Short-run oil prices

WEBVTT
Kind: captions
Language: en

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In the last video we
explored when you pay a

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certain amount of money
on a per gallon basis

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at the pump, how does that
break down who get what?

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How much of that goes to the gas station,

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verses the transportation
network, verses the

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refineries, verses the
actual oil producers?

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The one thing I do want
to emphasis is I just

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use that as kind of indicative numbers.

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They can change widely
based on what's going

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on in the market, and
where we are in the world.

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They are fairly
indicative. The other thing

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I want you to realize is that they aren't

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always proportional.
It's not like that if oil

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prices were to double
that this 15 cents that

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the retailer got would turn into 30 cents.

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In general, regardless
of the price of oil,

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at least in the United
States, the retailer

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tends to get between
5 cents per gallon and

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20 cents per gallon. It's normally in that

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10 to 15 cent range.
Some of that has to be

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netted against the 5 cents or so that goes

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for credit card processing. Taxes can be

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relatively fixed. It's
often on a per gallon basis.

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The spread that the refineries gets, it's

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also not necessary
proportional to the price

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of oil. There are times
where the oil prices very

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high because their
might be a lot of excess

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capacities at the refineries.

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Their not able to charge a huge premium,

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or maybe their not able
to get a lot of the

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other stuff. The refineries
might not be able

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to make much if anything
on each barrel of oil

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that they actual refine. Sometimes it goes

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the other way around. A low price of oil,

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if the refining capacity is really tight,

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the refineries can raise the
price of the actual refined

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oil products. They can
raise more and more money.

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The players in this whole
supply chain that do,

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whose profits are a
function of the price of

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oil are the oil producers.
Just to be clear,

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sometimes all of these
are owned by the same

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company. That's what they
call these kind of vertically

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integrated oil producers.
Sometimes they are

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different players, and
when they are different

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players, the ones that
makes the most when oil

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prices are high are the producers.

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These producers, they
invest huge amounts of

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money in exploration and then in drilling.

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They make some assumptions.
They say, "Hey, this

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oil rig that I'm going
to spend a hundred or

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two hundred million
dollars on, this is going

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to be break even if oil
prices are say $30 a barrel."

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Obviously, if oil prices
end up being at $100 a

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barrel, they're going to make a killing.

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They're going to make
$70 per barrel of profit.

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This thing is going to
produce millions and

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millions of barrels. On
the other hand, if oil

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prices go down to $15
per barrel, they're going

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to be killed. They're
going to take a huge loss

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on this huge investment they made.

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The one question I want
to at least attempt to

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address, and it's not a simple question.

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Many people devote their careers to this.

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What is actually dictating
the price of oil?

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We see it can't be just
the traditional supply

00:02:40.998 --> 00:02:43.990
and demand, or at least in
the short term it can't.

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If we look here at 2008.
In mid 2008 oil prices

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were pushing $150, and
then only a few months

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later they had collapsed to $32 a barrel.

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They had gone down by a factor of 5.

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There is something that happened here.

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The financial crisis
hit, obviously, peoples

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expectations of global
growth would have been

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gone down. The economy wouldn't grow.

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People might use a little
less energy, a little

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less fossil fuels, whatever. That wouldn't

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be enough to justify a
5 fold decrease in the

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price of oil. Something else is at play.

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As you can imagine, a lot
of it is just going to be

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the psychology of the crowd
right over here or the

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psychology of market.

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People were driving up the price of oil,

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and over here people freaked up, and they

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started driving down the price of oil.

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To think about that in a
little bit more concrete terms.

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I mean think about the
price, or I'm going to

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think about the oil markets
in particular in the long term

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and short term, or the
long run and the short run.

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In the long run, let me draw the long run

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right over here. In the
long run we can think of

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the oil markets like
you would think of any

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traditional microeconomic market.

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Oil is entrusting because
it's a microeconomic.

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It's one good or service that has huge

00:03:57.833 --> 00:03:59.732
implementations on the macroeconomy on the

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growth of nations, how they
act, and whatever else.

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We can think of it in kind of classical

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microeconomic terms.
That's the price of oil.

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That's the quantity of
oil. You can imagine

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that those first few
millions of barrels are

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fairly cheap to produce, and then every

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incremental millions of barrels.

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If you think about this,
this is the quantity

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the millions of barrels per day.

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They have to go explore finding it harder

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and harder places, using more and more

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technology to find it,
so the marginal cost

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of producing incremental barrels goes up.

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Another way of thinking
about this, at a low

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price, oil producers
say, "Hey, I'm going to

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leave that oil in the
ground. Why should I pump

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it out and produce it
now? So there won't be a

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lot of quantity produce."

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At a higher price they're
like hey, we're going

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to pump as much as we
can. We're going to find

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that oil wherever it
is. We are going to pump

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it and get it to the market.

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Two ways to interpret the
long run supply curve.

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Long run supply.

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The demand, also, we
can kind of view it in

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kind of a classical way.
Those first few millions

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of gallons, a huge
benefit to the consumers.

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There are some people
that maybe oil is the only

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thing they can use. They
can't go to any source

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of energy. They get
huge benefits, but then

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the marginal benefit goes down for every

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incremental barrel of oil.

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Another way of thinking
about it, at high prices

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there aren't a lot of
people who are interested

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in doing it. They
say,"Thank you. I'll just

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go use something else.
I'll use solar power,

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I'll walk to work, or whatever else."

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Then at low prices they
say, "Hey. I'm going

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to use all the oil I can
use. I'm going to drive

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my gas guzzler 100 miles to work. I'm just

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going to drive it around
the block for fun.

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I'm going to leave it
running, because I don't

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like to start my engine,
and all the rest."

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This kind of gives you a classical model

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downwards-sloping demand curve, and an

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upward-sloping supply
curve. Then you would end up

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with some equilibrium
price in the long run, and

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some equilibrium quantity.

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This right over here
does not describe this

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all too well. Between
here and here you did

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not have dramatic changes in
how people ... the amount of

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oil that supplied into the market.

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You did not have dramatic
changes in peoples

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behavior in terms of how they consumed,

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or where they consumed
a lot or a little of it.

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One way to think about it
is this is the long run.

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Think about dynamics in
the long run, if there

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is new technology to
find new oil to supply

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curve could shift to the right like this.

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If for whatever reason
people start driving

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electric cars, then the
demand curve could shift

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to the left like that.
If for whatever reason

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it became fashionable again for people to

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drive SUVs, the demand curve
could shift to the right.

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If countries economic
growth accelerates, if

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people in India and China
end up becoming wealthier

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and want to buy more
combustion automobiles,

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it could shift to the right.

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In the long term you can
think about it in that way.

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If there's more drilling, if there's eases

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regulation on drilling,
you could shift the supply

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curve to the right. If
you increase environmental

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regulations, supply curve
could shift to the left.

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You could figure out the implications.

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That's not what's really
at play in the short run.

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When I think about the
short run, I'm not thinking

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about on a second-by-second
basis, the short

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run is really we're
thinking on over a period

00:07:05.766 --> 00:07:08.679
of months or even a small number of years.

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That's because people aren't
changing their behavior

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dramatically on a month-to-month basis.

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They already bought their cars.

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They already bought
their gas-guzzling SUVs.

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Also, it not easy for
suppliers to turn capacity

00:07:19.993 --> 00:07:22.352
on or off in the very short run.

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In the short run our
model might look something

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like this. Obviously, these are gross over

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simplifications, but
they help us think about

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it a little bit. This is the quantity.

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This is price, so in the
short run, the quantity

00:07:34.395 --> 00:07:36.989
supplied is really not
going to be too sensitive

00:07:36.989 --> 00:07:40.023
to price. It might look
something like this.

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I'll just do it as a vertical
line just to really state

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how in the short offering,
over a of months,

00:07:44.994 --> 00:07:47.201
people are just going to pump
out the oil that they were

00:07:47.201 --> 00:07:48.535
planning on pumping on. Their
not going to shut wells.

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Their not going not use
their tankers or whatever

00:07:53.929 --> 00:07:55.206
else to transport their oil.

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Their going to produce,
and it's going to be

00:07:57.001 --> 00:07:58.669
transported to the market.

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This is the short run
supply curve, regardless

00:08:01.506 --> 00:08:04.400
of the price. In the long
run, if the prices go

00:08:04.400 --> 00:08:07.535
down they might decided to
turn off capacity. If prices go

00:08:07.535 --> 00:08:10.753
up they might do more
expiration, open up more wells,

00:08:10.753 --> 00:08:13.322
but that takes time.
Often years to do that,

00:08:13.322 --> 00:08:15.393
especially if you start
from the expiration phase.

00:08:15.393 --> 00:08:17.869
This is supply not too sensitive to price.

00:08:17.869 --> 00:08:20.124
Demand might look something like this.

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Once again this is one
way of thinking about it.

00:08:22.189 --> 00:08:25.258
A very simple model. Demand
might look something ...

00:08:25.258 --> 00:08:27.389
I'll do it in orange. Might look something

00:08:27.389 --> 00:08:33.120
like this. Where is
goes ... looks something

00:08:33.120 --> 00:08:35.290
like that. The reason I
drew demand that like,

00:08:35.290 --> 00:08:37.921
is it kind of fits at
least people short term

00:08:37.921 --> 00:08:43.655
behavior. If our price
right now is right over

00:08:43.655 --> 00:08:47.053
here, if it were to
pop-up right over there,

00:08:47.053 --> 00:08:48.994
in the short run, people
don't change their

00:08:48.994 --> 00:08:50.386
behavior that dramatically.
Their house and

00:08:50.386 --> 00:08:52.397
their work is the same distance.

