of the 38 years there have been several years of expansion, growth, profit, and success; and there have been years of the business struggling, shrinking, and year over year losses. The events of the business over the past 38 occurred without a deep understanding of the concepts above by the owner. Without understanding how the U.S. economy fluctuates in the business cycle can make it is easy to blame one’s self more harshly than one deserves because one will fail to recognize that the macro economy has more influence on your business that you as a business owner have.

This at least can be said about what happens to people who do not understand that the marco-economy is causing massive fluctuations in the success of their business: One will falsely attribute successes to their own superior intelligence too often when the economy is performing at peak; and one will too harshly blame their own inferior intelligence when  the business does poorly as a result of the economy being in a trough.

I hope this information useful,

Fabian, Latino Economist

Works cited

McConnel; Brue; Flynn. Economics. 18th Edition. McGraw-Hill. 537-538. 2009. Print.

 

 

Oil price volatility, what caused the price of oil to go from $10 to $145 per barrel?

At the end of the 1990s two broad market events occurred that collapsed the equilibrium price of oil in the stock market. The demand for oil was decreased, and the supply of oil was increased. The decrease in demand and increase of supply is described perfectly in our Economics textbook “Supply Increase; Demand Decrease What effect will a supply increase and a demand decrease for some good (for example, apples) have on equilibrium price? Both changes decrease price, so the net result is a price drop greater than that resulting from either change alone (57). The first was Iraq’s return to normality and stability, which allowed for Iraq to drastically increase its oil production. And the second Macroeconomic event is that the Asian countries with leading GDPs were engrossed in a financial crisis causing Asia’s demand for oil to decrease significantly.

Notice the chart between 1991 and 1997 is the gulf war and how low the oil production is, and notices the spike in Iraq’s oil production after the war. The market would have had its equilibrium at around $34 a barrel just before Iraq nearly doubled its daily output of oil barrels per day from 750,000 to 1.5 million barrels a day, from which Iraq’s supply to the market only increased.

OG-AA982_Iraq03_G_20140314115419

 

Here we have a chart created by the World Bank, which records the falling GDPs of the Asian countries that comprised the Asian financial crisis. The fall in GDP and fall in the rate of exchange of the crashing Asian countries would necessarily reduce the consumption/demand of oil this mass of Asian countries demanded pre Asian financial crisis.

images

 

 

 

 

 

As the Asian countries passed through the crisis demand returned to normality, and these countries continued to grow at developing country rates increasing the demand for oil from these countries. From the Asian financial crisis to now, China has also increased its demand for oil so much that it has over taken the U.S. as the number 1 consumer of oil in the world. This massive addition to the demand of oil has helped to continuously increase the equilibrium price of oil. The 2007 global financial crisis and 2008 global recession which the world is still recovering from also devalued the worth of financial markets worldwide, and reduced the worth of global currencies such as the U.S. which caused the price oil, which is a commodity to finally spike to its $145 dollar level, because the low worth of the paper currencies became devalued by 50% compared to commodities like oil and gold for example. In essence, the rise of the price of oil to $145 a barrel was caused by inflation.

crude-oil-price-history-chart-2015-07-18-macrotrends

 

 

(2) Why did a barrel of oil go down from $145 to approximately $60 in recent months?

 

In 2014 oil prices dropped 50%, from above $100 a barrel to as low as $50 a barrel. The reason why is because one of the largest suppliers of oil increased its supply to the market by a minimum of 680,000 barrels of oil per day. According to a Nov. 2014 article in Bloomberg Business, the “Saudi minister al-Naimi reiterated on April 7 that OPEC will only pare output to rebalance the global market if other producers share the burden. Al-Naimi has said several times since OPEC’s Nov. 27 decision that the group’s supplies shouldn’t be curtailed to make room for higher-cost producers. (Carpenter, Saudi…Rising Market Share Fight). It has been speculated that the higher costs producers that are being referred to are the Shale Oilers of America who are reaping profits from the high price of oil that is maintained by OPEC’s restraint of its oil production.

Saudi Arabia’s strategy is to take a temporary reduction in their profit per barrel by driving the price of oil down over 50%, Saudi Arabia accomplishing this by supplying more oil than the market demands; and the reason why the Saudi Arabia sees the loss as temporary is because, while Saudi Arabia has the lowest costs of any oil producer in the world, other oil producers who had thin profit margins while the price of oil was $100 a barrel and above, will cease participating in the oil business because they will be profitless and bankrupt; the perfect example of the low profit margin producers would be American shale oil producers. For Saudi Arabia’s strategy to be ultimately successful the low price of oil would need to result in pushing out the shale oil producers of the U.S., and after driving out the other producers, then the amount of oil supplied to the market will reduce back to its original output before Saudi Arabia increased its oil production because the Shale Oil producers will be diminished, and thus the oil prices will rise, though perhaps not back to $100 a barrel, but high enough for Saudi Arabia to recover profits by selling many more barrels per share even at a lower price.

