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Videos uploaded by user “Marginal Revolution University”
What is Gross Domestic Product (GDP)?
 
04:36
Picture the economy as a giant supermarket, with billions of goods and services inside. At the checkout line, you watch as the cashier rings up the price for each finished good or service sold. What have you just observed? The cashier is computing a very important number: gross domestic product, or GDP. GDP is the market value of all finished goods and services, produced within a country in a year. But, what does "market value" mean? And what defines a "finished good"? These, and more questions, percolate inside your head. Meanwhile, the cashier starts ringing up the total, and you’re left confused. An array of things pass by you — A bottle of wine. A carton of eggs. A cake from the local bakers. A tractor, of all things. A bunch of ballpens. A bag of flour. In this video, join us as we show you how to make sense of this important economic indicator. You’ll learn how GDP is computed, and you’ll get answers to some pretty interesting questions along the way. Questions like, “Why are the eggs in my homemade omelet part of the GDP, but the eggs my baker uses are not? Why does my bottle of French wine contribute to France’s GDP, even if I bought it in the United States?” Most importantly, you’ll also learn why polar bears aren’t part of the GDP computation, even if they’re incredibly cute. So, buckle in for a bit—in the following videos we’ll dive into specifics on GDP. Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1p4ZtxL Next video: http://bit.ly/1mY2bn0 Help us caption & translate this video! http://amara.org/v/HZv3/
Zimbabwe and Hyperinflation: Who Wants to Be a Trillionaire?
 
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How would you like to pay $417.00 per sheet of toilet paper? Sound crazy? It’s not as crazy as you may think. Here’s a story of how this happened in Zimbabwe. Around 2000, Robert Mugabe, the President of Zimbabwe, was in need of cash to bribe his enemies and reward his allies. He had to be clever in his approach, given that Zimbabwe’s economy was doing lousy and his people were starving. Sow what did he do? He tapped the country’s printing presses and printed more money. Clever, right? Not so fast. The increase in money supply didn’t equate to an increase in productivity in the Zimbabwean economy, and there was little new investment to create new goods. So, in effect, you had more money chasing the same goods. In other words, you needed more dollars to buy the same stuff as before. Prices began to rise -- drastically. As prices rose, the government printed more money to buy the same goods as before. And the cycle continued. In fact, it got so out of hand that by 2006, prices were rising by over 1,000% per year! Zimbabweans became millionaires, but a million dollars may have only been enough to buy you one chicken during the hyperinflation crisis. It all came crashing down in 2008 when -- given that the Zimbabwean dollar basically ceased to exist -- Mugabe was forced to legalize transactions in foreign currencies. Hyperinflation isn’t unique to Zimbabwe. It has occurred in other countries such as Yugoslavia, China, and Germany throughout history. In future videos, we’ll take a closer look at inflation and what causes it. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2hNkAFy Next video: http://bit.ly/2j4niXI
Indifference Curves
 
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Think about what restricts your choices when it comes to buying goods and services. Your income is one variable. Prices are another. What about what you like and don’t like? That’s an important one! Your preferences play a huge role in how you decide to spend your money. We often face so many options when it comes to what we buy that it can be difficult to decide. Even with a simple example of pizzas and coffees, there can be many combinations that would give you the same level of satisfaction or happiness – what economists call utility. There are also many combinations to which you might find yourself totally indifferent. In this video, Arizona State University’s Professor Joana Girante will show you how to graph an indifference curve. She’ll also introduce you to marginal rates of substitution (don’t worry, it sounds more complicated than it is!). We’ll also take a look at how perfect substitutes and perfect complements change the shape of an indifference curve. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/2thhmLZ Next video: http://bit.ly/2rWsdwV
Quantity Theory of Money
 
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The quantity theory of money is an important tool for thinking about issues in macroeconomics. The equation for the quantity theory of money is: M x V = P x Y What do the variables represent? M is fairly straightforward – it’s the money supply in an economy. A typical dollar bill can go on a long journey during the course of a single year. It can be spent in exchange for goods and services numerous times. In the quantity theory of money, how many times an average dollar is exchanged is its velocity, or V. The price level of goods and services in an economy is represented by P. Finally, Y is all of the finished goods and services sold in an economy – aka real GDP. When you multiply P x Y, the result is nominal GDP. Actually, when you multiply M x V (the money supply times the velocity of money), you also get nominal GDP. M x V is equal to P x Y by definition – it’s an identity equation. You can think about the two sides of the equation like this: the left (M x V) covers the actions of consumers while the right (P x Y) covers the actions of producers. Since everything that is sold is bought by someone, these two sides will remain equal. Up next, we’ll use the quantity theory of money to discuss the causes of inflation. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2jvcIbq Next video: http://bit.ly/2k0ZCny
Asymmetric Information and Used Cars
 
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George Akerlof, a Nobel Prize-winning economist, analyzed the theory of adverse selection – which occurs when an offer conveys negative information about what is being offered. In the market for used cars, Akerlof posited that sellers have more information about the car’s quality than buyers. He argued that this leads to the death spiral of the market, and market failure. However, the market has developed solutions such as warrantees, guarantees, branding, and inspections to offset information asymmetry. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1T7d6ZY Next video: http://bit.ly/1TzdfDZ
Intro to the Solow Model of Economic Growth
 
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Here's a quick growth conundrum, to get you thinking. Consider two countries at the close of World War II—Germany and Japan. At that point, they've both suffered heavy population losses. Both countries have had their infrastructure devastated. So logically, the losing countries should’ve been in a post-war economic quagmire. So why wasn't that the case at all? Following WWII, Germany and Japan were growing twice, sometimes three times, the rate of the winning countries, such as the United States. Similarly, think of this quandary: in past videos, we explained to you that one of the keys to economic growth is a country's institutions. With that in mind, think of China's growth rate. China’s been growing at a breakneck pace—reported at 7 to 10% per year. On the other hand, countries like the United States, Canada, and France have been growing at about 2% per year. Aside from their advantages in physical and human capital, there's no question that the institutions in these countries are better than those in China. So, just as we said about Germany and Japan—why the growth? To answer that, we turn to today's video on the Solow model of economic growth. The Solow model was named after Robert Solow, the 1987 winner of the Nobel Prize in Economics. Among other things, the Solow model helps us understand the nuances and dynamics of growth. The model also lets us distinguish between two types of growth: catching up growth and cutting edge growth. As you'll soon see, a country can grow much faster when it's catching up, as opposed to when it's already growing at the cutting edge. That said, this video will allow you to see a simplified version of the model. It'll describe growth as a function of a few specific variables: labor, education, physical capital, and ideas. So watch this new installment, get your feet wet with the Solow model, and next time, we'll drill down into one of its variables: physical capital. Helpful links: Puzzle of Growth: http://bit.ly/1T5yq18 Importance of Institutions: http://bit.ly/25kbzne Rise and Fall of the Chinese Economy: http://bit.ly/1SfRpDL Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1RxdLDT Next video: http://bit.ly/1RxdSzo Help us caption & translate this video! http://amara.org/v/IHQj/
Intro to the Bond Market
 