00:08:52.397 --> 00:08:54.255
It's takes them a while
to start thinking about

00:08:54.255 --> 00:08:56.140
moving a little bit closer, changing jobs,

00:08:56.140 --> 00:08:58.724
maybe getting a pass for
public transportation,

00:08:58.724 --> 00:09:01.371
or trading in their
gas-guzzling car for another

00:09:01.371 --> 00:09:03.522
car, or car pooling, or whatever else.

00:09:03.522 --> 00:09:05.209
If prices go down, the other way around.

00:09:05.209 --> 00:09:07.701
They might still have their Prius.

00:09:07.701 --> 00:09:10.722
They won't trade it in
for a more gas-guzzling

00:09:10.722 --> 00:09:14.053
car, et cetera, et cetera.
What this describes

00:09:14.053 --> 00:09:18.059
is in the short run
the prices aren't being

00:09:18.059 --> 00:09:23.327
dictated by these classical
mircoeconomic inputs

00:09:23.327 --> 00:09:26.131
or factors in terms of supply and demand.

00:09:26.131 --> 00:09:28.522
What's really effecting
them in the short term

00:09:28.522 --> 00:09:32.389
is market psychology,
and this is why I put a

00:09:32.389 --> 00:09:36.221
little picture of Chicago Board of Trade.

00:09:36.221 --> 00:09:38.263
Which is where they
trade futures contracts.

00:09:38.263 --> 00:09:40.723
Futures contracts and
I've done video where I

00:09:40.723 --> 00:09:42.454
go into detail on what
futures contracts are.

00:09:42.454 --> 00:09:44.054
They are a way of trading commodities.

00:09:44.054 --> 00:09:46.324
Instead of people
walking around with vials

00:09:46.324 --> 00:09:48.323
or barrels of oil and
exchanging them, they say,

00:09:48.323 --> 00:09:51.388
"Here's a contract to
purchase oil from me in

00:09:51.388 --> 00:09:53.380
a month, or at a specific
date, or two months

00:09:53.380 --> 00:09:55.653
at a specific date." People trade those.

00:09:55.653 --> 00:09:58.668
In the near term, what's
really driving the price

00:09:58.668 --> 00:10:01.796
of oil? What's really
causing these fluctuations

00:10:01.796 --> 00:10:03.927
right over here? That
can't really be described

00:10:03.927 --> 00:10:06.921
by all of these things,
is peoples psychology, and

00:10:06.921 --> 00:10:08.989
peoples information.
They look at things like

00:10:08.989 --> 00:10:12.185
the Middle East. They say, "Will Israel,

00:10:12.185 --> 00:10:14.186
Benjamin Netanyahu,
Israels Prime Minister,

00:10:14.186 --> 00:10:17.325
decide to preemptively
bomb Iran in an attempt

00:10:17.325 --> 00:10:20.057
to get rid of their
nuclear program. Will Iran

00:10:20.057 --> 00:10:22.467
do something crazy? How
would they retaliate?

00:10:22.467 --> 00:10:24.722
Would they try to close off
the straight of our moves?"

00:10:24.722 --> 00:10:27.218
Even if no one really
believes that is happening,

00:10:27.218 --> 00:10:28.596
some of them might say, Well someone else

00:10:28.596 --> 00:10:30.721
might believe it." They might
buy the futures contracts

00:10:30.721 --> 00:10:32.928
and then try to trade
it up, and other people,

00:10:32.928 --> 00:10:34.991
eventually, that oil has to be delivered,

00:10:34.991 --> 00:10:36.852
they might take deliver
of that oil but not

00:10:36.852 --> 00:10:38.590
bring it to market. They
might hoard it in some

00:10:38.590 --> 00:10:40.986
way, because they believe
that somethings going to

00:10:40.986 --> 00:10:43.251
happen and oil is going
to be scarce at some

00:10:43.251 --> 00:10:44.889
point in the future.

00:10:44.889 --> 00:10:46.987
The big take away is
all of these things, the

00:10:46.987 --> 00:10:50.808
production of oil,
other sources of energy,

00:10:50.808 --> 00:10:52.920
peoples behavior, they
do matter in the long

00:10:52.920 --> 00:10:55.168
run on the price of oil. In the short run,

00:10:55.168 --> 00:10:56.926
we're talking about the
order of 6 months to

00:10:56.926 --> 00:10:59.657
over a year. It really
is market psychology.

00:10:59.657 --> 00:11:02.641
Some of these geopolitical
events that might

00:11:02.641 --> 00:11:06.470
effect market psychology
that's causing these

00:11:06.470 --> 00:11:09.367
wild swings in the price of oil.


Breakdown of gas prices

WEBVTT
Kind: captions
Language: en

00:00:00.500 --> 00:00:04.040
What I hope to do in this video
is explore the relationship

00:00:04.040 --> 00:00:06.390
between oil and gas prices.

00:00:06.390 --> 00:00:09.130
And you do see that there
is a very strong correlation

00:00:09.130 --> 00:00:10.380
between how they trend.

00:00:10.380 --> 00:00:12.960
This right over
here is oil prices,

00:00:12.960 --> 00:00:14.820
quoted at a specific
point on the planet.

00:00:14.820 --> 00:00:16.780
It is dependent
on where you are.

00:00:16.780 --> 00:00:19.610
As you can see, this is
in US dollars per barrel.

00:00:19.610 --> 00:00:24.420
In early 2008 around $100 went
up to $140 then came back down.

00:00:24.420 --> 00:00:26.630
And then it's been
trending up ever since.

00:00:26.630 --> 00:00:29.090
Now it's about $100 per barrel.

00:00:29.090 --> 00:00:33.450
This is where we see the oil
prices are per barrel basis.

00:00:33.450 --> 00:00:36.420
And then related to that you
see the price of gasoline.

00:00:36.420 --> 00:00:38.720
And this is even more
geographically specific.

00:00:38.720 --> 00:00:41.210
Because not only do have
transportation costs,

00:00:41.210 --> 00:00:45.270
but you also have very
region-specific taxation

00:00:45.270 --> 00:00:47.670
for oil and
sometimes regulation.

00:00:47.670 --> 00:00:49.770
But taxation is
the big part of it.

00:00:49.770 --> 00:00:52.620
But you do see it trends
up when oil prices trend up

00:00:52.620 --> 00:00:53.870
and then it goes down.

00:00:53.870 --> 00:00:55.900
And this is on a
per gallon basis.

00:00:55.900 --> 00:00:58.122
And these are the prices
right over here in New York.

00:00:58.122 --> 00:00:59.830
But they don't move
completely lock step.

00:00:59.830 --> 00:01:02.810
If anything you see that the
oil price on a per barrel basis

00:01:02.810 --> 00:01:06.870
is much more volatile than the
gasoline price right over here.

00:01:06.870 --> 00:01:08.440
But there is the
same general trend.

00:01:08.440 --> 00:01:10.870
When the oil prices moves
up this tends to move up.

00:01:10.870 --> 00:01:13.780
But it's not always in
the same percentage.

00:01:13.780 --> 00:01:15.940
But there's definitely
a relationship.

00:01:15.940 --> 00:01:18.580
Now, before trying to figure
out when you pay, say,

00:01:18.580 --> 00:01:20.800
$4 at the pump how
much of that is

00:01:20.800 --> 00:01:24.400
oil, and how much is refining,
and how much is transportation

00:01:24.400 --> 00:01:27.300
let's at least kind of build
up to that to think about

00:01:27.300 --> 00:01:31.020
just how does the oil
even end up in your car.

00:01:31.020 --> 00:01:34.880
And then we can build up
that price of the oil,

00:01:34.880 --> 00:01:37.370
or the price of the
gasoline, I should say.

00:01:37.370 --> 00:01:40.075
So this right over here, you are
probably familiar with these.

00:01:40.075 --> 00:01:43.040
These are oil rigs, two
very different types.

00:01:43.040 --> 00:01:44.490
This is an offshore oil rig.

00:01:44.490 --> 00:01:46.070
This is a land based oil rig.

00:01:46.070 --> 00:01:48.159
But they're both doing the
same fundamental thing.

00:01:48.159 --> 00:01:49.950
They're drilling into
the ground until they

00:01:49.950 --> 00:01:51.550
get to a pocket of oil.

00:01:51.550 --> 00:01:53.580
And then they will
pump that oil out

00:01:53.580 --> 00:01:55.650
and try to transport it
to the market somehow,

00:01:55.650 --> 00:01:57.680
first going through a refinery.

00:01:57.680 --> 00:01:59.060
Offshore is really fascinating.

00:01:59.060 --> 00:02:01.400
It really is an engineering
marvel how they do it.

00:02:01.400 --> 00:02:03.840
It might be sitting
out here in the ocean.

00:02:03.840 --> 00:02:06.630
And it will literally go
to the bottom of the ocean,

00:02:06.630 --> 00:02:08.370
go to the sea floor,
and then drill

00:02:08.370 --> 00:02:11.339
from there to actually
get to the oil pockets.

00:02:11.339 --> 00:02:12.880
So it's really an
engineering marvel.

00:02:12.880 --> 00:02:13.890
And you have to be very careful.

00:02:13.890 --> 00:02:15.830
It can be very dangerous
working on an oil rig.

00:02:15.830 --> 00:02:17.496
And obviously, if there's
an accident on them

00:02:17.496 --> 00:02:19.120
it could be an
environmental nightmare,

00:02:19.120 --> 00:02:21.300
like what we saw what
the BP situation.

00:02:21.300 --> 00:02:23.920
But it is undoubtedly
an engineering marvel.

00:02:23.920 --> 00:02:27.230
Now once you have that oil you
need to get it to a refinery

00:02:27.230 --> 00:02:30.810
so that oil can be broken
up into it useful parts.

