ECON 0110 Lecture Notes - Lecture 3: Producer Price Index, Gdp Deflator, Market Basket
Chapter 6
Micro and Macroeconomics
Microeconomics
Focuses on how decisions are made by individuals and firms and the consequences of those
decisions
Ā§
ā
Macroeconomics
Examines the overall behavior of the economy
How the actions of ALL of the individuals and firms in the economy INTERACT to
produce a particular economy-wide level of economic performance
ā”
Ā§
Not simply the sum of individual actions
Millions of individual actions compound upon one another to produce an outcome that
is not the sum of those individual actions
ā”
Ā§
Paradox of Thrift
Families and businesses are worried about hard economic times ahead and they cut
their spending.
ā”
The reduction in spending depresses the economy and businesses lay off workers.
ā”
Families and businesses end up worse off than if they hadn't cut their spending.
ā”
Ā§
ā
ā¢
History of Macroeconomics
Emerged as a separate field of study during the Great Depression
Before the Great Depression, economists viewed the economy as self-regulating
Ā§
Governments' attempts to improve the economy's performance would be ineffective at best
and might make things worse
Ā§
ā
Self-Regulating Economy
Problems such as unemployment are resolved without government intervention, through
the working of the invisible hand
Ā§
Pre-1930s convention
Ā§
ā
John Maynard Keynes
This all changed during the Great Depression.
Ā§
In 1936, John Maynard Keynes published
The General Theory of Employment, Interests,
and Money
.
Ā§
This book transformed macroeconomics
Ā§
Keynesian Economics
Economic slumps are caused by inadequate spending, and they can be mitigated by
government intervention
ā”
Post 1930s conventional wisdom
ā”
Ā§
Keynes argues that government intervention, through fiscal and monetary policy can help
the economy recover from a recession.
Recessions are caused by inadequate spending.
ā”
Fiscal Policy
Changes in government spending and taxes to affect overall spending.
Ā®
i.e. tax returns
Ā®
Helps lower and middle income
Ā®
ā”
Monetary Policy
Changes in the quantity of money to alter interest rates and affect overall
spending.
Ā®
Reduce interest rates
Becomes easier to borrow money
ā
More people spend money
ā
Ā®
ā”
Ā§
ā
As a Result
Macroeconomics is often concerned with policy.
What can the government do to make macroeconomic performance better?
ā”
Ā§
During the Great Recession (2007-2008), Congress, the White House, and Federal Reserve
took policy steps to fend off the economic slump that were Keynesian in spirit.
Ā§
ā
ā¢
Macroeconomic Concerns
The Business Cycle
Ā§
The study of business cycle is the study of recessions and expansions.
Ā§
Recession (Contraction)
Period of economic downturn when output and employment are falling
ā”
From peak to trough,
ā”
Ā§
Expansions (Recoveries)
Periods of economic upturn when output and employment are rising.
ā”
From trough to peak
ā”
Ā§
Business-Cycle Peaks
The point at which the economy turns from expansion to recession,.
ā”
Ā§
Business-Cycle Trough
The point at which the economy turns from recession to expansion.
ā”
Ā§
Business Cycles
The short-run alteration between recessions and expansion
ā”
Ā§
The Pain of Recession
The most important effect of a recession is its effect on the ability of workers to find and
hold jobs.
ā”
Ā§
Procyclical
Increases in expansions, decreases in recessions
ā”
i.e. production, employment
ā”
Ā§
Countercyclical
Decreases in expansions, increases in recessions
ā”
i.e. unemployment, college enrollment
ā”
Ā§
ā
Economic Growth
Long-Run Economic Growth
The sustained upward trend in the economy's output over time
ā”
Ā§
Long-Run Growth Per Capita
A sustained upward trend in output per person
ā”
The key to higher wages and a rising standard of living
ā”
Ā§
Long-run growth is a relatively modern phenomenon.
From 1000 to 1800 real aggregate output increase by 0.2% per year
The same rate as the population grew
Ā®
No growth in per capita output
Ā®
ā”
Workers in England in the early 1700s were not much better off than they had been in
the 1200s.
ā”
Ā§
In the part 50 years, real aggregate output increased by 3.5% per year.
Caused by industrial revolution!
