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General Economic Principles and Macroeconomic Indices

Please provide information and explanations on the following:

I. The three General Economic Principles
a.) All choice involve costs
b.) People Respond to Incentives in Predictable Ways
c.) The Consequences of Choices Lie in the Future.

II. On Macroeconomic indices:
a.) Unemployment rate
b.) GDP Output gap
c.) Consensus GDP growth
d.) Publicly held debt

References:

Schug, Mark C. and Wentworth, Donald R. (2000). Handy Dandy Guide (HDC). National Council on Economic Education. Retrieved on April 11, 2013 from http://www.vcee.org/misc/userfiles/file/Six%20Core%20Economic%20Principles.pdf.

The Economist (January 26, 2013 issue).Looking better: Some risks, but less fear, as the second term gets under way. Retrieved on April 11, 2013 from http://www.economist.com/news/united-states/21570738-some-risks-less-fear-second-term-gets-under-way-looking-better.:

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Unemployment Rate:

The Economist article paints a rosy picture of the future. They credit Obama with major economic reforms that have ended the recession. Under Obama, a generous estimate is that maybe 790,000 jobs have been created since Obama took office. Since the number of people eligible to work in the US grew by 8.4 million people since Obama was elected, it seems that The Economist's picture is too optimistic.

Unemployment is a slippery term since there are many different ways to calculate it. The Economist relies on U1, which only records the number of people out of work for 15 months or longer. Military personnel are exempted.

The U6 indicator is more accurate, but is rarely reported on mainstream news. This measure refers to the total unemployed, those who get poorly paid part time work while they're looking and those who are "marginally attached." These are discouraged workers that have given up finding jobs. If this is the measure of unemployment, that includes underemployment and people who have just dropped out, the rate calculated by U6 is 23%.

The problem is that, in terms of incentives, using the U1 figure provides false confidence. The Economist claims that the investor confidence index has dropped. But if it dropped on that basis, it is faulty and misleading.

This also means that more household belt tightening is necessary as the economy continues its recession. Therefore, in terms of choices and costs, households have to streamline their needs and be very careful with their money. If on the other hand, households decide to borrow, then their debt burden will grow, but at least, it wold buy them some time.

The Economist also claims that, since the Fed will not raise rates until at least 2015, that this means borrowing will begin to skyrocket. No evidence of this so far. In this case, the incentive of low rates is harmed by the generally poor state of the economy. In addition, choice is hindered across the board: banks are wary of lending, government regulation is tighter, consumer debt is going up (and is larger than the federal debt) and therefore, the typical incentive of low rates is not doing what it normally does. Therefore, the choice is being made, in general, to hold onto money rather than invest it, at least for the time being.

GDP Output Gap:

This concept compares a theoretical measure with a real measure. Actual GDP is contrasted to "potential GDP." This latter is purely theoretical because it is a measure of output and growth if all the productive elements of an entire economy were to function at full capacity, with the only exception that the capacity must be sustainable for the long term. This must be the case because short term growth can lead to inflation and overproduction.

The Economist, quoting Jeff Sachs, holds that the US is set to grow by 3% over the next three years, on average. The only problem here is in the article itself: the possibility of households and banks re-leveraging themselves, that is, borrowing more on top of a massive consumer debt accumulation. As of early 2013, US consumer debt, taken together was over $11.34 trillion. As it stands it is unrepayable.

If all choices involve costs, then, if the Economist is right, the choice to borrow ...

Solution Summary

The general economic principles and macroeconomic indices are analyzed.

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