00:02:30.810 --> 00:02:34.220
And the way that is typically
transported to a refinery

00:02:34.220 --> 00:02:37.360
is some combination of a
pipeline or an oil tanker.

00:02:37.360 --> 00:02:42.070
This right over here is
actually the Alaskan pipeline.

00:02:42.070 --> 00:02:44.900
And it takes oil from the
very northern part of Alaska

00:02:44.900 --> 00:02:45.900
to the southern part.

00:02:45.900 --> 00:02:48.450
So that it can then be put on
oil tankers, which can then

00:02:48.450 --> 00:02:51.430
transported anywhere in
the world to refineries.

00:02:51.430 --> 00:02:52.820
It could go straight
to a tanker.

00:02:52.820 --> 00:02:55.010
Actually even some offshore
places you could use a tanker.

00:02:55.010 --> 00:02:56.890
Or sometimes even if
they're close enough

00:02:56.890 --> 00:02:59.410
to land they actually
might have a pipeline that

00:02:59.410 --> 00:03:02.110
will take it to land where
it can go to a refinery

00:03:02.110 --> 00:03:06.620
or go to an oil tanker so it
can be transported even farther.

00:03:06.620 --> 00:03:08.540
And then from there,
it gets to a refinery.

00:03:08.540 --> 00:03:11.390
And so we could start to think
about how the price of oil

00:03:11.390 --> 00:03:14.590
is built up before we even
think about what a refinery even

00:03:14.590 --> 00:03:15.860
does.

00:03:15.860 --> 00:03:19.230
So let's say that the
current price of oil-- and I

00:03:19.230 --> 00:03:21.870
kind of rigged the
numbers, not to be

00:03:21.870 --> 00:03:25.180
too punny-- to work
out fairly well.

00:03:25.180 --> 00:03:28.155
But let's say that the current
price of oil is $90 per barrel.

00:03:34.710 --> 00:03:38.180
So, and this is
just a units thing,

00:03:38.180 --> 00:03:41.200
a barrel is equal to 42 gallons.

00:03:41.200 --> 00:03:43.730
So if I say I have
a barrel of water

00:03:43.730 --> 00:03:47.000
I'm really saying that I
have 42 gallons of water.

00:03:47.000 --> 00:03:49.360
And now all 42
gallons of crude oil

00:03:49.360 --> 00:03:53.500
do not turn into 42
gallons of gasoline.

00:03:53.500 --> 00:03:56.160
Out of 42 gallons
of crude oil you

00:03:56.160 --> 00:04:00.660
can get about 19 or 20
gallons of gasoline.

00:04:00.660 --> 00:04:02.570
For the sake of to
make the numbers easy

00:04:02.570 --> 00:04:08.190
I'll just go with 20,
20 gallons of gasoline.

00:04:08.190 --> 00:04:12.210
And then the rest
will be other stuff.

00:04:12.210 --> 00:04:14.160
So 22 gallons of other stuff.

00:04:14.160 --> 00:04:15.790
It might not even be 22 gallons.

00:04:15.790 --> 00:04:16.630
In fact it won't be.

00:04:16.630 --> 00:04:17.860
Some of it is just waste.

00:04:17.860 --> 00:04:19.140
Some of it is byproduct.

00:04:19.140 --> 00:04:22.670
Some of this is actually used
to fuel the refining process.

00:04:22.670 --> 00:04:24.070
So let me not write that number.

00:04:24.070 --> 00:04:25.490
So the rest is other stuff.

00:04:30.950 --> 00:04:35.060
So this refinery is paying $90
per barrel when it gets it.

00:04:35.060 --> 00:04:38.540
So that incorporates what the
oil producers are getting.

00:04:38.540 --> 00:04:41.580
It also takes care of
the transportation costs

00:04:41.580 --> 00:04:42.970
to the refinery.

00:04:42.970 --> 00:04:45.310
And let's say just for
the sake of argument

00:04:45.310 --> 00:04:48.877
that the refinery
can sell-- let's

00:04:48.877 --> 00:04:51.460
say it's doesn't even take care
of the transportation network.

00:04:51.460 --> 00:04:53.793
Let's say there's people who
are willing to buy directly

00:04:53.793 --> 00:04:55.400
from the refinery
at the refinery.

00:04:55.400 --> 00:05:00.560
They're willing to buy
gasoline at $3.25 per gallon.

00:05:00.560 --> 00:05:08.470
So the gas at refinery
people are willing to spend,

00:05:08.470 --> 00:05:17.680
or the transporter is willing
to pay them, $3.25 per gallon.

00:05:17.680 --> 00:05:20.851
And so from this
barrel they're going

00:05:20.851 --> 00:05:22.510
to get 20 gallons of gasoline.

00:05:22.510 --> 00:05:25.490
They can sell that
at $3.25 per gallon.

00:05:25.490 --> 00:05:30.660
So you're going to have
20 times $3.25, which

00:05:30.660 --> 00:05:33.200
is let's see 20 times 3 is 60.

00:05:33.200 --> 00:05:36.930
And then 20 times $0.25 is $5.

00:05:36.930 --> 00:05:39.330
So they're going to get
$65 for the gasoline.

00:05:43.090 --> 00:05:45.090
And then let's just say
for the sake of argument

00:05:45.090 --> 00:05:47.360
they get $35 for
the other stuff.

00:05:50.345 --> 00:05:52.220
And some of this other
stuff is quite useful.

00:05:52.220 --> 00:05:53.580
It's stuff like motor oil.

00:05:53.580 --> 00:05:54.910
It could be jet fuel.

00:05:54.910 --> 00:05:57.850
It could be natural gas.

00:05:57.850 --> 00:06:01.240
And it could be obviously fuel
to actually fuel the refinery.

00:06:01.240 --> 00:06:04.250
And so let's actually
start building this

00:06:04.250 --> 00:06:06.720
up right over here.

00:06:06.720 --> 00:06:14.400
So one way to think about it--
so let me draw it this way.

00:06:14.400 --> 00:06:18.730
We're up to $3.25 per gallon,
is what the price is exiting

00:06:18.730 --> 00:06:21.590
the refinery, what the
refineries getting for it.

00:06:21.590 --> 00:06:22.900
So let me draw it down here.

00:06:28.020 --> 00:06:31.480
So let's say that this is $1.

00:06:31.480 --> 00:06:34.110
This is $2.

00:06:34.110 --> 00:06:36.590
And this is $3.

00:06:36.590 --> 00:06:42.130
And then they're getting
$3.25 would be like that.

00:06:42.130 --> 00:06:43.800
That is what the
refinery is getting.

00:06:43.800 --> 00:06:45.258
And one way to
think about it, it's

00:06:45.258 --> 00:06:47.770
not completely because
all of their profit

00:06:47.770 --> 00:06:49.110
isn't coming from the gasoline.

00:06:49.110 --> 00:06:51.470
But one way to think
about it is the refinery,

00:06:51.470 --> 00:06:55.020
after refining this
barrel of crude oil

00:06:55.020 --> 00:06:56.860
that they paid $90
for, they're going

00:06:56.860 --> 00:06:58.950
to get $65 for the gasoline.

00:06:58.950 --> 00:07:05.450
And then they're going to
get $35 for the other stuff.

00:07:05.450 --> 00:07:08.295
So they made a combination of,
what is it, they made $100.

00:07:08.295 --> 00:07:11.040
They're able to buy
this crude oil at $90,

00:07:11.040 --> 00:07:12.440
do what they had to do.

00:07:12.440 --> 00:07:15.104
And then they're able
to sell it for $100.

00:07:15.104 --> 00:07:17.020
So one way to think about
it is that, at least

00:07:17.020 --> 00:07:20.820
in this situation, 90% of
what they're getting for it

00:07:20.820 --> 00:07:21.830
was their cost.

00:07:21.830 --> 00:07:25.590
But it breaks down between the
other stuff in the gasoline.

00:07:25.590 --> 00:07:28.150
So it's not super
easy to break down.

00:07:28.150 --> 00:07:31.330
But you can say, in this
example, a good chunk of this

00:07:31.330 --> 00:07:34.330
was the cost of gasoline.

00:07:34.330 --> 00:07:36.780
And it obviously depends
how you account for it.

00:07:36.780 --> 00:07:39.170
But a good chunk of it,
not the cost of gasoline,

00:07:39.170 --> 00:07:42.880
a good chunk of it is
the cost the crude.

00:07:42.880 --> 00:07:45.160
And this right over
here, you could say

00:07:45.160 --> 00:07:47.980
is how much the
refinery actually makes.

00:07:47.980 --> 00:07:50.570
And the amount that
the refinery gets

00:07:50.570 --> 00:07:52.470
versus what it costs--
so the amount they

00:07:52.470 --> 00:07:55.300
get for all of the product they
produce versus the crude oil

00:07:55.300 --> 00:07:57.430
that they have to pay
for, this margin, this

00:07:57.430 --> 00:07:59.210
is often called
the crack spread.

00:08:03.070 --> 00:08:05.420
And just to understand
what a refinery is doing,

00:08:05.420 --> 00:08:08.372
it's breaking up that crude
oil into its various parts.

00:08:08.372 --> 00:08:10.080
And it's actually a
fairly simple-- well,

00:08:10.080 --> 00:08:11.370
I don't want to
say simple process.

00:08:11.370 --> 00:08:12.105
Obviously when you
look at a refinery

00:08:12.105 --> 00:08:13.970
it does not look
like a simple thing.

00:08:13.970 --> 00:08:16.940
But the idea for the process
is fairly straightforward.

00:08:16.940 --> 00:08:22.105
It takes the crude oil and it
heats it up through a boiler.

00:08:24.880 --> 00:08:27.970
So right over here the
crude is getting really hot.

00:08:27.970 --> 00:08:29.190
This is the boiler.