ā”
Ā§
ā
Inflation and Deflation
Inflation
A rising in overall level of prices
ā”
Ā§
Deflation
A falling in overall level of prices
ā”
Ā§
Supply and demand only explain why one particular good or service becomes more
expensive relative to other goods and services.
It doesn't explain why the price of goods and services in the economy may increase or
decrease
ā”
Example
When McDonald's opened in 1954, a burger cost $0.15. A burger at McDonald's
now costs at least $1. This happened to all goods in the economy.
Ā®
ā”
Ā§
In the short-run, inflation is closely linked to the business cycle.
When the economy is depressed, inflation tends to fall.
ā”
When the economy is booming, inflation tends to rise.
ā”
Ā§
In the long-run, inflation is mainly determined by changes in the money supply.
The total quantity of assets that can be readily used to make purchases.
ā”
Ā§
ā
ā¢
International Trade
Open Economy
An economy that trades goods and services with other countries.
ā”
Ā§
Trade Deficit
When the value of goods and services brought from foreigners is more than the value of
goods and services a country sells to foreigners
ā”
Import > Export
ā”
Ā§
Trade Surplus
When the value of goods and services brought from foreigners is less than the value of
goods and services a country sells to foreigners
ā”
Import < Export
ā”
Ā§
Microeconomics tells us why countries trade
Comparative advantage
ā”
Ā§
Macroeconomics studies why countries run trade deficits or surpluses.
Ā§
ā
Chapter 7
Measuring the Macroeconomy
How large is the economy of a country?
ā
When is a country in a recession/expansion?
ā
How rich is a country?
ā
How quickly is a country's economy growing?
ā
ā¢
National Income Accounting
The foundation economists use to measure almost everything in macroeconomics
ā
National Income Accounts
Keeps track of the flows of money between different sectors of the economy
Ā§
In the US, the national income accounts are kept by the Bureau of Economic Analysis
Ā§
ā
ā¢
Circular Flow Diagram
ā
Household
Inflow: income, govt transfer
Ā§
Outflow: consumption, savings, taxes
Ā§
ā
Government
Inflow: taxes, govt borrowing
Ā§
Outflow: govt transfer, govt consumption
Ā§
ā
Firms
Inflow: revenue, borrowing and stocks
Ā§
Outflow: investment spending, wages
Ā§
ā
Rest of the World
Inflow: imports, foreign borrowing
Ā§
Outflow: exports, foreign lending
Ā§
ā
ā¢
Circular Flow Definitions: Households
Consumer Spending (C)
Household spending on goods and services
Ā§
ā
Government Transfers
Payments by the government to individuals for which no good or service is provided in
return
Ā§
i.e. social security, unemployment insurance, food stamps
Ā§
ā
Disposable Income
Income plus government transfers minus taxes
Ā§
The total amount of household income available to spend or save
Ā§
ā
Private Savings
Disposable income minus consumer spending
Ā§
ā
ā¢
Circular Flow Definitions: Governments
Government Borrowing
The total amount of funds borrowed by the federal, state, and local governments in the
financial market
Ā§
ā
Government Purchases (G)
Total expenditures on goods and services by federal, state, and local governments
Ā§
ā
ā¢
Circular Flow Definitions: Firms
Inventories
Stocks of goods and raw materials held to facilitate business operations
Ā§
ā
Investment Spending (I)
Spending on productive physical capital (machines, buildings, and inventories)
Ā§
ā
Stock
A share in the ownership of a company held by a shareholder
Ā§
ā
Bond
Borrowing in the form of an IOU that pays interest (debt)
Ā§
ā
ā¢
Circular Flow Definitions: Rest of World
Exports
Goods and services sold from the United States to the rest of the world
Ā§
ā
Imports
Goods and services purchased in the United States from the rest of the world
Ā§
ā
Net Exports (X-IM)
Exports - Imports
Ā§
ā
ā¢
GDP
Consumer spending, government purchases, investment spending, and net exports all go into the
market for goods and services
ā
GDP comes out
ā
Gross Domestic Product (GDP)
The total market value of all final goods and services produced in the economy during a
given year
Ā§
ā
What is a final good or service?
Final Goods and Services
Goods and services sold to the final or end user
ā”
Ā§
Intermediate Goods and Services
Goods and services bought from one firm to another firm that are inputs for production
of final goods and services
ā”
Ā§
ā
ā¢
Calculating GDP
There are 3 different approaches to calculate GDP. All should result in the same value for GDP.