 

1114_HowMuchCanFracking

 

(3) What is the equilibrium price of a barrel of oil today?

 

The price of per barrel a day closed at $59.13, and has been hovering around the $60 range for a while now. This is the new equilibrium price, as $60 per barrel of oil is the price that the largest supplier in the market (and leader of OPEC) is satisfied receiving per barrel of oil to supplied.

 

In an article from financial analyst house “Reuters” by analyst Alex Lawler, the current equilibrium price of oil is talked about, but more importantly the article quotes the OPEC leaders at their OPEC meeting in Vienne on 6/5/2015. In short, Saudi Arabia’s increase of supply has established the current equilibrium for oil at $60 a barrel but the other OPEC members who had been voicing that seeking $100 a barrel for oil “would be fair.” At the recent meeting in Vienne the Opec members other than Saudi Arabia are now saying that $75 a barrel would be a fair price, in hopes that Saudi Arabia will curtail its increased production in order to support an equilibrium price of $75 or above. The Reuter’s article states in light of the current equilibrium price and the comments of OPEC members other than Saudi Arabia, “The comment adds to signs that many of the world’s biggest producers are gravitating towards a new equilibrium price that they believe may be low enough to deter competition from higher-cost frontiers without wrecking OPEC members’ budgets (Reuters, OPEC Seeing $75).” This quote from Reuters is consistent with my current analysis.

 

 

Works Cited

 

Carpenter, Claudia. Saudi Oil Output Rising Amid Fight For Market Share. Bloomberg

Business. Feb 2015. Web. http://www.bloomberg.com/news/articles/2015-02-19/saudi-arabia-oil-production-rises-to-about-10-mln-b-d-pira

Lawler, Alex. OPEC price hawk Iran joins others seeing $75 oil as “fair”. Reuters. June 2015. Web.

http://www.reuters.com/article/2015/06/05/us-opec-meeting-iran-price-idUSKBN0OL0UC20150605

Rahemtulla, Karim. The Fall of U.S. Fracking?. Wall Street Daily. Nov. 2014. Web.

http://www.wallstreetdaily.com/2014/11/11/u-s-fracking-industry/

Smith, Grant. Saudi Arabia Adds Half A Bakken. Bloomberg Business. Apr. 2015. Web.

http://www.bloomberg.com/news/articles/2015-04-16/saudi-arabia-adds-half-a-bakken-to-global-oil-market-in-a-month

 

Impact Illegal Immigrants Have On The U.S. Economy

PREFACE: Greetings readers of Latino Economist. Donald Trump made, to most, offensive claims that Mexican illegal immigrants have a negative impact on the U.S.A socially and economically. As a Latino I take issue with this, but more importantly I wish to weigh Trump’s remarks in Economic terms. Why put aside Trump’s social offense? I do so because Economic data (money) is the first language of the U.S.A. In order to have an impact on real issues, and to have a voice that will be seriously considered by U.S. residents of all ethnicities, I currently am of the opinion that Latinos need to present inequalities in the language that the majority society of the country we live in speaks.

Also, if we analyze the facts and can present an alternative narrative based on facts, rather than unsubstantiated claims like Mr. Trump has made, I believe the majority of U.S. citizens, who are fair-minded people, will draw fair conclusions about immigrants, and even illegal immigrants, if people are presented with the reality of what illegal immigrants contribute to the U.S.A. economically.

As such, I am seeking to research economic data on these subjects to compile a scholarly research paper that will present a whole picture of the historical, current, and future reality of the Mexican illegal immigrant economy in U.S.A., and how it impacts the country.

To begin this journey I submitted a request via e-mail to my Macroeconomics Professor, for his aide. What follows is the letter I just e-mailed to him:

Hello Prof. [name omitted],

Fabian [Latino Economist] here, from your online Macroeconomics class, summer 2015. I would like to request your aide in my independent research. My research is in the field of Economics (I believe).

REQUEST: I would appreciate it if you could direct me to databases that you use and know of, where I can acquire and research reliable and comprehensive, scholarly and official, economic data on Mexican illegal immigrants that reside in the U.S.