00:08:29.190 --> 00:08:33.150
And the boiler is fueled,
often fueled or usually fueled,

00:08:33.150 --> 00:08:35.460
by some of the
outputs of that oil.

00:08:35.460 --> 00:08:37.840
So this is fire,
just to symbolize

00:08:37.840 --> 00:08:39.049
that it's getting hot.

00:08:39.049 --> 00:08:41.741
And then it goes into
a distillation column.

00:08:41.741 --> 00:08:44.240
And the distillation column,
that's why you see all of these

00:08:44.240 --> 00:08:46.720
towers right over here
in an oil refinery.

00:08:46.720 --> 00:08:48.690
Those are the
distillation columns.

00:08:48.690 --> 00:08:51.870
And so in a distillation column
the different parts of the oil

00:08:51.870 --> 00:08:53.810
have different
boiling temperatures.

00:08:53.810 --> 00:08:55.870
So the very long carbon
chains in the oil

00:08:55.870 --> 00:08:58.030
have very high
boiling temperatures.

00:08:58.030 --> 00:09:00.640
So as hot as they are
they're not going to boil.

00:09:00.640 --> 00:09:03.390
They're going to stay in
their liquid form down here.

00:09:03.390 --> 00:09:04.920
And then the slightly
shorter chains

00:09:04.920 --> 00:09:08.099
they're going to boil and
evaporate a little bit.

00:09:08.099 --> 00:09:10.140
But then as they rise
they're going to cool down.

00:09:10.140 --> 00:09:12.800
And then they might
condense right over here.

00:09:12.800 --> 00:09:15.740
Then they can be pulled
away in pipes and then

00:09:15.740 --> 00:09:17.700
things that are even
slightly shorter chains

00:09:17.700 --> 00:09:20.610
than that will go a little
bit higher before cooling

00:09:20.610 --> 00:09:22.520
to even lower temperatures
before going back

00:09:22.520 --> 00:09:23.602
into a liquid state.

00:09:23.602 --> 00:09:25.310
And then they can be
collected over here.

00:09:25.310 --> 00:09:27.560
All the way until you get
to the very shortest chains,

00:09:27.560 --> 00:09:30.860
like the natural gas, that would
be collected out at the top.

00:09:30.860 --> 00:09:32.650
And the gasoline that
you put in your car

00:09:32.650 --> 00:09:37.625
it might be collected
right over here from this.

00:09:37.625 --> 00:09:39.440
So you're essentially
breaking up that oil

00:09:39.440 --> 00:09:40.852
into its different parts.

00:09:40.852 --> 00:09:42.310
And on some of the
other parts this

00:09:42.310 --> 00:09:44.184
might be motor oil right
over here, the thing

00:09:44.184 --> 00:09:46.920
that you used to lubricate your
engine, not fuel your engine.

00:09:46.920 --> 00:09:48.810
You might have jet fuel up here.

00:09:48.810 --> 00:09:51.540
And you have a whole ton of
other different-- kerosene,

00:09:51.540 --> 00:09:54.200
all sorts of things,
you are able to take out

00:09:54.200 --> 00:09:55.620
of that crude oil.

00:09:55.620 --> 00:09:58.340
But anyway, let's get
back to the gasoline.

00:09:58.340 --> 00:10:00.570
So the refinery got $3.25.

00:10:00.570 --> 00:10:03.330
Now we have to
transport that gasoline.

00:10:03.330 --> 00:10:05.680
So let's say $0.10
for transportation.

00:10:05.680 --> 00:10:08.150
So this is at $3.25
right over here.

00:10:08.150 --> 00:10:11.440
So now we're going to have
$0.10 for transportation.

00:10:11.440 --> 00:10:16.550
So that right over here is
$0.10 for transportation.

00:10:16.550 --> 00:10:19.220
I'll just write
transportation for short.

00:10:19.220 --> 00:10:20.770
And then it goes
to the gas station.

00:10:20.770 --> 00:10:23.880
And as I mentioned, gas
is heavily, heavily taxed.

00:10:23.880 --> 00:10:25.620
And depends on
what jurisdiction,

00:10:25.620 --> 00:10:28.476
what country, and even
states within countries.

00:10:28.476 --> 00:10:30.850
But for the sake of simplicity,
let's just say it's taxed

00:10:30.850 --> 00:10:34.330
at $0.50 a gallon, which is
not that different from what

00:10:34.330 --> 00:10:36.080
it's taxed at in many states.

00:10:36.080 --> 00:10:38.220
So now we're at $0.50 a gallon.

00:10:38.220 --> 00:10:42.090
So that would be right around,
so let's say-- actually,

00:10:42.090 --> 00:10:43.030
let me do a new color.

00:10:43.030 --> 00:10:45.870
I keep using the same
colors over and over again.

00:10:45.870 --> 00:10:50.060
So let's say this is
$0.50 a gallon tax.

00:10:50.060 --> 00:10:52.190
So that is tax right
over there going

00:10:52.190 --> 00:10:55.480
to the state and
federal government.

00:10:55.480 --> 00:10:57.630
And so let's see $3.25
is what the refinery got,

00:10:57.630 --> 00:11:02.040
$0.10 for transportation,
gets us to $3.35, $0.50 tax,

00:11:02.040 --> 00:11:07.720
so this is $0.50 tax,
gets us to $3.85.

00:11:07.720 --> 00:11:09.915
And then now we're
at the gas station.

00:11:09.915 --> 00:11:12.040
There essentially it's
going to cost $3.85 a gallon

00:11:12.040 --> 00:11:12.670
for that fuel.

00:11:12.670 --> 00:11:15.490
The gas station needs to make
some money to pay their costs.

00:11:15.490 --> 00:11:21.470
The gas station sales you
that fuel at $4 a gallon.

00:11:21.470 --> 00:11:23.220
And so you might say,
OK, the gas station,

00:11:23.220 --> 00:11:25.045
that already seems
surprisingly low.

00:11:25.045 --> 00:11:26.420
And that is actually
on the order

00:11:26.420 --> 00:11:28.260
of how much gas stations
actually make on

00:11:28.260 --> 00:11:29.490
a per gallon basis.

00:11:29.490 --> 00:11:32.530
You might say, hey, the
gas station made $0.15.

00:11:32.530 --> 00:11:38.020
$4 minus the $3.85 that takes
in all of these other costs.

00:11:38.020 --> 00:11:40.322
But actually a huge amount
of that $0.15 actually

00:11:40.322 --> 00:11:41.780
goes to the credit
card processors.

00:11:41.780 --> 00:11:44.230
Because most people pay the
pump with a credit card.

00:11:44.230 --> 00:11:45.997
And that's why some
gas stations like it,

00:11:45.997 --> 00:11:47.830
will give you a discount
if you pay in cash,

00:11:47.830 --> 00:11:51.630
because of that $0.15 as
much as, and or in general

00:11:51.630 --> 00:11:55.060
around $0.05 of that will
go to the credit cards,

00:11:55.060 --> 00:11:58.690
will go to the credit card
processors, credit card fees.

00:11:58.690 --> 00:11:59.980
I know this is getting messy.

00:12:03.110 --> 00:12:08.582
So the retailer will be left
with about $0.10 of margin.

00:12:08.582 --> 00:12:10.040
So anyway, hopefully
that gives you

00:12:10.040 --> 00:12:13.670
a sense of how crude
oil turns into gasoline.

00:12:13.670 --> 00:12:15.500
And when you pay
at the pump what

00:12:15.500 --> 00:12:18.420
is the breakdown for
the different players.

00:12:18.420 --> 00:12:21.100
And how much of
the money is going

00:12:21.100 --> 00:12:23.590
to those different players.


Tax lever of fiscal policy

WEBVTT
Kind: captions
Language: en

00:00:00.545 --> 00:00:01.805
Voiceover: I want to do a quick follow-up

00:00:01.805 --> 00:00:03.556
to the last video because I did not give

00:00:03.556 --> 00:00:06.999
a complete picture of all
of the fiscal policy tools

00:00:06.999 --> 00:00:09.444
that a government has at its disposal.

00:00:09.444 --> 00:00:11.806
What I focused on in the last video

00:00:11.806 --> 00:00:14.361
is a government that holds taxes constant,

00:00:14.361 --> 00:00:16.087
taxes constant,

00:00:16.472 --> 00:00:19.026
and increases spending.

00:00:19.026 --> 00:00:22.610
Spending goes up.

00:00:22.610 --> 00:00:24.668
The only way that a
government could do that

00:00:24.668 --> 00:00:27.072
is by taking on more debt,

00:00:27.072 --> 00:00:29.109
or I guess if there are some governments

00:00:29.109 --> 00:00:29.916
that are saving,

00:00:29.916 --> 00:00:30.748
saving less,

00:00:30.748 --> 00:00:31.430
but most of them,

00:00:31.430 --> 00:00:33.448
they're going to have
to take on more debt.

00:00:33.448 --> 00:00:36.077
So they're going to take on more debt.

00:00:36.077 --> 00:00:38.395
Just to think about it in terms of the,

00:00:38.395 --> 00:00:43.055
in terms of the GDP
expenditure components,

00:00:43.055 --> 00:00:45.064
we know that GDP,

00:00:45.064 --> 00:00:47.650
GDP is equal to consumption,

00:00:47.650 --> 00:00:51.469
which is mostly consumers, individuals,

00:00:51.469 --> 00:00:54.408
investment, which is mostly firms,

00:00:54.408 --> 00:00:57.186
and some consumer spending on new houses.

00:00:57.186 --> 00:00:59.581
Then you have government expenditure,

00:00:59.581 --> 00:01:00.825
and then you have net exports,

00:01:00.825 --> 00:01:02.414
which kind of completes the picture.