Expenditure Approach
Add up the total amount spend on all final goods and services
ā”
5 components:
Consumer spending (C)
Ā®
Investment Spending (I)
Ā®
Government Spending (G)
Ā®
Exports (X)
Ā®
Imports (IM) -subtracted
Ā®
ā”
GDP = C + I + G + X - IM
ā”
Add up aggregated spending on domestically produced final goods and services
Do not include the value of intermediate goods and services
Ā®
Do not include the value of used goods that are sold
Ā®
Do not include the value of goods produced abroad by domestically downed
factories of production
Citizenship doesn't matter, location odes
ā
Ā®
ā”
Ā§
Income Approach
Add up the income received by all factors of production in producing final goods and
services
Land, labor, physical capital, human capital
Ā®
Add rent earned to those who lease their land and structures to firms
Ā®
Add wages earned by labor
Ā®
Add dividends, the profits paid to shareholders who are the owners of the firms'
physical capital.
Ā®
Add interests paid to those who lend their savings to firms and governments.
Ā®
ā”
One person's spending is another person's income
ā”
Ā§
Value Added
The value of a firms' sales minus the value of its purchases of intermediate goods and
services
VA = Sales - Purchases
Ā®
ā”
Adding up all of the value added by each firm of all final goods and services produced
ā”
ā”
Ā§
ā
ā¢
In Class Assignment
ā
GDP = C + I + G + X - IM
ā
GDP = $510 + $110 + $150 + $50 - $20
ā
GDP = $800
ā
ā¢
Normal vs Nominal GDP
In order to measure economic growth, we need a measure of aggregate output.
The economy's total quantity of output of final goods and services
Ā§
We typically use real GDP as a measure of aggregate output
Ā§
ā
Real GDP
The total value of all final goods and services produced in the economy during a given year,
calculates using the prices of a selected base year
Ā§
Example
Base year: 2005
ā”
Real GDP2018 = P2005*Q2018
ā”
Ā§
More accurate
Ā§
ā
Nominal GDP
The value of all final goods and services produced in the economy during a given year,
calculated using the prices in the year in which the output was produces
Ā§
Nominal GDP2018 = P2018*Q2018
Ā§
ā
ā¢
Example: Calculating Real GDP
ā
ā¢
GDP Per Capita
GDP per capita = GDP / population
ā
Since GDP measures all household income, GDP per capita gives a measure of the average income
per person in a country
ā
Quick, useful measure of how rich and well-off the people of a country are
ā
ā¢
Measuring Prices
We have come up with a single measure of aggregate output in the economy.
ā
Can we come up with a single measure of prices in the entire economy?
The price of some goods and services go up: gasoline, electricity, cable television service.
Ā§
The price of other goods and services go down: electronics, eggs, milk.
Ā§
ā
ā¢
Price Level
Single measure of goods
ā
Aggregate Price Level
A measure of the overall level of prices in the economy
Constructed using the market basket of goods and services
ā”
Ā§
ā
Market Basket
A hypothetical set of consumer purchases of goods and services
Economists measure the price level using price index.
ā”
Ā§
ā
Price Index
Measures the cost of purchasing a given market basket in a given year, where that cost is
normalized so it is equal to 100 in the selected base year.
Ā§
Price Index in a Given Year = (Cost of market basket in a given year / Cost of market basket
in base year) *100
Ā§
ā
ā¢
Example: Price Index
ā
ā¢
Inflation Rate
The percent change per year in a price index, typically the consumer price index
ā
Inflation Rate = ((Price Index in Year 2 - Price Index in Year 1) / Price Index in Year 1)*100
ā
ā¢
Commonly Used Price Indices
Consumer Price Index (CPI)
Measures the cost of the market basket of a typical urban American family
Ā§
ā
Producer Price Index (PPI)
Measure the changes in the prices of goods purchased by producers
Ā§
ā
GDP Deflator
(Nominal GDP/Real GDP)*100
Ā§
ā
ā¢
Lecture 3
Friday,*May*25,*2018
2:12*PM
Chapter 6
Micro and Macroeconomics
Microeconomics
Focuses on how decisions are made by individuals and firms and the consequences of those
decisions
Ā§
ā
Macroeconomics
Examines the overall behavior of the economy
How the actions of ALL of the individuals and firms in the economy INTERACT to
produce a particular economy-wide level of economic performance
ā”
Ā§
Not simply the sum of individual actions
Millions of individual actions compound upon one another to produce an outcome that
is not the sum of those individual actions
ā”
Ā§
Paradox of Thrift
Families and businesses are worried about hard economic times ahead and they cut
their spending.