REASON: I would like to read and analyze the research and write an academic level paper on it for my own benefit in the future, as I plan to major in Economics and I desire to improve the latino economy in the U.S. throughout my life through the use of the economic tools I acquire.

WHAT I THINK THE DATA WILL HELP ME UNDERSTAND AND CONCLUDE

The impact illegal immigrants have on the U.S. economy, and whether that impact is worse, equal to, or better than the impact the average U.S. citizen has on the U.S. economy. And how so, statistically.

THE TYPE OF ECONOMIC DATA I AM SEEKING

I feel the amount of years of economic data can be an important factor. I would like for the economic data to span back in time as far back as the first year of economic data, on the impact illegal Mexican immigrants have on the U.S. economy, and from there every year up until the present.

I would like to discover about the Mexican illegal immigrant economy in the U.S.A:

  1. How much economic value is contributed to the economy? For example, what is the quantity of final goods produced, as a percentage of real GDP, by Mexican illegal immigrant labor?
  2. What is the negative value subtracted from the U.S. economy by Mexican illegal immigrants residing in the U.S.? Which theoretically can be caused by the taxes Mexican illegal immigrants do not pay on income, or the percentage of real GDP removed from the U.S. economy and transferred into the economy of Mexico when money is sent to Mexico by Mexican illegal immigrants.
  3. I would like to determine mathematically if illegal immigrants do more good than harm, or alternatively, more harm than good to the economy.
  4. I would like to know the crime rates in the illegal immigrant community in the U.S.A and compare it to the crime rates of legal U.S. citizens.
  5. For comparison to understand the immigrant dilemma in the recent centuries in the U.S., I would like to research the economic history of Italian immigrants (legal and illegal), and crime data from the era of Italian immigration until now.
  6. The current economic status, and crime rates, of Italian-Americans in the U.S. (I want to track the historical progression of factors for immigrant groups transitioning into ethnic citizen groups, which can be compared to the early-american slave exploiting european immigrant economy, that has transitioned to no longer thriving on slave labor).
  7. Etc. etc.

HOW MY RESEARCH RELATES TO CURRENT EVENTS, MYSELF, AND HISTORY

I am Mexican-American. Recently Republican Presidential candidate DonaId Trump has implied in recent public statements that illegal immigrants are a drain or some type of negative impact on the U.S. economy. What I noticed is his lack of citing official information derived from the research and analysis of data, on the negative impact illegal immigrants have on the U.S. economy, and how it may differ from statistical U.S. citizen behavior.

I WANT MY CONCLUSION TO BE BASED ON DATA

Rather than basing my opinion of Trump’s claims on my emotions as an offended fair-minded person, or allowing my pride to be insulted as a Mexican-American, I instead would like to analyze whether or not Trump’s claims are true or false in economic terms. If he is correct or false I would rather let the data inform me rather than anything else.

 

RELATED RESEARCH TOPICS: HOW WELL U.S. ANTI-(ILLEGAL-)IMMIGRANT SENTIMENT HAS COMPARED WITH ECONOMIC REALITIES––HISTORICALLY 

  1.  The history of the anti-Italian immigrant sentiment of U.S. citizens, resulting in discrimination and scapegoating of Italian immigrants by U.S. citizens.
  2.  The history of anti-immigrant sentiment of U.S. citizens, resulting in discrimination and scapegoating of Italian immigrants by U.S. citizens.
  3. The history of anti-immigrant sentiment of U.S. citizens in general, and how it manifested itself in the form of discrimination and scapegoating of immigrants by U.S. citizens.
  4. Etc. etc.

 

Well then, that is my request, and those are my reasons for my request. I know you are a busy Professor and I understand you have many other obligations to meet for the school and whatever else I am unaware of in your life. I appreciate you reading my request. If you do not have the time to help I would appreciate guidance on what Professors or organizations I should approach at N.C.C. that could aide me in my endeavor. I really hope you have the time to help me and that it won’t be too much of a burden to you.

I hope you are having a good summer,

Fabián, Latino Economist

I am excited about this research project I have undertaken, and I look forward to any all feedback and discussion myself, and you the readers of Latino Economist will have on this subject.

Thanks for reading,

Fabián, Latino Economist

Why I am starting this blog. 7/2/15

I am starting this blog to force myself to:

  • Learn the discipline of Economics as effectively as possible.
  • Find, help, and learn from likeminded Economists and Latinos.

Thanks for reading!

Fabian