00:01:02.414 --> 00:01:04.073
But what we described in the last video

00:01:04.073 --> 00:01:05.915
is these two things are held constant.

00:01:05.915 --> 00:01:07.227
Taxes don't change.

00:01:07.227 --> 00:01:07.908
People,

00:01:07.908 --> 00:01:09.852
the government isn't
fueling its expenditures

00:01:09.852 --> 00:01:11.921
with more taxes, so this
part stays constant,

00:01:11.921 --> 00:01:13.464
but with the extra debt,

00:01:13.464 --> 00:01:16.184
the government spends
more, so this part goes up,

00:01:16.184 --> 00:01:17.920
everything else holds roughly constant,

00:01:17.920 --> 00:01:21.745
and so GDP would go up.

00:01:21.745 --> 00:01:24.235
The other tool that the government has,

00:01:25.158 --> 00:01:27.175
has at its disposal,

00:01:27.175 --> 00:01:30.117
is to hold spending constant,

00:01:30.117 --> 00:01:34.587
so spending is held constant,

00:01:34.587 --> 00:01:36.330
and lowering taxes,

00:01:36.330 --> 00:01:38.188
and lowering taxes,

00:01:38.188 --> 00:01:40.079
which would essentially put more money

00:01:40.079 --> 00:01:43.475
in the hands of consumers
of individuals, families,

00:01:43.475 --> 00:01:44.783
and firms.

00:01:44.783 --> 00:01:46.408
Once again, the only way they can do that,

00:01:46.408 --> 00:01:47.849
if you hold spending constant,

00:01:47.849 --> 00:01:49.259
and you're reducing your revenues,

00:01:49.259 --> 00:01:51.265
the only way they can
do that is once again,

00:01:51.265 --> 00:01:52.790
taking on more debt.

00:01:52.790 --> 00:01:54.327
This is a common theme here.

00:01:54.327 --> 00:01:56.910
They would have to take on more debt,

00:01:56.910 --> 00:01:58.830
assuming they don't have any savings

00:01:58.830 --> 00:02:03.190
to kind of eat up, to
finance this type of thing.

00:02:03.190 --> 00:02:04.915
Looking at this again, we have

00:02:04.915 --> 00:02:08.784
GDP is equal to
consumption plus investment

00:02:08.784 --> 00:02:11.915
plus government spending plus net exports,

00:02:11.915 --> 00:02:13.538
plus net exports,

00:02:13.538 --> 00:02:14.783
in this situation,

00:02:14.783 --> 00:02:16.409
government spending is held constant

00:02:16.409 --> 00:02:18.582
but because the consumers' and the firms'

00:02:18.582 --> 00:02:19.659
taxes have gone down,

00:02:19.659 --> 00:02:21.015
they have more to spend,

00:02:21.015 --> 00:02:23.465
and they will spend some component of it,

00:02:23.465 --> 00:02:25.790
and so these two pieces will go up,

00:02:25.790 --> 00:02:27.580
and GDP will go up.

00:02:27.580 --> 00:02:29.743
I just wanted to make
sure we added this picture

00:02:29.743 --> 00:02:30.584
right over here.

00:02:30.584 --> 00:02:32.790
Fiscal policy isn't just about increasing

00:02:32.790 --> 00:02:34.332
or decreasing government spending.

00:02:34.332 --> 00:02:36.916
It can also be about tax policy,

00:02:36.916 --> 00:02:39.531
increasing or decreasing taxes.


Monetary and fiscal policy

WEBVTT
Kind: captions
Language: en

00:00:00.500 --> 00:00:04.340
Two words you'll hear thrown
a lot in macroeconomic circles

00:00:04.340 --> 00:00:11.830
are monetary policy
and fiscal policy.

00:00:11.830 --> 00:00:15.550
And they're normally talked
about in the context of ways

00:00:15.550 --> 00:00:19.280
to shift aggregate demand
in one direction or another

00:00:19.280 --> 00:00:21.570
and often times to kind of
stimulate aggregate demand,

00:00:21.570 --> 00:00:23.102
to shift it to the right.

00:00:23.102 --> 00:00:24.560
And what I want to
do in this video

00:00:24.560 --> 00:00:27.122
is focus on what these
two different tools who

00:00:27.122 --> 00:00:28.580
are, who are the
actors, and how do

00:00:28.580 --> 00:00:32.820
they go about actually shifting
the aggregate demand curve.

00:00:32.820 --> 00:00:35.250
So monetary policy--
this is literally

00:00:35.250 --> 00:00:37.410
deciding how much
money to print.

00:00:37.410 --> 00:00:39.450
So it's literally
printing money--

00:00:39.450 --> 00:00:43.990
either deciding to print more
of it or deciding to print less.

00:00:43.990 --> 00:00:45.800
It tends to be done
in the United States--

00:00:45.800 --> 00:00:47.530
especially in most
large countries-- it's

00:00:47.530 --> 00:00:52.860
done by the central bank,
which is sometimes directly

00:00:52.860 --> 00:00:54.770
part of the government.

00:00:54.770 --> 00:00:56.820
Sometimes it's
quasi-independent.

00:00:56.820 --> 00:00:59.610
In the US, it's a quasi--
The US central bank, which

00:00:59.610 --> 00:01:02.530
is the Federal Reserve,
is quasi-independent.

00:01:02.530 --> 00:01:04.349
And in future videos
we'll talk more

00:01:04.349 --> 00:01:08.550
about the governance structure
of the Federal Reserve.

00:01:08.550 --> 00:01:12.700
Most of the major appointees
are made by the US government.

00:01:12.700 --> 00:01:15.590
All of its excess profits
goes back to the US Treasury,

00:01:15.590 --> 00:01:18.120
so in that way it's part
of the US government.

00:01:18.120 --> 00:01:20.690
But it's set up to be--
also has some influence

00:01:20.690 --> 00:01:22.540
from private industry.

00:01:22.540 --> 00:01:26.120
The member banks have a
stake in what's going on.

00:01:26.120 --> 00:01:28.920
It often coordinates
amongst member banks.

00:01:28.920 --> 00:01:31.025
So you have your Federal
Reserve as a central bank

00:01:31.025 --> 00:01:31.900
in the United States.

00:01:31.900 --> 00:01:34.310
It's quasi-independent,
but it's been

00:01:34.310 --> 00:01:36.290
given the right to print money.

00:01:36.290 --> 00:01:38.590
And I'll just draw it
here as physical dollars,

00:01:38.590 --> 00:01:40.950
but most of the money that
is going to print actually

00:01:40.950 --> 00:01:42.830
is electronic money.

00:01:42.830 --> 00:01:45.337
And the way this affects
the aggregate demand curve,

00:01:45.337 --> 00:01:47.170
the Federal Reserve
doesn't just print money

00:01:47.170 --> 00:01:49.340
and go out and start buying
things with that money.

00:01:49.340 --> 00:01:51.006
Well, it does buy
things, but it doesn't

00:01:51.006 --> 00:01:52.950
go out and buy
goods and services.

00:01:52.950 --> 00:01:55.680
What it does with this is
it essentially lends it out,

00:01:55.680 --> 00:01:57.300
so it's essentially buying debt.

00:02:02.170 --> 00:02:05.640
And if buying debt seems like a
weird thing to say, buying debt

00:02:05.640 --> 00:02:10.030
it is the same thing
as lending money.

00:02:10.030 --> 00:02:13.950
If I buy a treasury bond,
so if I'm buying debt,

00:02:13.950 --> 00:02:16.360
I'm buying a treasury
bond means I'm implicitly

00:02:16.360 --> 00:02:17.560
lending that money.

00:02:17.560 --> 00:02:19.640
If I buy the bond directly
from the government,

00:02:19.640 --> 00:02:22.290
that means I'm lending that
money to the US government.

00:02:22.290 --> 00:02:26.870
If I directly buy a bond
from a US corporation,

00:02:26.870 --> 00:02:29.380
I'm essentially lending that
money to the corporation.

00:02:29.380 --> 00:02:30.720
They're going to give
me interest payments

00:02:30.720 --> 00:02:32.386
in the form of coupons,
and then they're

00:02:32.386 --> 00:02:34.970
going to pay back that
money at some future date.

00:02:34.970 --> 00:02:36.860
So this is essentially
lending money.

00:02:36.860 --> 00:02:39.940
And what this does is it's
increasing the supply of money

00:02:39.940 --> 00:02:41.600
that's out there to be lent.

00:02:41.600 --> 00:02:45.599
And so if we think of the
market for money-- so let's

00:02:45.599 --> 00:02:47.390
see, now we're thinking
microeconomic terms

00:02:47.390 --> 00:02:48.535
for the market for money.

00:02:51.360 --> 00:02:53.590
If this is the price of
money, which is really

00:02:53.590 --> 00:02:59.410
just the interest
rate as a percentage,

00:02:59.410 --> 00:03:04.070
and this right over here
is the supply of money.

00:03:04.070 --> 00:03:08.030
And I'll just draw-- so this
might be our supply curve.

00:03:08.030 --> 00:03:10.020
That's supply.

00:03:10.020 --> 00:03:14.020
And this is the demand curve.

00:03:14.020 --> 00:03:17.107
And let's say right over here,
this is short-term money.

00:03:17.107 --> 00:03:19.315
And we won't focus on the
different durations and all

00:03:19.315 --> 00:03:19.980
of that.

00:03:19.980 --> 00:03:21.771
But let's say we're
sitting right over here

00:03:21.771 --> 00:03:24.540
at a clearing
interest rate of 5%.

00:03:24.540 --> 00:03:25.370
So it makes sense.

00:03:25.370 --> 00:03:26.286
So this is right here.

00:03:26.286 --> 00:03:28.910
This is our demand curve.