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Most borrowers borrow through banks. But established and reputable institutions can also borrow from a different intermediary: the bond market. That’s the topic of this video. We’ll discuss what a bond is, what it does, how it’s rated, and what those ratings ultimately mean. First, though: what’s a bond? It’s essentially an IOU. A bond details who owes what, and when debt repayment will be made. Unlike stocks, bond ownership doesn’t mean owning part of a firm. It simply means being owed a specific sum, which will be paid back at a promised time. Some bonds also entitle holders to “coupon payments,” which are regular installments paid out on a schedule. Now—what does a bond do? Like stocks, bonds help raise money. Companies and governments issue bonds to finance new ventures. The ROI from these ventures, can then be used to repay bond holders. Speaking of repayments, borrowing through the bond market may mean better terms than borrowing from banks. This is especially the case for highly-rated bonds. But what determines a bond’s rating? Bond ratings are issued by agencies like Standard and Poor’s. A rating reflects the default risk of the institution issuing a bond. “Default risk” is the risk that a bond issuer may be unable to make payments when they come due. The higher the issuer’s default risk, the lower the rating of a bond. A lower rating means lenders will demand higher interest before providing money. For lenders, higher ratings mean a safer investment. And for borrowers (the bond issuers), a higher rating means paying a lower interest on debt. That said, there are other nuances to the bond market—things like the “crowding out” effect, as well as the effect of collateral on a bond’s interest rate. These are things we’ll leave you to discover in the video. Happy learning! Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/29Q2f7d Next video: http://bit.ly/29WhXgC Office Hours video: http://bit.ly/29R04Ba Help us caption & translate this video! http://amara.org/v/QZ06/
Comparative Advantage
 
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What is comparative advantage? And why is it important to trade? This video guides us through a specific example surrounding Tasmania — an island off the coast of Australia that experienced the miracle of growth in reverse. Through this example we show what can happen when a civilization is deprived of trade, and show why trade is essential to economic growth. In an economy with a greater number of participants trading goods and services, there are more ways to find a comparative advantage and earn more by creating the most value for others. Let’s dive right in with an example from our new friends, Bob and Ann. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1QEYD77 Next video: http://bit.ly/21gU5IU Help us caption & translate this video! http://amara.org/v/GLJf/
The Equilibrium Price and Quantity
 
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In this lesson, we investigate how prices reach equilibrium and how the market works like an invisible hand coordinating economic activity. At equilibrium, the price is stable and gains from trade are maximized. When the price is not at equilibrium, a shortage or a surplus occurs. The equilibrium price is the result of competition amongst buyers and sellers. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1WJ4kPF Next video: http://bit.ly/1Q0Bs3D
Purchasing Power Parity: When in India, Get a Haircut
 
04:28
How far does your money go in other countries? Before you hop on that next overseas flight, watch this video on the fundamental concept of purchasing power parity. ----------------------------------------------------------------------------------------- Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Development Economics Course: http://bit.ly/2wz3PDK Ask a question about the video: http://bit.ly/2x63zOi Next video: http://bit.ly/2wBvST1 Help translate this video: http://bit.ly/2iWSVTy
Game of Theories: The Monetarists
 
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Meet the monetarists! This business cycle theory emphasizes the effect of the money supply and the central bank on the economy. Formulated by Nobel Laureate Milton Friedman, it’s a “goldilocks” theory that argues for a steady rate of fairly low inflation to keep the economy on track. ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2zGiZHg Ask a question about the video: http://bit.ly/2jp4Tpz Next video: http://bit.ly/2joHHYP Help translate this video: http://bit.ly/2ABeX2o
What Is Opportunity Cost?
 
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Opportunity cost refers to the value a person could have received but passed up in pursuit of another option. --------------------------------------------------------------- Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Dictionary of Economics Course: http://bit.ly/2w7alQT Additional practice questions: http://bit.ly/2Mrzn7i Ask a question about the video: http://bit.ly/2w6NW66 Help translate this video: http://bit.ly/2MMtDCi
Trading Pollution: How Pollution Permits Paradoxically Reduce Emissions
 
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In an effort to reduce pollution, the government tried two policy prescriptions under the Clean Air Act Amendments of 1990. The first—command and control—mandated that each power plant lower its pollution by a determined amount. However, different firms face different cost curves and, because information is dispersed, policymakers don’t always know those costs. The second policy prescription—tradable pollution permits—empowered firms to use knowledge of their cost curves to buy or sell pollution permits as needed. Under this policy, the invisible hand of the market helped discover the lowest cost way of reducing pollution.  Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1p5hfkn Next video: http://bit.ly/1R24Bch Help us caption & translate this video! http://amara.org/v/GSnT/
Nominal vs. Real GDP
 
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"Are you better off today than you were 4 years ago? What about 40 years ago?" These sorts of questions invite a different kind of query: what exactly do we mean, when we say “better off?” And more importantly, how do we know if we’re better off or not? To those questions, there’s one figure that can shed at least a partial light: real GDP. In the previous video, you learned about how to compute GDP. But what you learned to compute was a very particular kind: the nominal GDP, which isn’t adjusted for inflation, and doesn’t account for increases in the population. A lack of these controls produces a kind of mirage. For example, compare the US nominal GDP in 1950. It was roughly $320 billion. Pretty good, right? Now compare that with 2015’s nominal GDP: over $17 trillion. That’s 55 times bigger than in 1950! But wait. Prices have also increased since 1950. A loaf of bread, which used to cost a dime, now costs a couple dollars. Think back to how GDP is computed. Do you see how price increases impact GDP? When prices go up, nominal GDP might go up, even if there hasn’t been any real growth in the production of goods and services. Not to mention, the US population has also increased since 1950. As we said before: without proper controls in place, even if you know how to compute for nominal GDP, all you get is a mirage. So, how do you calculate real GDP? That’s what you’ll learn today. In this video, we’ll walk you through the factors that go into the computation of real GDP. We’ll show you how to distinguish between nominal GDP, which can balloon via rising prices, and real GDP—a figure built on the production of either more goods and services, or more valuable kinds of them. This way, you’ll learn to distinguish between inflation-driven GDP, and improvement-driven GDP. Oh, and we’ll also show you a handy little tool named FRED — the Federal Reserve Economic Data website. FRED will help you study how real GDP has changed over the years. It’ll show you what it looks like during healthy times, and during recessions. FRED will help you answer the question, “If prices hadn’t changed, how much would GDP truly have increased?” FRED will also show you how to account for population, by helping you compute a key figure: real GDP per capita. Once you learn all this, not only will you see past the the nominal GDP-mirage, but you’ll also get an idea of how to answer our central question: "Are we better off than we were all those years ago?" Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/24pzD7X Next video: http://bit.ly/1TGgR8r Help us caption & translate this video! http://amara.org/v/H0PX/
The Solow Model and the Steady State
 