ā”
The reduction in spending depresses the economy and businesses lay off workers.
ā”
Families and businesses end up worse off than if they hadn't cut their spending.
ā”
Ā§
ā
ā¢
History of Macroeconomics
Emerged as a separate field of study during the Great Depression
Before the Great Depression, economists viewed the economy as self-regulating
Ā§
Governments' attempts to improve the economy's performance would be ineffective at best
and might make things worse
Ā§
ā
Self-Regulating Economy
Problems such as unemployment are resolved without government intervention, through
the working of the invisible hand
Ā§
Pre-1930s convention
Ā§
ā
John Maynard Keynes
This all changed during the Great Depression.
Ā§
In 1936, John Maynard Keynes published
The General Theory of Employment, Interests,
and Money
.
Ā§
This book transformed macroeconomics
Ā§
Keynesian Economics
Economic slumps are caused by inadequate spending, and they can be mitigated by
government intervention
ā”
Post 1930s conventional wisdom
ā”
Ā§
Keynes argues that government intervention, through fiscal and monetary policy can help
the economy recover from a recession.
Recessions are caused by inadequate spending.
ā”
Fiscal Policy
Changes in government spending and taxes to affect overall spending.
Ā®
i.e. tax returns
Ā®
Helps lower and middle income
Ā®
ā”
Monetary Policy
Changes in the quantity of money to alter interest rates and affect overall
spending.
Ā®
Reduce interest rates
Becomes easier to borrow money
ā
More people spend money
ā
Ā®
ā”
Ā§
ā
As a Result
Macroeconomics is often concerned with policy.
What can the government do to make macroeconomic performance better?
ā”
Ā§
During the Great Recession (2007-2008), Congress, the White House, and Federal Reserve
took policy steps to fend off the economic slump that were Keynesian in spirit.
Ā§
ā
ā¢
Macroeconomic Concerns
The Business Cycle
Ā§
The study of business cycle is the study of recessions and expansions.
Ā§
Recession (Contraction)
Period of economic downturn when output and employment are falling
ā”
From peak to trough,
ā”
Ā§
Expansions (Recoveries)
Periods of economic upturn when output and employment are rising.
ā”
From trough to peak
ā”
Ā§
Business-Cycle Peaks
The point at which the economy turns from expansion to recession,.
ā”
Ā§
Business-Cycle Trough
The point at which the economy turns from recession to expansion.
ā”
Ā§
Business Cycles
The short-run alteration between recessions and expansion
ā”
Ā§
The Pain of Recession
The most important effect of a recession is its effect on the ability of workers to find and
hold jobs.
ā”
Ā§
Procyclical
Increases in expansions, decreases in recessions
ā”
i.e. production, employment
ā”
Ā§
Countercyclical
Decreases in expansions, increases in recessions
ā”
i.e. unemployment, college enrollment
ā”
Ā§
ā
Economic Growth
Long-Run Economic Growth
The sustained upward trend in the economy's output over time
ā”
Ā§
Long-Run Growth Per Capita
A sustained upward trend in output per person
ā”
The key to higher wages and a rising standard of living
ā”
Ā§
Long-run growth is a relatively modern phenomenon.
From 1000 to 1800 real aggregate output increase by 0.2% per year
The same rate as the population grew
Ā®
No growth in per capita output
Ā®
ā”
Workers in England in the early 1700s were not much better off than they had been in
the 1200s.
ā”
Ā§
In the part 50 years, real aggregate output increased by 3.5% per year.
Caused by industrial revolution!
ā”
Ā§
ā
Inflation and Deflation
Inflation
A rising in overall level of prices
ā”
Ā§
Deflation
A falling in overall level of prices
ā”
Ā§
Supply and demand only explain why one particular good or service becomes more
expensive relative to other goods and services.
It doesn't explain why the price of goods and services in the economy may increase or
decrease
ā”
Example
When McDonald's opened in 1954, a burger cost $0.15. A burger at McDonald's
now costs at least $1. This happened to all goods in the economy.
Ā®
ā”
Ā§
In the short-run, inflation is closely linked to the business cycle.