00:03:28.910 --> 00:03:31.629
So all of the people who will
get more than 5% benefit out

00:03:31.629 --> 00:03:34.170
of the money-- maybe they have
an investment where they could

00:03:34.170 --> 00:03:37.932
get 10% on the money
or 8% or 5.1%--

00:03:37.932 --> 00:03:40.390
they're all willing to borrow
that money and then invest it

00:03:40.390 --> 00:03:41.420
in whatever they want to do.

00:03:41.420 --> 00:03:42.836
Or this might even
be consumption,

00:03:42.836 --> 00:03:44.350
people who are saying, hey, 5%.

00:03:44.350 --> 00:03:46.374
That's worth it for
me to go out and buy

00:03:46.374 --> 00:03:48.040
that thing that makes
me whatever happy.

00:03:48.040 --> 00:03:49.870
But from an investment point of
view it makes even more sense.

00:03:49.870 --> 00:03:52.078
If I'm going to get an 8%
return on my money-- that's

00:03:52.078 --> 00:03:55.140
my benefit-- it makes sense
for me to borrow it at 5%.

00:03:55.140 --> 00:03:58.420
It makes sense all
the way up to 5.0001%.

00:03:58.420 --> 00:03:59.950
I'd actually borrow it.

00:03:59.950 --> 00:04:02.210
And so in the Federal
Reserve, or any central bank,

00:04:02.210 --> 00:04:04.100
prints money and it buys debt.

00:04:04.100 --> 00:04:06.280
It goes out into debt
markets and it usually

00:04:06.280 --> 00:04:07.930
buys the safest kind
of debt, but that

00:04:07.930 --> 00:04:09.736
affects all of the debt markets.

00:04:09.736 --> 00:04:11.110
It goes out and
buys debt market.

00:04:11.110 --> 00:04:14.090
They're essentially shifting
the supply curve of money

00:04:14.090 --> 00:04:15.340
to the right.

00:04:15.340 --> 00:04:17.644
They shift the supply
curve to the right.

00:04:17.644 --> 00:04:19.019
And so at any
given interest rate

00:04:19.019 --> 00:04:22.140
you could say that
there is more money.

00:04:22.140 --> 00:04:26.110
And so the supply curve might
look something like that.

00:04:26.110 --> 00:04:28.820
And this is interesting because
assuming the demand has not

00:04:28.820 --> 00:04:32.670
shifted, what you now have
is a different clearing

00:04:32.670 --> 00:04:35.170
price, a different equilibrium
price, for the money.

00:04:35.170 --> 00:04:37.170
Maybe this is now at 3%.

00:04:40.310 --> 00:04:43.050
And you also have more money
being lent and borrowed.

00:04:43.050 --> 00:04:44.990
So if this was the
old quantity of money

00:04:44.990 --> 00:04:47.299
that was lent and
borrowed-- I'm just

00:04:47.299 --> 00:04:48.590
going to make up a number here.

00:04:48.590 --> 00:04:54.670
Let's say that this is $100
billion in some time period.

00:04:54.670 --> 00:04:56.715
And now we're at $120 billion.

00:04:59.600 --> 00:05:02.880
So now by essentially printing
money, buying debt, increasing

00:05:02.880 --> 00:05:04.970
the supply of money
two things happen.

00:05:04.970 --> 00:05:06.729
Interest rates went down.

00:05:06.729 --> 00:05:08.520
And so now you have
all of these characters

00:05:08.520 --> 00:05:11.480
out here who before, they
weren't going to borrow money

00:05:11.480 --> 00:05:14.750
at 5% because their
benefit on that money

00:05:14.750 --> 00:05:16.850
was between 5% and 3%.

00:05:16.850 --> 00:05:19.120
Maybe it's 4% or 3.5%.

00:05:19.120 --> 00:05:21.550
It didn't make sense
for them to borrow at 5%

00:05:21.550 --> 00:05:25.249
and invest it and only get
a 4% return or a 3% return.

00:05:25.249 --> 00:05:27.040
But now that interest
rates have gone down,

00:05:27.040 --> 00:05:30.130
now it does make sense for
them to borrow the money,

00:05:30.130 --> 00:05:32.680
all the way down to someone
who has some type of project

00:05:32.680 --> 00:05:34.610
or investment that
has a 3% return.

00:05:34.610 --> 00:05:36.460
They also say, hey, I'm neutral.

00:05:36.460 --> 00:05:39.060
Now I could borrow at 3%,
and then I could invest it.

00:05:39.060 --> 00:05:41.807
But definitely the
person with 3.1% or 3.2%,

00:05:41.807 --> 00:05:43.890
if they have investments
that give them that much,

00:05:43.890 --> 00:05:45.890
they would definitely
want to borrow.

00:05:45.890 --> 00:05:48.310
And we could assume that all
this incremental borrowing--

00:05:48.310 --> 00:05:49.960
so this little example that
I did right over here--

00:05:49.960 --> 00:05:52.080
all this incremental
$20 billion of borrowing

00:05:52.080 --> 00:05:53.090
is going to be spent.

00:05:53.090 --> 00:05:56.280
People will borrow
money not to just sit

00:05:56.280 --> 00:05:58.490
but stuff it into
their mattresses.

00:05:58.490 --> 00:06:01.210
They'll borrow that money
to go invest it in some way,

00:06:01.210 --> 00:06:02.250
to spend it.

00:06:02.250 --> 00:06:03.960
And so what this
will do, all of this

00:06:03.960 --> 00:06:06.060
will shift aggregate
demand to the right.

00:06:06.060 --> 00:06:08.430
Right here, we're talking
in microeconomic terms,

00:06:08.430 --> 00:06:11.290
but then if we think about
aggregate supply and demand--

00:06:11.290 --> 00:06:14.280
so this is aggregate.

00:06:14.280 --> 00:06:17.960
Let me write aggregate
right over here.

00:06:17.960 --> 00:06:18.850
This is price.

00:06:18.850 --> 00:06:21.060
This is real GDP.

00:06:21.060 --> 00:06:23.480
This is our aggregate demand.

00:06:26.810 --> 00:06:29.730
And then our short run aggregate
supply might look something

00:06:29.730 --> 00:06:30.430
like this.

00:06:34.580 --> 00:06:36.850
And so if we're shifting
aggregate demand

00:06:36.850 --> 00:06:39.580
to the right where there's going
to be more demand for goods

00:06:39.580 --> 00:06:41.954
and services, these people
are going to borrow this money

00:06:41.954 --> 00:06:42.550
and spend it.

00:06:42.550 --> 00:06:47.550
You're going to essentially
stimulate the economy.

00:06:47.550 --> 00:06:49.790
So this shifts to the right.

00:06:49.790 --> 00:06:53.550
You have a situation where real
GDP will go from this state

00:06:53.550 --> 00:06:55.520
to this state right over here.

00:06:55.520 --> 00:06:56.800
So it was expansionary.

00:06:56.800 --> 00:06:58.860
And obviously, if the
Federal Reserve decides

00:06:58.860 --> 00:07:01.130
to print less money
or if they even

00:07:01.130 --> 00:07:04.560
decide to essentially soak up
the money that's in the market

00:07:04.560 --> 00:07:07.300
by selling some of the
debt that they own,

00:07:07.300 --> 00:07:09.050
so that they're sucking
dollars out of it,

00:07:09.050 --> 00:07:11.360
then the opposite
effect would happen.

00:07:11.360 --> 00:07:14.360
Now fiscal policy is
essentially the government

00:07:14.360 --> 00:07:17.520
directly going out there and
demanding goods and services

00:07:17.520 --> 00:07:19.820
from the economy.

00:07:19.820 --> 00:07:21.920
You have the government.

00:07:21.920 --> 00:07:25.210
It has two sources of
revenue that it can spend.

00:07:25.210 --> 00:07:27.080
It has money from taxes.

00:07:27.080 --> 00:07:28.570
It has tax revenue.

00:07:28.570 --> 00:07:30.830
And then it can go
out and borrow money.

00:07:30.830 --> 00:07:34.090
And so it also has
access to debt markets.

00:07:34.090 --> 00:07:36.210
And when the government
borrows money,

00:07:36.210 --> 00:07:38.124
they're essentially
issuing treasury bills,

00:07:38.124 --> 00:07:40.540
if you're talking about the
US Treasury Bills and Treasury

00:07:40.540 --> 00:07:40.970
Bonds.

00:07:40.970 --> 00:07:42.880
If you were to buy those
from the US government,

00:07:42.880 --> 00:07:44.963
you're essentially lending
money to the government

00:07:44.963 --> 00:07:47.100
to finance their debt.

00:07:47.100 --> 00:07:49.430
And so they can take these
two sources of money,

00:07:49.430 --> 00:07:53.190
and then if they decide
to spend more-- and let's

00:07:53.190 --> 00:07:55.060
say that they're going
to hold taxes fixed.

00:07:55.060 --> 00:07:57.840
So they're not going to take
out any demand from the economy.

00:07:57.840 --> 00:08:00.985
They might ratchet up debt
and then ratchet up spending.

00:08:03.660 --> 00:08:05.830
And then this
government is directly

00:08:05.830 --> 00:08:09.050
going out there and demanding
more goods and services.

00:08:09.050 --> 00:08:12.040
So that could also shift
the aggregate demand curve

00:08:12.040 --> 00:08:12.920
to the right.

00:08:12.920 --> 00:08:15.660
So these are two different
levers, two different tools,

00:08:15.660 --> 00:08:17.120
that have been
used in governments

00:08:17.120 --> 00:08:20.075
all around the world to shift
aggregate demand one way

00:08:20.075 --> 00:08:23.030
or another or an attempt to
shift aggregate demand one

00:08:23.030 --> 00:08:23.860
way or the other.

