Macro-Market-Micro AGEC 430 Macroeconomics of Agriculture Spring 2010

Macro-Market-MicroMacro-Market-Micro

AGEC 430Macroeconomics of Agriculture

Spring 2010

Let’s Look at a Simplified Let’s Look at a Simplified Closed MacroeconomyClosed Macroeconomy

Ce

Y-T

Ac

Consumption

Ce

Y-T

Ac

ie

Ie Ai

Consumption Investment

Ce

Y-T

Ac

ie

Ie Ai

Ad

Pe

Ypot

As

Consumption Investment Aggregate Product

Ye

Remember that aggregate demand includes both consumption and investment expenditures as well as government spending and net exports.

Ce

Y-T

Ac

ie

Ie Ai

Ad

Pe

Ypot

As

Consumption Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market

Ce

Y-T

Ac

ie

Ie Ai

Ad

Pe

Ypot

As

Consumption Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market Phillips Curve

UR

%ΔP

Ce

Y-T

Ac

ie

Ie Ai

Ad

Pe

Ypot

As

Consumption Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market Phillips Curve

UR

%ΔP

These relationships represent a

simplified “real” macroeconomy

MsMd

ie

Qm

Money Market

Policy LinkagesPolicy Linkages

MsMd

ie

Qm Yt-1

h

T

Money Market Tax Revenue

Policy LinkagesPolicy Linkages

MsMd

ie

Qm Yt-1

h

T

Yt-1

h

T

G

Money Market Tax Revenue Budget Deficit

Policy LinkagesPolicy Linkages

MsMd

ie

Qm Yt-1

h

T

Yt-1

h

T

G

Money Market Tax Revenue Budget Deficit

Policy LinkagesPolicy Linkages

National debt

NDt = NDt-1 + Gt - Tt

Wheat Market

Dw Sw

Pwe

Qwe

Ad

Pe

Ypot

As

Aggregate Product

Ye

Macro to Market LinkageMacro to Market Linkage

Wheat Market

Dw Sw

Pwe

Qwe

Wheat Producer

MC

Pwe MR

qwe

Ad

Pe

Ypot

As

Aggregate Product

Ye

Market to Micro LinkageMarket to Micro Linkage

AC

Wheat Market

Dw Sw

Pwe

Qwe

Wheat Producer

MC

Pwe MR

qwe

Ad

Pe

Ypot

As

Aggregate Product

Ye

Market to Micro LinkageMarket to Micro Linkage

AC

Is the wheat producer making a profit?

Wheat Producer

MC

Pwe MR

qwe

Market to Micro LinkageMarket to Micro Linkage

AC

Average profit is the difference between MR and AC at qwe

Total profit therefore is equal to average profit times qwe

Is the wheat producer making a profit?

Wheat Producer

MC

Pwe MR

qwe

Market to Micro LinkageMarket to Micro Linkage

AC

Average profit is the difference between MR and AC at qwe

Total profit therefore is equal to average profit times qwe

Is the wheat producer making a profit?

Any Questions?Any Questions?

Effects of Expansionary Effects of Expansionary Monetary PolicyMonetary Policy

MsMd

ie

Qm

Money Market

Action:The Federal Reserve buys government bonds.

MsMd

ie

Qm

Money Market

Effect:This action expands the money supply, shifting the money supply curve to the right, and lowers the market interest rate.

ie

Ie Ai

Investment

1

Let’s look at the effect on the “real”economy.

ie

Ie Ai

Ad

Pe

Ypot

As

Investment Aggregate Product

Ye

12

ie

Ie Ai

Ad

Pe

Ypot

As

Investment Aggregate Product

Ye

12 Ce

Y-T

Ac

Consumption

3

We defined inflation as follows:

%ΔP = a1(%Δwr) + a2(Y / YPOT)

Is there demand pull inflationdemand pull inflation in this economy? Why?

ie

Ie Ai

Ad

Pe

Ypot

As

Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market

12

4

Ce

Y-T

Ac

Consumption

3

We defined inflation as follows:

%ΔP = a1(%Δwr) + a2(Y / YPOT)

Is there cost push inflationcost push inflation in this economy? Why?

What Does The Phillips Curve What Does The Phillips Curve Therefore Look Like in This Therefore Look Like in This

Economy?Economy?

Phillips Curve

UR

%ΔP

??????

Phillips Curve

UR

%ΔP

Phillips Curve

UR

%ΔP

Thus we can ignore the Phillips Curve for now.