When the economy is depressed, inflation tends to fall.
ā”
When the economy is booming, inflation tends to rise.
ā”
Ā§
In the long-run, inflation is mainly determined by changes in the money supply.
The total quantity of assets that can be readily used to make purchases.
ā”
Ā§
ā
ā¢
International Trade
Open Economy
An economy that trades goods and services with other countries.
ā”
Ā§
Trade Deficit
When the value of goods and services brought from foreigners is more than the value of
goods and services a country sells to foreigners
ā”
Import > Export
ā”
Ā§
Trade Surplus
When the value of goods and services brought from foreigners is less than the value of
goods and services a country sells to foreigners
ā”
Import < Export
ā”
Ā§
Microeconomics tells us why countries trade
Comparative advantage
ā”
Ā§
Macroeconomics studies why countries run trade deficits or surpluses.
Ā§
ā
Chapter 7
Measuring the Macroeconomy
How large is the economy of a country?
ā
When is a country in a recession/expansion?
ā
How rich is a country?
ā
How quickly is a country's economy growing?
ā
ā¢
National Income Accounting
The foundation economists use to measure almost everything in macroeconomics
ā
National Income Accounts
Keeps track of the flows of money between different sectors of the economy
Ā§
In the US, the national income accounts are kept by the Bureau of Economic Analysis
Ā§
ā
ā¢
Circular Flow Diagram
ā
Household
Inflow: income, govt transfer
Ā§
Outflow: consumption, savings, taxes
Ā§
ā
Government
Inflow: taxes, govt borrowing
Ā§
Outflow: govt transfer, govt consumption
Ā§
ā
Firms
Inflow: revenue, borrowing and stocks
Ā§
Outflow: investment spending, wages
Ā§
ā
Rest of the World
Inflow: imports, foreign borrowing
Ā§
Outflow: exports, foreign lending
Ā§
ā
ā¢
Circular Flow Definitions: Households
Consumer Spending (C)
Household spending on goods and services
Ā§
ā
Government Transfers
Payments by the government to individuals for which no good or service is provided in
return
Ā§
i.e. social security, unemployment insurance, food stamps
Ā§
ā
Disposable Income
Income plus government transfers minus taxes
Ā§
The total amount of household income available to spend or save
Ā§
ā
Private Savings
Disposable income minus consumer spending
Ā§
ā
ā¢
Circular Flow Definitions: Governments
Government Borrowing
The total amount of funds borrowed by the federal, state, and local governments in the
financial market
Ā§
ā
Government Purchases (G)
Total expenditures on goods and services by federal, state, and local governments
Ā§
ā
ā¢
Circular Flow Definitions: Firms
Inventories
Stocks of goods and raw materials held to facilitate business operations
Ā§
ā
Investment Spending (I)
Spending on productive physical capital (machines, buildings, and inventories)
Ā§
ā
Stock
A share in the ownership of a company held by a shareholder
Ā§
ā
Bond
Borrowing in the form of an IOU that pays interest (debt)
Ā§
ā
ā¢
Circular Flow Definitions: Rest of World
Exports
Goods and services sold from the United States to the rest of the world
Ā§
ā
Imports
Goods and services purchased in the United States from the rest of the world
Ā§
ā
Net Exports (X-IM)
Exports - Imports
Ā§
ā
ā¢
GDP
Consumer spending, government purchases, investment spending, and net exports all go into the
market for goods and services
ā
GDP comes out
ā
Gross Domestic Product (GDP)
The total market value of all final goods and services produced in the economy during a
given year
Ā§
ā
What is a final good or service?
Final Goods and Services
Goods and services sold to the final or end user
ā”
Ā§
Intermediate Goods and Services
Goods and services bought from one firm to another firm that are inputs for production
of final goods and services
ā”
Ā§
ā
ā¢
Calculating GDP
There are 3 different approaches to calculate GDP. All should result in the same value for GDP.