00:08:23.860 --> 00:08:25.940
Monetary policy
is more indirect.

00:08:25.940 --> 00:08:28.940
Printing money, using that to
increase the supply of money

00:08:28.940 --> 00:08:32.090
that's out there to be lent,
that lowers interest rates.

00:08:32.090 --> 00:08:35.630
And then because it
lowers interest rates,

00:08:35.630 --> 00:08:38.770
there's more willingness to
borrow and invest that money.

00:08:38.770 --> 00:08:42.190
Fiscal policy, you're directly
going out there and just buying

00:08:42.190 --> 00:08:45.660
more goods and services
by usually ratcheting up

00:08:45.660 --> 00:08:46.160
your debt.

00:08:46.160 --> 00:08:47.600
Or fiscal policy could
go the other way.

00:08:47.600 --> 00:08:49.720
If you're trying to restrain
the economy, you could lower

00:08:49.720 --> 00:08:51.380
your debt, lower
your spending, or you

00:08:51.380 --> 00:08:53.620
could do some other
combination. s


Minli Virdone

WEBVTT
Kind: captions
Language: en

00:00:00.993 --> 00:00:01.685
Minli: Okay.

00:00:01.685 --> 00:00:02.902
Sal: So I'm here with Minli.

00:00:02.902 --> 00:00:05.014
What do you do here at the Kahn Academy?

00:00:05.014 --> 00:00:07.490
Minli: I'm the Lead of Strategic Initiatives at Kahn Academy.

00:00:07.490 --> 00:00:09.942
Sal: And what are some of these initiatives

00:00:09.942 --> 00:00:11.328
that are strategic?

00:00:11.328 --> 00:00:13.782
Minli: The initiatives that are strategic include;

00:00:13.782 --> 00:00:15.470
number one, our summer camp, so we're running

00:00:15.470 --> 00:00:18.140
a summer camp this year that is going to be

00:00:18.140 --> 00:00:20.367
in Palo Alto, it's called The Discovery Lab,

00:00:20.367 --> 00:00:22.410
that's one of the strategic initiatives.

00:00:22.410 --> 00:00:24.685
Sal: And why are we doing this?

00:00:24.685 --> 00:00:27.795
Minli: Well, I think the big reason why is that

00:00:27.795 --> 00:00:29.430
we're known for online education.

00:00:29.430 --> 00:00:32.797
We are known to do the work in the classroom

00:00:32.797 --> 00:00:36.188
so that teachers can free up time to do projects.

00:00:36.188 --> 00:00:38.184
One of the constant feedbacks that we get

00:00:38.184 --> 00:00:40.182
from teachers is that they don't know

00:00:40.182 --> 00:00:42.762
what projects to do in the classroom

00:00:42.762 --> 00:00:44.200
now that the time is freed up.

00:00:44.200 --> 00:00:47.097
One of the intents of the summer camp is

00:00:47.097 --> 00:00:49.248
to identify what are the projects that are fun,

00:00:49.248 --> 00:00:51.603
that are also educational and interesting;

00:00:51.603 --> 00:00:53.755
not forced education, like truly interesting ...

00:00:53.755 --> 00:00:54.510
Sal: Not paint by numbers ...

00:00:54.510 --> 00:00:57.546
Minli: Not paint by numbers, and people actually

00:00:57.546 --> 00:01:00.955
find that they actuallylearn something from it.

00:01:00.955 --> 00:01:04.131
So identify what those projects are and feel that out online.

00:01:04.131 --> 00:01:05.827
Sal: So it's kind of a "discovery lab" for

00:01:05.827 --> 00:01:07.189
all involved, the kids will discover ...

00:01:07.189 --> 00:01:09.354
Minli: Yes, and then we will discover.

00:01:09.354 --> 00:01:10.896
Sal: And then we'll discover what works,

00:01:10.896 --> 00:01:12.767
what's not, what's an idea appropriate

00:01:12.767 --> 00:01:13.849
for different ages and ...

00:01:13.849 --> 00:01:14.463
Minli: Yeah.

00:01:14.463 --> 00:01:15.181
Sal: And things like that.

00:01:15.181 --> 00:01:18.768
What kind of stuff are we all looking at to do?

00:01:18.768 --> 00:01:22.982
Minli: We are doing a variety of things.

00:01:22.982 --> 00:01:25.352
One big thing is that we're going to do

00:01:25.352 --> 00:01:27.376
a lot of robotics activities with,

00:01:27.376 --> 00:01:29.438
they go by [unintelligible], so they go about

00:01:29.438 --> 00:01:31.761
learning about the mechanical structures of robots,

00:01:31.761 --> 00:01:34.439
learning about the sensors; how so you use sensors?

00:01:34.439 --> 00:01:36.250
And then probably doing some big competition

00:01:36.250 --> 00:01:37.619
like we did a couple years ago.

00:01:37.619 --> 00:01:38.520
Sal: Lego Sumo Wrestling.

00:01:38.520 --> 00:01:39.855
Minli: Lego Sumo Wrestling was ...

00:01:39.855 --> 00:01:41.852
Sal: The kids, it's amazing what they did.

00:01:41.852 --> 00:01:43.767
They did a lot more than I would have expected.

00:01:43.767 --> 00:01:45.350
Minli: And it's the Olympics this year which ...

00:01:45.350 --> 00:01:46.064
Sal: Oh, okay.

00:01:46.064 --> 00:01:47.355
Minli: Which is even better (laughs) so

00:01:47.355 --> 00:01:49.439
we can make it very [unintelligible].

00:01:49.439 --> 00:01:51.021
Robotics is a big piece.

00:01:51.021 --> 00:01:53.241
The second big piece is all the Math and Music stuff

00:01:53.241 --> 00:01:55.431
that [Vai] does, so Vai and I had gone to

00:01:55.431 --> 00:01:58.268
a classroom a couple months ago and we did

00:01:58.268 --> 00:02:01.390
a lot of creating platonic sonnets,

00:02:01.390 --> 00:02:03.687
creating geometric shapes with students

00:02:03.687 --> 00:02:05.890
and giving them the intuition behind the Math.

00:02:05.890 --> 00:02:08.843
Sal: Right, the tangible, especially 3-dimensional

00:02:08.843 --> 00:02:11.491
Mathematics and 3-dimensional Geometry,

00:02:11.491 --> 00:02:13.361
it's kind of hard to really get a tangible sense

00:02:13.361 --> 00:02:14.422
without it being tangible.

00:02:14.422 --> 00:02:18.314
Minli: Yeah, exactly. We talk about things like

00:02:18.314 --> 00:02:19.724
the triangle being the strongest shape;

00:02:19.724 --> 00:02:21.224
why is the triangle the strongest shape?

00:02:21.224 --> 00:02:23.358
Let's put one together and let's put a square together,

00:02:23.358 --> 00:02:25.330
let's try to twist and turn it, and then you realize,

00:02:25.330 --> 00:02:26.805
"Oh, this is why a triangle is stronger."

00:02:26.805 --> 00:02:27.557
Sal: Right, so they believe and also get

00:02:27.557 --> 00:02:28.761
kind of an intuition for it.

00:02:28.761 --> 00:02:30.471
And some of the other stuff like

00:02:30.471 --> 00:02:32.176
random games and simulations.

00:02:32.176 --> 00:02:33.642
Minli: Yeah, exactly. I'm going to do lots of

00:02:33.642 --> 00:02:35.979
games and simulations from the secondary training markets

00:02:35.979 --> 00:02:39.314
that you did and some sort of economics training

00:02:39.314 --> 00:02:41.477
I'm trying to make up right now, so it'll be fun.

00:02:41.477 --> 00:02:43.634
Sal: That's exciting.

00:02:43.634 --> 00:02:44.974
Minli: I would want to go to this camp.

00:02:44.974 --> 00:02:48.882
(laughing)

00:02:48.882 --> 00:02:49.911
So I interrupted you ...

00:02:49.911 --> 00:02:50.413
Minli: Yup.

00:02:50.413 --> 00:02:51.558
Sal: So camp is one thing.

00:02:51.558 --> 00:02:53.697
Minli: Camp is one thing, and the second thing is

00:02:53.697 --> 00:02:55.278
in Generalized International Strategy,

00:02:55.278 --> 00:02:57.276
so how do we work with international partners

00:02:57.276 --> 00:02:59.448
or international schools who want to use Kahn Academy.

00:02:59.448 --> 00:03:01.965
Sal: So there are people outside of ...

00:03:01.965 --> 00:03:02.956
So what's going on?

00:03:02.956 --> 00:03:04.107
You just went on a recent trip.

00:03:04.107 --> 00:03:05.666
Minli: Yes, I went on a recent trip.

00:03:05.666 --> 00:03:07.536
There are many things going on.

00:03:07.536 --> 00:03:09.118
I think generally when people hear about

00:03:09.118 --> 00:03:11.126
Kahn Academy, they're excited, which is great for us,

00:03:11.126 --> 00:03:14.038
so there's a lot of pull of wanting to use

00:03:14.038 --> 00:03:16.247
Kahn Academy in schools outside.

00:03:16.247 --> 00:03:18.370
Sometimes it's just a matter of getting people

00:03:18.370 --> 00:03:19.953
up to speed or just saying,

00:03:19.953 --> 00:03:21.890
"Here's how you can do this really easy,"

00:03:21.890 --> 00:03:24.119
and then just getting them started.

00:03:24.119 --> 00:03:26.455
That's one thing, but then the other bigger

00:03:26.455 --> 00:03:30.731
implementations that people are doing for example,

00:03:30.731 --> 00:03:35.209
just last week I was in the state of Senora in Mexico.

00:03:35.209 --> 00:03:38.290
They are giving out one laptop per child,

00:03:38.290 --> 00:03:41.411
a PC to each student, then they're also providing

00:03:41.411 --> 00:03:42.171
internet access.