Since no inflation possible

ie

Ie Ai

Ad

Pe

Ypot

As

Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market

12

4

Wheat Market

Dw Sw

PWe

QWe

5

Ce

Y-T

Ac

Consumption

3

Increase in wages and disposable personal income increases the demand for wheat as long as the income elasticity > zero.

ie

Ie Ai

Ad

Pe

Ypot

As

Investment Aggregate Product

LsLd

wre

Ye

Le Lmax

Labor Market

12

4

Wheat Market

Dw Sw

PWe

QWe

Wheat Producer

MC

PWe MR

qwe

5 6

Ce

Y-T

Ac

Consumption

3

AC

Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up

Impact on Farm Financial StatementsImpact on Farm Financial Statements

MC

PWe MR

qwe

6

AC

Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up

Impact on Farm Financial StatementsImpact on Farm Financial Statements

Remember taxes assumed to be based on Yt-1 and not current income.

Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up

Farm Balance Sheet: 1/Current assets Up Current liabilities Up (accrued taxes)Land values 2/ Up Fixed liabilities No changeFixed assets No change Net worth UpTotal assets Up Total debt and equity Up

Impact on Farm Financial StatementsImpact on Farm Financial Statements

1/ Assumes a current market value balance sheet.2/ Capitalized land values rise due to higher farm income.

Farm Income Statement:Farm revenue UpFarm expenses Up slightlyFarm taxable income Up Income taxes No change Net farm income Up

Farm Balance Sheet: 1/Current assets Up Current liabilities Up (accrued taxes)Land values 2/ Up Fixed liabilities No changeFixed assets No change Net worth UpTotal assets Up Total debt and equity Up

Impact on Farm Financial StatementsImpact on Farm Financial Statements

1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.

Conclusion: Expansionary monetary policy good for farmers.

Any Questions?Any Questions?

Effects of Contractionary Effects of Contractionary Fiscal PolicyFiscal Policy

Yt-1

h

T

Tax Revenue

Action:The government raises the income tax rate.

Yt-1

h

T

Yt-1

h

T

G

Tax Revenue Budget Deficit

Effect:Raises tax revenue and lowers the budget deficit in the short run since tax revenue based on last year’s income.

Ce

Y-T

Ac

Consumption

1Let’s look at the effect on the “real”Economy again.

Ce

Y-T

Ac

Consumption

1

ie

Ie Ai

Investment

2

Ce

Y-T

Ac

Consumption

1

ie

Ie Ai

Investment

2

Ad

Pe

Ypot

As

Aggregate Product

Ye

3

LsLd

wre

Le Lmax

Labor Market

4

Ce

Y-T

Ac

Consumption

1

ie

Ie Ai

Investment

2

Ad

Pe

Ypot

As

Aggregate Product

Ye

3

LsLd

wre

Le Lmax

Labor Market

4

Wheat Market

Dw Sw

PWe

QWe

5

Ce

Y-T

Ac

Consumption

1

ie

Ie Ai

Investment

2

Ad

Pe

Ypot

As

Aggregate Product

Ye

3

Decrease in wages and disposable personal income decreases the demand for wheat as long as the income elasticity > zero.

LsLd

wre

Le Lmax

Labor Market

4

Wheat Market

Dw Sw

PWe

QWe

Wheat Producer

MCPWe MR

qwe

5 6

Ce

Y-T

Ac

Consumption

1

ie

Ie Ai

Investment

2

Ad

Pe

Ypot

As

Aggregate Product

Ye

3

AC

Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down

Impact on Farm Financial StatementsImpact on Farm Financial Statements

MCPWe MR

qwe

6

AC

Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down

Impact on Farm Financial StatementsImpact on Farm Financial Statements

Last year’s income taxed at a higher rate.

Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down

Farm Balance Sheet: 1/Current assets Down Current liabilities Down (accrued taxes)Land values 2/ Down Fixed liabilities No changeOther assets No change Net worth Down Total assets Down Total debt and equity Down

Impact on Farm Financial StatementsImpact on Farm Financial Statements

1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.

Farm Income Statement:Farm revenue DownFarm expenses Down slightlyFarm taxable income Down Income taxes Down Net farm income Down

Farm Balance Sheet: 1/Current assets Down Current liabilities Down (accrued taxes)Land values 2/ Down Fixed liabilities No changeOther assets No change Net worth Down Total assets Down Total debt and equity Down

Impact on Farm Financial StatementsImpact on Farm Financial Statements

1/ Assumes a current market value balance sheet.2/ Capitalized land values fall due to lower farm income.

Conclusion: Contractionary fiscal policy not good for farmers.

Any Questions?Any Questions?

Know These RelationshipsKnow These Relationships