Expenditure Approach
Add up the total amount spend on all final goods and services
ā”
5 components:
Consumer spending (C)
Ā®
Investment Spending (I)
Ā®
Government Spending (G)
Ā®
Exports (X)
Ā®
Imports (IM) -subtracted
Ā®
ā”
GDP = C + I + G + X - IM
ā”
Add up aggregated spending on domestically produced final goods and services
Do not include the value of intermediate goods and services
Ā®
Do not include the value of used goods that are sold
Ā®
Do not include the value of goods produced abroad by domestically downed
factories of production
Citizenship doesn't matter, location odes
ā
Ā®
ā”
Ā§
Income Approach
Add up the income received by all factors of production in producing final goods and
services
Land, labor, physical capital, human capital
Ā®
Add rent earned to those who lease their land and structures to firms
Ā®
Add wages earned by labor
Ā®
Add dividends, the profits paid to shareholders who are the owners of the firms'
physical capital.
Ā®
Add interests paid to those who lend their savings to firms and governments.
Ā®
ā”
One person's spending is another person's income
ā”
Ā§
Value Added
The value of a firms' sales minus the value of its purchases of intermediate goods and
services
VA = Sales - Purchases
Ā®
ā”
Adding up all of the value added by each firm of all final goods and services produced
ā”
ā”
Ā§
ā
ā¢
In Class Assignment
ā
GDP = C + I + G + X - IM
ā
GDP = $510 + $110 + $150 + $50 - $20
ā
GDP = $800
ā
ā¢
Normal vs Nominal GDP
In order to measure economic growth, we need a measure of aggregate output.
The economy's total quantity of output of final goods and services
Ā§
We typically use real GDP as a measure of aggregate output
Ā§
ā
Real GDP
The total value of all final goods and services produced in the economy during a given year,
calculates using the prices of a selected base year
Ā§
Example
Base year: 2005
ā”
Real GDP2018 = P2005*Q2018
ā”
Ā§
More accurate
Ā§
ā
Nominal GDP
The value of all final goods and services produced in the economy during a given year,
calculated using the prices in the year in which the output was produces
Ā§
Nominal GDP2018 = P2018*Q2018
Ā§
ā
ā¢
Example: Calculating Real GDP
ā
ā¢
GDP Per Capita
GDP per capita = GDP / population
ā
Since GDP measures all household income, GDP per capita gives a measure of the average income
per person in a country
ā
Quick, useful measure of how rich and well-off the people of a country are
ā
ā¢
Measuring Prices
We have come up with a single measure of aggregate output in the economy.
ā
Can we come up with a single measure of prices in the entire economy?
The price of some goods and services go up: gasoline, electricity, cable television service.
Ā§
The price of other goods and services go down: electronics, eggs, milk.
Ā§
ā
ā¢
Price Level
Single measure of goods
ā
Aggregate Price Level
A measure of the overall level of prices in the economy
Constructed using the market basket of goods and services
ā”
Ā§
ā
Market Basket
A hypothetical set of consumer purchases of goods and services
Economists measure the price level using price index.
ā”
Ā§
ā
Price Index
Measures the cost of purchasing a given market basket in a given year, where that cost is
normalized so it is equal to 100 in the selected base year.
Ā§
Price Index in a Given Year = (Cost of market basket in a given year / Cost of market basket
in base year) *100
Ā§
ā
ā¢
Example: Price Index
ā
ā¢
Inflation Rate
The percent change per year in a price index, typically the consumer price index
ā
Inflation Rate = ((Price Index in Year 2 - Price Index in Year 1) / Price Index in Year 1)*100
ā
ā¢
Commonly Used Price Indices
Consumer Price Index (CPI)
Measures the cost of the market basket of a typical urban American family
Ā§
ā
Producer Price Index (PPI)
Measure the changes in the prices of goods purchased by producers
Ā§
ā
GDP Deflator
(Nominal GDP/Real GDP)*100
Ā§
ā
ā¢
Lecture 3
Friday,*May*25,*2018
2:12*PM
Document Summary
Focuses on how decisions are made by individuals and firms and the consequences of those decisions. How the actions of all of the individuals and firms in the economy interact to produce a particular economy-wide level of economic performance. Millions of individual actions compound upon one another to produce an outcome that is not the sum of those individual actions. Families and businesses are worried about hard economic times ahead and they cut their spending. The reduction in spending depresses the economy and businesses lay off workers. Families and businesses end up worse off than if they hadn"t cut their spending. Emerged as a separate field of study during the great depression. Before the great depression, economists viewed the economy as self-regulating. Governments" attempts to improve the economy"s performance would be ineffective at best and might make things worse. Problems such as unemployment are resolved without government intervention, through the working of the invisible hand.