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Remember our simplified Solow model? One end of it is input, and on the other end, we get output. What do we do with that output? Either we can consume it, or we can save it. This saved output can then be re-invested as physical capital, which grows the total capital stock of the economy. There's a problem with that, though: physical capital rusts. Think about it. Yes, new roads can be nice and smooth, but then they get rough, as more cars travel over them. Before you know it, there are potholes that make your car jiggle each time you pass. Another example: remember the farmer from our last video? Well, unless he's got some amazing maintenance powers, in the end, his tractors will break down. Like we said: capital rusts. More formally, it depreciates. And if it depreciates, then you have two choices. You either repair existing capital (i.e. road re-paving), or you just replace old capital with new. For example, you may buy a new tractor. You pay for these repairs and replacements with an even greater investment of capital. We call the point where investment = depreciation the steady state level of capital. At the steady state level, there is zero economic growth. There's just enough new capital to offset depreciation, meaning we get no additions to the overall capital stock. A further examination of the steady state can help explain the growth tracks of Germany and Japan at the close of World War II. In the beginning, their first few units of capital were extremely productive, creating massive output, and therefore, equally high amounts available to be saved and re-invested. As time passed, the growing capital stock created less and less output, as per the logic of diminishing returns. Now, if economic growth really were just a function of capital, then the losers of World War II ought to have stopped growing once their capital levels returned to steady state. But no, although their growth did slow, it didn't stop. Why is this the case? Remember, capital isn't the only variable that affects growth. Recall that there are still other variables to tinker with. And in the next video, we'll show two of those variables: education (e) and labor (L). Together, they make up our next topic: human capital. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/23B5u4b Next video: http://bit.ly/1Sdlrvx Help us caption & translate this video! http://amara.org/v/IM5L/
The Hockey Stick of Human Prosperity
 
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In this series, Professor Don Boudreaux explores the question economists have been asking since the era of Adam Smith -- what creates wealth? On a timeline of human history, the recent rise in standards of living resembles a hockey stick -- flatlining for all of human history and then skyrocketing in just the last few centuries. Without specialization and trade, our ancient ancestors only consumed what they could make themselves. How can specialization and trade help explain the astonishing growth of productivity and output in such a short amount of time—after millennia of famine, low life expectancy, and incurable disease? What topic should we do next? http://bit.ly/1QWdvOn Ask a question about the video: http://bit.ly/21HwvW1 Next video: http://bit.ly/1Qum40J Help us caption & translate this video! http://amara.org/v/Elbp/
Game of Theories: Real Business Cycle
 
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Many economic downturns throughout human history can be explained by real business cycle (RBC) theory. So what makes this theory “real” and what are its drawbacks? We’ll cover both in this five-minute tour of RBC. ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2jLs7GD Ask a question about the video: http://bit.ly/2AjRPcB Next video: http://bit.ly/2z7RxBk Help translate this video: http://bit.ly/2zoC7N6
Introduction to Fiscal Policy
 
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A recession hits and the government increases spending to stimulate the economy. How is this any different from increased government spending during a boom? ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2wEg5nz Ask a question about the video: http://bit.ly/2iDOux3 Next video: http://bit.ly/2glOiBx Help translate this video: http://bit.ly/2vmfvuw
Budget Constraints
 
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Think through all of the variables that determine the price of a cup of coffee. It might help to imagine the coffee beans on the farm first. Consider the land costs and the price of the farmer’s labor. What about transportation of the beans to the roaster? There are packaging costs, oil costs, driver costs...and we’re still only talking about the beans! Once the roasted beans finally make it to your local coffee shop, they still have to be turned in that cup of coffee. The cost of rent for the building is a factor in the price of the final good, as is the labor of the barista and the price of electricity in your area. We’re barely scratching the surface here, but you get the idea that a ton of variables are behind the price of even a relatively simple good like a cup of coffee. What you, the consumer, are able and willing to pay is yet another one. Your salary helps set your budget constraints. And your budget constraints are a crucial variable in helping you decide whether to spend $5 on that cup of coffee, or $5 on something else. In this video, we’ll examine what budget constraints look like and how they function by graphing a simple example: $50 to spend on $5 coffees or $10 pizzas. You’ll see how the graph shifts as variables change. We’ll also use this example talk about a fundamental concept in economics that can help you make better decisions: opportunity costs. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/2s0uZ5B Next video: http://bit.ly/2rHPUY1
Adam Smith, Theory of Moral Sentiments
 
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Adam Smith's Theory of Moral Sentiments (1759) lays out his moral philosophy, and provides the philosophical and psychological underpinnings of the better-known Inquiry Into the Nature and Causes of the Wealth of Nations (1776). In this video, prepared for the History of Economic Thought course for economics majors at Northwestern University, I highlight the main ideas in Theory of Moral Sentiments and their relevance to Smith's subsequent works. Great Economists: Classical Economics and its Forerunners course: http://mruniversity.com/courses/great-economists-classical-economics-and-its-forerunners Ask a question about the video: http://mruniversity.com/courses/great-economists-classical-economics-and-its-forerunners/adam-smith-theory-moral-sentiments#QandA Next video: http://mruniversity.com/courses/great-economists-classical-economics-and-its-forerunners/adam-smith%E2%80%99s-theory-growth
The Money Multiplier
 
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When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put. This practice is known as fractional reserve banking. Now, it’s fairly rare for a bank to only have 10% in reserves, and the number fluctuates. Since checkable deposits are part of the U.S. money supplies, fractional reserve banking, as you might have guessed, can have a big impact on these supplies. This is where the money multiplier comes into play. The money multiplier itself is straightforward: it equals 1 divided by the reserve ratio. If reserves are at 10%, the minimum amount required by the Fed, then the money multiplier is 10. So if a bank has $1 million in checkable deposits, it has $10 million to work with for stuff like loans and reserves. Now, typically, the money multiplier is more like 3, because banks can always hold more in reserves than the minimum 10%. When the money multiplier is higher, like during a boom, this gives the Fed more leverage to move M1 and M2 with a small change in reserves. But when the multiplier is lower, such as during a recession, the Fed has less leverage and must push harder to wield its indirect influence over M1 and M2. Next up, we’ll take a closer look at how the Fed controls the money supply and how that has changed since the Great Recession. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2eHWWtC Ask a question about the video: http://bit.ly/2utp1IH Next video: http://bit.ly/2udpA7U
Asymmetric Information and Health Insurance
 
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In this video, we discuss asymmetric information, adverse selection, and propitious selection in relation to the market for health insurance. Health insurance consumers come in a range of health, but to insurance companies, everyone has the same average health. Consumer have more information about their health than do insurers. How does this affect the price of health insurance? Why would some consumers prefer to not buy health insurance at all? And how does this all relate to the Affordable Care Act? Let’s dive in. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1S1qQ75 Next video: http://bit.ly/21raRSr Help us caption & translate this video! http://amara.org/v/HIE9/
What Is the Rule of 70?
 
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What’s the “rule of 70?” The rule of 70 is an easy method of estimating how quickly a variable will double if you know its annual growth rate. If a variable is growing at a rate of x% per period, you simply take 70 and divide it by x. The rule of 70 is useful for all sorts of applications. For example, if you’ve saved some money in an investment account that’s growing at 5% per year, you can divide 70 by 5 to get an approximation for how quickly your savings will double. No complicated math required. But that’s not all! You can calculate how long it will take a country’s GDP to double, how quickly your startup’s users will double given its current growth rate, or when the number of bacteria in a petri dish will double. As you can see, there are many different applications of this rule! In the video, we’ll walk you through a few scenarios where using the rule 0f 70 lets you easily see the power of compounding without the trouble of actually doing the compounding math. (Bonus: You’ll also learn how to apply the rule of 70 in reverse.) MRU covers the rule of 70 in its video on "Growth Miracles and Growth Disasters" (http://bit.ly/2sWOMAj) in the Principles of Macroeconomics course. We also answer your questions on the rule of 70 in our Office Hours video on the topic (http://bit.ly/2shXHdZ). Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Dictionary of Economics: http://bit.ly/2sMAsfy Ask a question about the video: http://bit.ly/2shWrY2
Basic Facts of Wealth
 
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We know that there are rich countries, poor countries, and countries somewhere in between. Economically speaking, Japan isn’t Denmark. Denmark isn’t Madagascar, and Madagascar isn’t Argentina. These countries are all different. But how different are they? That question is answered through real GDP per capita—a country’s gross domestic product, divided by its population. In previous videos, we used real GDP per capita as a quick measure for a country’s standard of living. But real GDP per capita also measures an average citizen’s command over goods and services. It can be a handy benchmark for how much an average person can buy in a year -- that is, his or her purchasing power. And across different countries, purchasing power isn’t the same. Here comes that word again: it’s different. How different? That’s another question this video will answer. In this section of Marginal Revolution University’s course on Principles of Macroeconomics, you’ll find out just how staggering the economic differences are for three countries—the Central African Republic, Mexico, and the United States. You’ll see why variations in real GDP per capita can be 10 times, 50 times, or sometimes a hundred times as different between one country and another. You’ll also learn why the countries we traditionally lump together as rich, or poor, might sometimes be in leagues all their own. The whole point of this? We can learn a lot about a country’s wealth and standard of living by looking at real GDP per capita. But before we give too much away, check out this video -- the first in our section on The Wealth of Nations and Economic Growth. Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1RnQCQL Next video: http://bit.ly/1R1RjN8 Help us caption & translate this video! http://amara.org/v/HdZ5/
What Is the Principal-Agent Problem?
 
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The principal-agent problem is one that pops up all the time in our daily lives. How have you dealt with asymmetric information in the past? ----------------------------------------------------------------------------------------- Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Dictionary of Economics Course: http://bit.ly/2EWL3vW Additional practice questions: http://bit.ly/2CngKNn Ask a question about the video: http://bit.ly/2oyZ9IY Help translate this video: http://bit.ly/2ov91Ef
Introduction to Consumer Choice
 
04:42
Everyday, you make tons of decisions about consumption. Your choices about what and how much of a good to buy are influenced by the laws of supply and demand. These choices are nearly endless. For example, at Starbucks, each drink is highly customizable. In fact, they offer over 80,000 combinations! When you buy a good or make a decision about how to use your time, you’re getting some sort of value, like a sense of happiness or satisfaction, out of it – economists call this “utility.” The increase in that value from buying an additional unit of a good or service is its marginal utility. When you make these decisions, you’re thinking at the margin, even if you don’t realize it. Think about how wonderful a shot of espresso, or your beverage of choice, is first thing in the morning. You probably derive quite a bit of utility! But how about a second, third, or even fourth shot of espresso? With each extra shot, you probably get a little less utility. At some point, the cost will outweigh the marginal utility. When you add up the satisfaction you get out of all of the shots of espresso, that is your total utility. Since each additional shot of espresso has a little less utility, economists refer to this concept as diminishing marginal utility. This is true for all goods and activities, but the amount of utility and marginal utility depends on the individual. For example, let’s say that Starbucks drops the price of shot of espresso. This can change the quantity demanded on aggregate because for some people, the drop in price will make the marginal utility they derive from an extra shot now worth the cost. But perhaps that’s not true for you and your consumption will not change. Are you starting to see how you instinctively think and act at the margin in your daily life? Up next, we’ll explore other factors beyond price that affect your habits as a consumer, such as preferences and income. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/2qr83Hg Next video: http://bit.ly/2qBZauA
Real GDP Per Capita and the Standard of Living
 
05:14
They say what matters most in life are the things money can’t buy. So far, we’ve been paying attention to a figure that’s intimately linked to the things money can buy. That figure is GDP, both nominal, and real. But before you write off GDP as strictly a measure of wealth, here’s something to think about. Increases in real GDP per capita also correlate to improvements in those things money can’t buy. Health. Happiness. Education. What this means is, as real GDP per capita rises, a country also tends to get related benefits. As the figure increases, people’s longevity tends to march upward along with it. Citizens tend to be better educated. Over time, growth in real GDP per capita also correlates to an increase in income for the country’s poorest citizens. But before you think of GDP per capita as a panacea for measuring human progress, here’s a caveat. GDP per capita, while useful, is not a perfect measure. For example: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you might think the three countries have about the same standard of living. But, a much larger portion of Nigeria's population lives on less than $2/day than the other two countries. This isn’t a question of income, but of income distribution—a matter GDP per capita can’t fully address. In a way, real GDP per capita is like a thermometer reading—it gives a quick look at temperature, but it doesn’t tell us everything. It’s far from the end-all, be-all of measuring our state of well-being. Still, it’s worth understanding how GDP per capita correlates to many of the other things we care about: our health, our happiness, and our education. So join us in this video, as we work to understand how GDP per capita helps us measure a country’s standard of living. As we said: it's not a perfect measure, but it is a useful one. Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1WJcJ5w Next video: http://bit.ly/1S1CxuA Help us caption & translate this video! http://amara.org/v/H04s/
Human Capital & Conditional Convergence
 
06:42
In our previous macroeconomics video, we said that the accumulation of physical capital only provides a temporary boost to economic growth. Does the same apply to human capital? To answer that, consider this: what happens to all new graduates, in the end? For a while, they’re productive members of the economy. Then age takes its toll, retirement rolls around, and eventually, the old workforce is replaced with a new infusion of people. But then, the cycle restarts. You get a new workforce, everyone’s productive for a while, and then they too retire. Does this ring a bell? It should, because this is similar to the depreciation faced by physical capital. Similarly, are there diminishing returns to education? It likely wouldn’t pay off for everyone to have a PhD, or for everyone to master Einstein’s great theories. That means the logic of diminishing returns, and the idea of a steady state, also applies to human capital. So, now we can revise our earlier statement. Now we can say that the accumulation of any kind of capital, only provides a temporary boost in economic growth. This is because all kinds of capital rust. So, one way or another, we’ll reach a point where new investments can only offset depreciation. It’s the steady state, all over again. However, what does the journey to steady state look like? The Solow model predicts that poor countries should eventually catch up to rich countries, especially since they’re growing from a lower base. And given their quicker accumulation of capital, poorer nations should also grow faster, than their more developed neighbors. And eventually, every country should reach similar steady states. In other words, we would see growth tracks that all eventually converge. So, why isn’t this always the case? Why, in some cases, are we seeing “Divergence, Big time,” as coined by economist Lant Pritchett? The answer to these questions, lies in the institutions of different countries and the incentives they create. Assuming that a certain set of countries do have similar institutions, that’s where we see the convergence predicted by the Solow model. We see that poorer countries do grow faster than their richer counterparts. And conditional on having similar institutions, eventually, even poorer countries will reach a similar steady state of output as more developed nations. We call this phenomenon conditional convergence. You can think of it as a national game of catch-up, with catch-up only happening if institutions don’t differ. What happens though, once all this catching up is done? Let’s not forget that there’s still another variable in the Solow model. This is variable A: ideas -- the subject of our next video. There, we’ll show you how ideas can keep a country moving along the cutting edge of growth. Catch up on the Solow model: Introduction to the Solow model: http://bit.ly/1SMud3G Physical Capital and Diminishing Returns: http://bit.ly/1SpLT31 The Solow Model and the Steady State: http://bit.ly/233vDGw Office Hours video on the Solow model: http://bit.ly/1VQ8XLe Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1NwAtKJ Next video: http://bit.ly/1SHvrdp Help us caption & translate this video! http://amara.org/v/IR1M/
Why Governments Create Inflation
 
08:33
Inflation can carry with it quite a few costs. But some governments, like Zimbabwe under President Robert Mugabe in the early 2000s, will go out of their to way to create inflation. Why? Well, in the Zimbabwe example, the government printed the money and used it to buy goods and services. The ensuing hyperinflation acted as a tax that transferred wealth from the citizens to the government. However, this is a fairly uncommon reason. Inflation doesn’t make for a good tax and it’s a last resort for desperate governments that are otherwise unable to raise funds. There are other benefits to inflation that would make governments want to create it. In the short run, inflation can actually boost economic output. However, as we’ve previously covered, an increase in the money supply leads to an equal increase in prices in the long run. If there’s a recession, governments might create inflation to spur productivity and ease the economic downturn. However, this type of inflationary boosting can be abused. Long-term boosting causes people to simply expect and prepare for it. Reducing inflation is also costly. If the process is reversed and the growth in the money supply decreases, we get disinflation. Unemployment will likely increase in the short run and an economy can go through a recession. But in the long run, prices will adjust as well. Inflation can be a neat trick for governments to boost productivity in an economy. But it can easily get out of hand and has even been likened to a drug. Once you start, you need more and more. And stopping is awfully painful as the economy shrinks. This concludes our section on Inflation and the Quantity Theory of Money. Up next in Principles of Macroeconomics, we’ll be digging into Business Fluctuations. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2lcPkAy Next video: http://bit.ly/2kMc9ub
What Is Money?
 
04:57
That may seem like a really simple question, but it’s actually kind of complicated. Paper bills and coins, or currency, is obviously money. But it doesn’t end there. Technically, “money” is anything that is a widely accepted means of payment. This has changed throughout history. Once upon a time, cattle could be considered money. Or cowry shells. Today, cryptocurrencies like Bitcoin are being added to the mix. Given that there’s no set definition for what makes a commodity money, there are a few measurements for the U.S. money supplies. The first, MB (or “monetary base”) measures currency and reserve deposits. This is what the Fed has the most direct control over. Our next stop will be fractional reserve banking and the money multiplier. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2v9RG5K Ask a question about the video: http://bit.ly/2u1rdZg Next video: http://bit.ly/2txoymI
Division of Labor: Burgers and Ships
 
03:50
A simple example of hamburgers being made at home versus at a restaurant can help illuminate the explosion of prosperity since the Industrial Revolution. The story of the division of labor and development of specialized tools is not a new one — Adam Smith began The Wealth of Nations with this concept. Yet it still has tremendous explanatory power about the world we inhabit. What topic should we do next? http://bit.ly/1QWdvOn Ask a question about the video: http://bit.ly/1VTve7j Next video: http://bit.ly/24EdNO2 Help us caption & translate this video! http://amara.org/v/Elbq/
Intro to Stock Markets
 
03:28
Today, we’ll examine a new kind of financial intermediary: stock markets. As an individual, you participate in the stock market when you buy a company’s shares. This turns you into a part-owner, entitled to some of the company's profits. Sometimes, profits are paid out directly via dividends. Other times, profits are reinvested for company growth. In this case, you benefit by seeing the value of your shares rise in tandem with this growth. Still, the buying and selling of stock doesn't actually create any new investment. Buying and selling only transfers ownership between stockholders. What actually creates investment is when a company offers stock to the public for the first time (known as an Initial Public Offering or IPO), which is when it issues new shares to raise money for key ventures. This process of turning savings into investment is what makes the stock market an intermediary. A key caveat, though—buying stock essentially means betting on a company. As with all gambles, sometimes it pays off, sometimes, it doesn't. For you as a saver, this means some of your stocks will win, and others, not so much. This volatility makes stock markets more risky than banks. Bank savers typically don't have to worry about fluctuations in the value of their deposits. As for the entrepreneurial side, the stock market is a key institution encouraging new businesses. For a founder, the payoff typically comes during the IPO. An IPO allows founders to sell some of their ownership (in a now more-valuable company) so they can diversify their own holdings. Next time, we'll look at the third kind of intermediary: bond markets. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/29fVsib Next video: http://bit.ly/29jDHUT Help us caption & translate this video! http://amara.org/v/P3sZ/
Costs of Inflation: Financial Intermediation Failure
 
06:04
In the previous video, we learned that inflation can add noise to price signals resulting in some costly mistakes from price confusion and money illusion. Now, we’ll look at how it can interfere with long-term contracting with financial intermediaries. Let’s say you want to take out a big loan, such as a mortgage on a house. The financial intermediary (in this case, a commercial bank) is going to charge you an interest rate as their profit for loaning you the money. In this situation, inflation has the potential to work against you or it can work against the bank. If the bank charges you a nominal interest rate (i.e., the interest rate on paper before taking inflation into account) of 5% and inflation climbs unexpectedly to 10% for the year, the real interest rate (nominal minus inflation) falls to -5%. The bank actually loses money. However, if inflation has been higher and banks are charging 15% for mortgages and inflation rates fall unexpectedly to 3%, you’re stuck paying a real interest rate of 12%! The above scenarios are similar to what actually happened in the United States in the 1960s and 1970s. Inflation was low in the 60s. But then in 70s, inflation rates climbed up unexpectedly. People that purchased a home in the 60s lucked out with low interest rates on their mortgages coupled with higher inflation, and many were able to pay off the loans more quickly than expected. But anyone that purchased a higher interest rate mortgage in the 70s only saw inflation fall back down. It was good for the banks and a costly choice for the homeowners. They were saddled with a high-interest mortgage while lower inflation meant a lower increase in wages. It’s not that the people buying homes in the 1960s were smarter than those in the 70s. As we’ve noted in previous videos, inflation can be very difficult to predict. When banks expect that inflation might be 10% in the coming years, they will generally adjust their nominal interest rates in order to achieve the desired real interest rate. This relationship between real and nominal interest rates and inflation is known as the Fisher effect, after economist Irving Fisher. We can see the Fisher effect in the data for nominal interest rates on U.S. mortgages from the 1960s through today. As inflation rates rise, nominal interest rates try to keep up. And as the inflation rates fall, nominal interest rates trail behind. Now, if inflation rates are both high and volatile, lending and borrowing gets scary for both sides. Long-term contracts like mortgages become more costly for everyone with much higher risk, so it happens less. This is damaging for an economy. Coordinating saving and investment is an important function of the market. If high and volatile inflation is making that inefficient and less common, total wealth declines. Up next, we’ll explore why governments create inflation in the first place. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2ka5M3j Next video: http://bit.ly/2lrhcil
Physical Capital and Diminishing Returns
 
05:03
Do you recall our question about Germany and Japan from our previous video? How did they achieve record economic growth following World War II? Today's video will help answer that question. We'll be digging into the K variable of our simplified Solow model: physical capital. To help with our discussion, we’ll be exploring two specific concepts. The first is the iron logic of diminishing returns which states that, for each new input of capital, there is less and less output produced. Your first input of capital will likely be the most productive, because you’ll allocate this first unit to the most important, value-adding tasks. The second concept we’ll cover is the marginal product of capital. This concept describes the output created by each new unit of invested capital. Can you already see how these two forces of capital help answer our question about Germany and Japan? For these two war-torn countries, the first few units of invested capital had a lot of bang for their buck. The first roads between destroyed cities, the first new steel mills, the first new businesses—these helped boost their growth rate tremendously. Even more so, remember that Germany and Japan were growing from a low economic base after the war. It's easy to grow a lot when the base is small. But all else being equal, you'd rather have a larger base, and grow slower. Capital has some more nuances worth thinking about, which we'll show in the next video. So get to watching, and in our next macroeconomics video, we'll show you yet another problem surrounding physical capital. Related video: Puzzle of Growth: http://bit.ly/1T5yq18 Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1SgTXz5 Next video: http://bit.ly/1MvGg2D Help us caption & translate this video! http://amara.org/v/IF0a/
Monetary Policy and the Federal Reserve
 
03:02
Spider-Man fans likely recall Uncle Ben advising his nephew, Peter Parker, that “With great power, comes great responsibility.” As it turns out, that sage wisdom is also pretty applicable to the U.S. Federal Reserve System (aka the Fed). The Fed Chairperson, currently Janet Yellen, may not shoot webs out of her wrists, but she and the organization she represents have some super powers over our money supply. The Fed also has quite a few limitations – monetary policy can only do so much. We’ve previously covered the quantity theory of money and long- and short-run economic growth. If you think back to those videos, you’ll remember that an increase in the money supply (which, in the U.S., is controlled by the Fed) only affects growth in the short-run. Even then, it’s often not smooth sailing. In this video, we’ll give you an introduction to the function of the Fed as well as some of the problems it faces, and raise the question, “What is money?” Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2tu13OM Next video: http://bit.ly/2t08M3A
Game of Theories: The Keynesians
 
08:04
When the economy is going through a recession, what should be done to ease the pain? And why do recessions happen in the first place? We’ll take a look at one of four major economic theories to find possible answers – and show why no theory provides a silver bullet. ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2j5noPM Ask a question about the video: http://bit.ly/2ydroAt Next video: http://bit.ly/2zop3UO Help translate this video: http://bit.ly/2yduioW
How the Division of Knowledge Saved My Son's Life
 
04:04
In this video, Professor Boudreaux explains how the specialization of knowledge helped his two-year old son overcome a life-threatening illness. The science of medicine has enjoyed significant progress since the 19th century thanks to the vast size of the market and demand for health care services. Despite his foresight, Adam Smith never could have imagined the degree of expertise held by some of today's medical specialists. What topic should we do next? http://bit.ly/1QWdvOn Ask a question about the video: http://bit.ly/21adJB2 Next video: http://bit.ly/1QumvrS Help us caption & translate this video! http://amara.org/v/Elbs/
Growth Miracles and Growth Disasters
 
04:26
In previous videos, you learned two things. First, that there can be large disparities in economic wealth among different countries. And second, you learned that one key factor drives that disparity: growth rate. As we said, it changes everything. But just how transformative is a country's growth rate? Take Argentina, for example. In 1950, the Argentine standard of living was similar to that of many Western European countries. Up until 1965, Argentina's per capita income was ahead of many of its neighbors. On the other hand, Japan in 1950 was on the other end of the spectrum. Japan had been ravaged by war and was only just beginning to find its economic footing again. At that time, Japan's standard of living was roughly the same as that of Mexico. It was quite poor, compared to the Argentina of the same era. But look at what's happened in the past 65 years. Japan today is one of the world's most prosperous countries. Since 1950, it has managed to double its living standards about every eight years. Argentina, on the other hand, has stagnated. Once, Argentina had double the standard of living of Japan. But Japan now doubles them today, with a standard of living 10 times higher than the one it had in 1950. In economic terms, Japan is what we would call a growth miracle. It's in the same class as other growth success stories, like South Korea and China which have experienced the “hockey stick” of prosperity. (India seems like it may have started on this path as well.) These countries are proof of one thing: with the right factors, a poor country can not only grow, but it can do so quickly. It can catch up with developed countries at an astonishing rate. What took the United States two centuries of steady growth can now be achieved by other countries in about one-fifth the time. Catch-up can happen in 40 years—about the span of a generation or two. That's the good news. The bad news is, while growth can skyrocket in some countries, growth isn’t guaranteed at all. Argentina is an example of this. It grew well for a time, and then it stalled. Even worse than Argentina, are countries like Niger, and Chad, which are the very worst of growth disasters. Not only are these countries in extreme poverty, but they also have little to no growth. More than that, these countries have never experienced substantial growth in the past. But why does that all matter? It matters because growth isn't just about numbers. It's not just about more goods and services. When a country grows, its citizens often end up with longer, healthier, and happier lives. Conversely, the countries that are growth disasters have citizens in poverty, with shorter and less happier lives. As bleak as this seems, it’s the plain truth: while growth miracles are possible, growth disasters are, too. Which leaves us with another question: what causes either state? What leads to growth, prosperity, health, and happiness? And then, what leads to the opposite situation? We're excited to share the answer, but that's a topic for future videos. For now, check out this video to get up to speed on growth miracles and growth disasters. Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/21rp5CK Next video: http://bit.ly/1LGgSkZ Help us caption & translate this video! http://amara.org/v/HkQU/
Consumer Optimization
 
06:29
We live in a world of scarcity. In other words, what we want outweighs what we can attain. Why? Well, we have limited resources – money, options, time, etc. When you’re making choices about what to buy, your budget, the prices of goods and services, and your preferences all act as constraints. To better illustrate this idea, let’s return to our simple example of pizzas and coffees. Let’s also assume that you like both pizza and coffee and want more of both. If you were to look at a map of your indifference curves for these goods, you’d see that you get the most utility on the indifference curve farthest from the origin. But, since scarcity is our reality, that level of utility is probably not achievable. Combining your budget constraint with your indifference curves can help you see how to get maximum utility given your resources. Any point at which your budget constraint lies tangent to an indifference curve is an optimal combination of pizzas and coffees. Why is it optimal? Two simple reasons: 1) You can afford it, and 2) it will give you the most happiness (aka utility). In this video, Arizona State University’s Professor Joana Girante will further explain the concept consumer optimization and how it applies to your everyday life. She’ll also cover why your points of consumer optimization will never intersect, but always lie tangent to, your indifference curves. Finally. Prof. Girante will go over marginal rates of substitution in more detail. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/2sRKDAa Next video: http://bit.ly/2k1nUOK
Causes of Inflation
 
06:46
In the last video, we learned the quantity theory of money and its corresponding identity equation: M x V = P x Y For a quick refresher: ‌•M is the money supply. ‌•V is the velocity of money. ‌•P is the price level. ‌•And Y is the real GDP. In this video, we’re rewriting the equation slightly to divide both sides by Y and explore the causes behind inflation. What we discover is that a change in P has three possible causes – changes in M, V, or Y. You probably know that prices can change a lot, even over a short period of time. Y, or real GDP, tends to change rather slowly. Even a seemingly small jump or fall in Y, such as 10% in a year, would signal astonishing economic growth or a great depression. Y probably isn’t our usual culprit for inflation. V, or the velocity of money, also tends to be rather stable for an economy. The average dollar in the United States has a velocity of about 7. That may fall or rise slightly, but not enough to influence prices. That leaves us with M. Changes in the money supply are the driving factor behind inflation. Put simply, when more money chases the same amount of goods and services, prices must rise. Can we put this theory to the test? Let’s look at some real-world examples and see if the quantity theory of money holds up. In Peru in 1990, hyperinflation came into full swing. If we track the growth rate of the money supply to the growth rate of prices, we can see that they align almost perfectly on a graph with both clocking in around 6,000% that year. If we plot the growth rates of the money supply along with the growth rates of prices for a many countries over a long stretch of time, we can see the same relationship. We’ll wrap-up the causes of inflation with three principles to keep in mind as we continue exploring this topic: ‌•Money is neutral in the long run: a doubling of the money supply will eventually mean a doubling of the price level. ‌•“Inflation is always and everywhere a monetary phenomena.” – Milton Friedman ‌•Central banks have significant control over a nation’s money supply and inflation rate. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2jR4yKz Next video: http://bit.ly/2jTTTiW
What Is Deadweight Loss?
 
03:23
Deadweight loss is lost gains from trade caused by a market inefficiency. --------------------------------------------------------------- Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Dictionary of Economics Course: http://bit.ly/2CZPtkb Additional practice questions: http://bit.ly/2SbME3Z Ask a question about the video: http://bit.ly/2yYaJ5L Help translate this video: http://bit.ly/2EClqAI
The Aggregate Demand Curve
 
05:48
This wk: Put your quantity theory of money knowledge to use in understanding the aggregate demand curve. Next wk: Use your knowledge of the AD curve to dig into the long-run aggregate supply curve. The aggregate demand-aggregate supply model, or AD-AS model, can help us understand business fluctuations. In this video, we’ll focus on the aggregate demand curve. The aggregate demand curve shows us all of the possible combinations of inflation and real growth that are consistent with a specified rate of spending growth. The dynamic quantity theory of money (M + v = P + Y), which we covered in a previous video, can help us understand this concept. We’ll walk you through an example by plotting inflation on the y-axis and real growth on the x-axis -- helping us draw an aggregate demand curve! Next week, we’ll combine our new knowledge on the AD curve with the long-run aggregate supply curve. Stay tuned! Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2oEWj4B Next video: http://bit.ly/2oiuIFy
Signaling
 
06:46
A signal is an action that reveals information. Let’s look at higher education, for example. A large fraction of the value you receive from your degree comes on the day you earn your diploma. Your expected wages don’t increase with each class you complete along the way; instead, they spike sharply at the end when you receive your diploma. This is often referred to as the “Sheepskin Effect” because diplomas used to be printed on sheepskin. Nobel Prize winner Michael Spence did research on this subject and found that education is valuable not necessarily because it creates valuable skills, but rather that it signals valuable skills. So how does the signal, represented by a degree, alleviate asymmetric information? Employers don’t necessarily know how smart or skilled you are. Your degree, however, provides a credible signal of these traits and gives them more information they can use in the hiring process. What other signals exist? We discuss examples like diamond engagement rings, why criminals tattoo their face, and why a peacock has a colorful tail. Let us know what examples you come up with in the comments. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/1Lcs5il Next video: http://bit.ly/2s9CF29 Help us caption & translate this video! http://amara.org/v/HIEc/
Econ Duel: Fiat Money vs. the Gold Standard
 
09:59
Throughout the 19th century and up until the Great Depression, the gold standard was used in the United States. It was largely abandoned in the 20th century. But what is the gold standard? It’s a system for defining the value of a currency in terms of gold. In other words, you could exchange your $20 paper bill for actual gold at one point in history. Under a fiat money system, such as the one we have in the U.S. today, that $20 paper bill is inconvertible. You can’t exchange it for a backing store of value because there isn’t one. In this Econ Duel, economists Scott Sumner and Larry White, who both focus on monetary theory and policy, debate the positives and drawbacks to the gold standard vs. fiat money, and the role of central banks. On the side of the gold standard, White argues that, when properly implemented without a central bank intervening, it provides a more predictable price level and lower average inflation. Sumner, taking up the banner for fiat money, argues that the gold standard is simply a rule that worked well in the 19th century and that a good fiat money system is, for this day and age, a better alternative. Who won this Duel? Do you feel like you walked away with a better sense of the complexities of monetary policy? We’d love to hear from you! Let us know what you thought about this Duel in the comments. Ask a question about the video: http://bit.ly/2h8KMpC Econ Duel course: http://bit.ly/1U715Qd Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Listen on Soundcloud: http://bit.ly/2gtWMBf And on iTunes: http://apple.co/2himNaA
Game of Theories: The Austrians
 
07:15
Austrian business cycle theorists argue that the central bank could be distorting market signals for entrepreneurs. How does this contribute to booms and busts? ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2icwMkP Ask a question about the video: http://bit.ly/2Agb9EH Next video: http://bit.ly/2i9D7NL Help translate this video: http://bit.ly/2AErHcB
Fiscal Policy and Crowding Out
 
05:26
Even timely, targeted, and temporary fiscal policy might not work as planned. With so many variables in an economy, a central bank’s monetary policy and savvy consumers can unintentionally help to offset it. ------------------------------------------------------------------------------------------------------------ Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/2g9PDMi Ask a question about the video: http://bit.ly/2y78LRW Exam coming soon! Help translate this video: http://bit.ly/2ydl1jp
Puzzle of Growth: Rich Countries and Poor Countries
 
08:33
Throughout this section of the course, we’ve been trying to solve a complicated economic puzzle—why are some countries rich and others poor? There are various factors at play, interacting in a dynamic, and changing environment. And the final answer to the puzzle differs depending on the perspective you're looking from. In this video, you'll examine different pieces of the wealth puzzle, and learn about how they fit. The first piece of the puzzle, is about productivity. You'll learn how physical capital, human capital, technological knowledge, and entrepreneurs all fit together to spur higher productivity in a population. From this perspective, you'll see economic growth as a function of a country's factors of production. You’ll also learn what investments can be made to improve and increase these production factors. Still, even that is too simplistic to explain everything. So we'll also introduce you to another piece of the puzzle: incentives. In previous videos, you learned about the incentives presented by different economic, cultural, and political models. In this video, we'll stay on that track, showing how different incentives produce different results. As an example, you'll learn why something as simple as agriculture isn't nearly so simple at all. We'll put you in the shoes of a hypothetical farmer, for a bit. In those shoes, you'll see how incentives can mean the difference between getting to keep a whole bag of potatoes from your farm, or just a hundredth of a bag from a collective farm. (Trust us, the potatoes explain a lot.) Potatoes aside, you're also going to see how different incentives shaped China's economic landscape during the “Great Leap Forward” of the 1950s and 60s. With incentives as a lens, you'll see why China's supposed leap forward ended in starvation for tens of millions. Hold on—incentives still aren’t the end of it. After all, incentives have to come from somewhere. That “somewhere” is institutions. As we showed you before, institutions dictate incentives. Things like property rights, cultural norms, honest governments, dependable laws, and political stability, all create incentives of different kinds. Remember our hypothetical farmer? Through that farmer, you'll learn how different institutions affect all of us. You'll see how institutions help dictate how hard a person works, and how likely he or she is to invest in the economy, beyond that work. Then, once you understand the full effect of institutions, you'll go beyond that, to the final piece of the wealth puzzle. And it's the most mysterious piece, too. Why? Because the final piece of the puzzle is the amorphous combination of a country’s history, ideas, culture, geography, and even a little luck. These things aren't as direct as the previous pieces, but they matter all the same. You'll see why the US constitution is the way it is, and you'll learn about people like Adam Smith and John Locke, whose ideas helped inform it. And if all this talk of pieces makes you think that the wealth puzzle is a complex one, you’d be right. Because the truth is, the question of “what creates wealth?” really is complex. Even the puzzle pieces you'll learn about don't constitute every variable at play. And as we mentioned earlier, not only are the factors complex, but they're also constantly changing as they bump against each other. Luckily, while the quest to finish the wealth puzzle isn’t over, at least we have some of the pieces in hand. So take the time to dive in and listen to this video and let us know if you have questions along the way. After that, we'll soon head into a new section of the course: we’ll tackle the factors of production so we can further explore what leads to economic growth. Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/1QEPrQ3 Next video: http://bit.ly/1WJe2Bw Help us caption & translate this video! http://amara.org/v/HrHZ/
Costs of Inflation: Price Confusion and Money Illusion
 
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The inflation rate can be somewhat volatile and unpredictable. For example, let’s take the period between 1964 and 1983 in the U.S. The inflation rate jumped around from 1.3% in 1964 to 5.9% in 1970, and all the way up to 14% in in 1980, before dipping back down to 3% in 1983. These dramatic changes, though still fairly mild in the realm of inflation, caught people off-guard. Peru’s inflation rates in the late 1980s through the early 1990s were on even more of a rollercoaster. Clocking in at 77% in 1986, its inflation rate was already quite high. But by 1990, it had jumped to 7,500%, only to fall to 73% a mere two years later. High and volatile inflation rates can wreak havoc on the price system where prices act as signals. If the price of oil rises, it signals scarcity of that product and allows consumers to search for alternatives. But with high and volatile inflation, there’s noise interfering with this price signal. Is oil really more scarce? Or are prices simply rising? This leads to price confusion – people are unsure of what to do and the price system is less effective at coordinating market activity. Money illusion is another problem associated with inflation. You’ve likely experienced this yourself. Think of something that you’ve noticed has gotten more expensive over the course of your lifetime, such as a ticket to the movies. Is it really that going out the movies has become a pricier activity, or is it the result of inflation? It’s difficult for us to make all of the calculations to accurately compare rising costs. This is known as “money illusion” – or when we mistake a change in the nominal price with a change in the real price. Inflation, especially when it’s high and volatile, can result in some costly problems for everyone. Next up, we’ll look at how it redistributes wealth and can break down financial intermediation. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2jnFcVR Next video: http://bit.ly/2jnFlZp
Exploring Equilibrium
 
05:35
In this video, we’ll review equilibrium in the adjustment process, showing that the equilibrium price is the only stable price. Then we’ll take a look at equilibrium quantity, where quantity demanded is equal to quantity supplied, and how this plays out in a free market economy that seeks to maximize gains from trade. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/24pv39I Next video: http://bit.ly/1VEEiNi
Moral Hazard
 
04:10
Imagine you take your car in to the shop for routine service and the mechanic says you need a number of repairs. Do you really need them? The mechanic certainly knows more about car repair than you do, but it’s hard to tell whether he’s correct or even telling the truth. You certainly don’t want to pay for repairs you don’t need. Sometimes, when one party has an information advantage, they may have an incentive to exploit the other party. This type of exploitation is called moral hazard, and can happen in many situations — a taxi driver who takes the “long route” to get a higher fare from a tourist, for example. In this video, we cover moral hazard and what is known as the principal-agent problem. Microeconomics Course: http://bit.ly/20VablY Ask a question about the video: http://bit.ly/21raqYk Next video: http://bit.ly/1Q0wow8 Help us caption & translate this video! http://amara.org/v/HIEa/