00:03:42.171 --> 00:03:43.234
Sal: Each student in the state of Senora?

00:03:43.234 --> 00:03:43.979
Minli: Each student in the state.

00:03:43.979 --> 00:03:45.293
Sal: There's like 300,000 students or something.

00:03:45.293 --> 00:03:48.259
Minli: Yeah, so they're providing each student

00:03:48.259 --> 00:03:51.779
with a computer and they're starting with 10,000 first,

00:03:51.779 --> 00:03:54.442
and I saw it just last week,

00:03:54.442 --> 00:03:56.491
each computer is labeled with the child's name

00:03:56.491 --> 00:04:00.695
and a serial number so they can track all the computers.

00:04:00.695 --> 00:04:02.338
They're also providing internet access as a

00:04:02.338 --> 00:04:04.998
constitutional right; and on top of that,

00:04:04.998 --> 00:04:08.214
in their portal, they have put Kahn Academy content,

00:04:08.214 --> 00:04:10.201
both in Spanish and in English, so that the

00:04:10.201 --> 00:04:13.168
students can access the content, so that's an example.

00:04:13.168 --> 00:04:16.728
Sal: So these aren't just urban students,

00:04:16.728 --> 00:04:18.756
the middle class, you saw kids ...

00:04:18.756 --> 00:04:21.063
Minli: We started off at a really indigenous location,

00:04:21.063 --> 00:04:23.995
which was called [Beckham] and these are students,

00:04:23.995 --> 00:04:26.285
it's their first time using computers,

00:04:26.285 --> 00:04:28.789
so they're going to have to learn computer

00:04:28.789 --> 00:04:30.664
literacy and then show them some of the

00:04:30.664 --> 00:04:33.748
Kahn Academy content, they're intrigued by it.

00:04:33.748 --> 00:04:37.674
I think it's just a big change process from there.

00:04:37.674 --> 00:04:40.524
That's one ... Other organizations,

00:04:40.524 --> 00:04:43.452
South Africa, there's a couple of organizations,

00:04:43.452 --> 00:04:46.702
they're doing the translations into the native language

00:04:46.702 --> 00:04:49.226
and they're doing an after school program

00:04:49.226 --> 00:04:52.118
that's really interesting ... Doing offline implementation.

00:04:52.118 --> 00:04:53.534
There are a lot of exciting things going on

00:04:53.534 --> 00:04:56.355
on the international front ... Mostly volunteer-driven.

00:04:56.355 --> 00:05:03.620
Sal: Wow. How did you end up here?

00:05:03.620 --> 00:05:07.047
Minli: I was excited by the mission the first time

00:05:07.047 --> 00:05:11.782
I heard about Kahn Academy and my background is

00:05:11.782 --> 00:05:13.811
I spent a couple years in social welfare in

00:05:13.811 --> 00:05:16.508
the Singapore government really focused in

00:05:16.508 --> 00:05:17.381
on low-income families ...

00:05:17.381 --> 00:05:18.092
Sal: That's where you grew up, Singapore?

00:05:18.092 --> 00:05:19.612
Minli: Singapore is where I grew up.

00:05:19.612 --> 00:05:23.231
I was there for the first 20 years of my life.

00:05:23.231 --> 00:05:24.790
Sal: You also taught in Singapore.

00:05:24.790 --> 00:05:27.824
Minli: I did. I taught high school Math and

00:05:27.824 --> 00:05:30.876
I had about 200 something, almost 300 students.

00:05:30.876 --> 00:05:32.766
Sal: 300 students that you were teaching at ...

00:05:32.766 --> 00:05:34.701
Minli: No, in separate classes during

00:05:34.701 --> 00:05:36.061
the same amount of time.

00:05:36.061 --> 00:05:37.731
Sal: You taught high school Math in Singapore

00:05:37.731 --> 00:05:39.365
and also worked for the government.

00:05:39.365 --> 00:05:41.311
Minli: The government, with low income family policy,

00:05:41.311 --> 00:05:44.071
focus on education and child care.

00:05:44.071 --> 00:05:47.584
I always felt like I needed to give back in some way.

00:05:47.584 --> 00:05:50.199
After that, I went to McKinsey and Company and

00:05:50.199 --> 00:05:52.282
I did some management consulting work.

00:05:52.282 --> 00:05:53.280
Sal: You were a hot shot consultant.

00:05:53.280 --> 00:05:57.617
Minli: I attempted to be, but after five plus years of that,

00:05:57.617 --> 00:05:59.198
I decided to revert back and this was

00:05:59.198 --> 00:06:02.155
a good place to merge the two experiences.

00:06:02.155 --> 00:06:03.734
Sal: What's it been like so far?

00:06:03.734 --> 00:06:05.624
Has it been what you expected?

00:06:05.624 --> 00:06:07.538
Is it different, better, worse?

00:06:07.538 --> 00:06:10.095
Minli: I keep telling everyone I know,

00:06:10.095 --> 00:06:11.204
which can be annoying sometimes,

00:06:11.204 --> 00:06:14.000
but I tell them it's the best job I've ever had.

00:06:14.000 --> 00:06:14.870
I love this job.

00:06:14.870 --> 00:06:16.174
Sal: You say that even when I'm not in the room?

00:06:16.174 --> 00:06:18.703
Minli: I say it, yes. I say that constantly.

00:06:18.703 --> 00:06:20.840
I say it on my Facebook page, I think my friends

00:06:20.840 --> 00:06:22.866
might start getting annoyed about that, but

00:06:22.866 --> 00:06:24.812
I truly believe ...

00:06:24.812 --> 00:06:27.873
Sal: But why is that other than

00:06:27.873 --> 00:06:29.757
our very good vacation policy?

00:06:29.757 --> 00:06:33.289
(laughter)

00:06:33.289 --> 00:06:35.615
Minli: I think it's the fact that it's

00:06:35.615 --> 00:06:38.281
a good team of people who are truly passionate

00:06:38.281 --> 00:06:41.057
about making a change.

00:06:41.057 --> 00:06:44.371
I think the change that we're trying to make

00:06:44.371 --> 00:06:46.907
is of such scale ... We're 25 people right now

00:06:46.907 --> 00:06:50.172
and we're heading 4.5 million unique users a month.

00:06:50.172 --> 00:06:53.188
That's huge scale and I get excited about

00:06:53.188 --> 00:06:55.907
the fact that the things I do will impact

00:06:55.907 --> 00:06:59.287
this group of students or actually not just students,

00:06:59.287 --> 00:07:01.228
people around the world who just want

00:07:01.228 --> 00:07:03.319
to learn something different.

00:07:03.319 --> 00:07:04.964
Sal: What's your sense of, like the summer camp,

00:07:04.964 --> 00:07:07.263
this is going to affect, there were over

00:07:07.263 --> 00:07:08.602
a hundred students this summer, how does that

00:07:08.602 --> 00:07:10.029
affect the scale?

00:07:10.029 --> 00:07:12.986
Minli: I think if we are very clear in our minds

00:07:12.986 --> 00:07:14.611
that yes, it is targeted towards the

00:07:14.611 --> 00:07:16.535
[unintelligible] group of students right now,

00:07:16.535 --> 00:07:19.318
but the intention is that these learning things

00:07:19.318 --> 00:07:20.743
that we find from the summer camp will be

00:07:20.743 --> 00:07:22.182
scaled out on a website and therefore

00:07:22.182 --> 00:07:24.494
available to the millions of students.

00:07:24.494 --> 00:07:27.403
That's how we're scaling the findings

00:07:27.403 --> 00:07:28.570
from the summer camp.

00:07:28.570 --> 00:07:30.069
Sal: What's your sense, where do you want to

00:07:30.069 --> 00:07:32.076
see all of this going, especially you were

00:07:32.076 --> 00:07:33.259
a teacher in Singapore, a lot of people

00:07:33.259 --> 00:07:35.027
hold up Singapore as kind of, it doesn't seem like

00:07:35.027 --> 00:07:37.657
it has a very good education system.

00:07:37.657 --> 00:07:39.153
What do you think was working there,

00:07:39.153 --> 00:07:40.300
what would you like to see more of,

00:07:40.300 --> 00:07:41.236
what do you think ...

00:07:41.236 --> 00:07:44.103
Minli: I think in general, just as a teacher

00:07:44.103 --> 00:07:46.295
whether you're in Singapore in a good education system,

00:07:46.295 --> 00:07:47.574
and I was teaching in a fairly good school,

00:07:47.574 --> 00:07:49.488
but even then you had levels of disparity,

00:07:49.488 --> 00:07:52.371
even within the classrooms and across the classrooms.

00:07:52.371 --> 00:07:54.680
I always felt that when I went into the classroom,

00:07:54.680 --> 00:07:58.622
it was like you just give a big, sort of sigh

00:07:58.622 --> 00:08:01.008
and you go, "All right everybody! Follow me!"

00:08:01.008 --> 00:08:03.116
and you're like, "Yes! Come on everyone!

00:08:03.116 --> 00:08:05.659
Let's learn Math together!"

00:08:05.659 --> 00:08:09.218
It was hard, even in a really good school with

00:08:09.218 --> 00:08:11.574
very good students because you knew that

00:08:11.574 --> 00:08:14.105
you were addressing the needs for that student,

00:08:14.105 --> 00:08:15.361
you knew that student was getting lost,

00:08:15.361 --> 00:08:17.068
you knew that student was bored,

00:08:17.068 --> 00:08:18.896
but you were trying your best to do all of that

00:08:18.896 --> 00:08:20.319
and just perform in front of the class and

00:08:20.319 --> 00:08:22.199
keep everyone entertained in the 15 minutes

00:08:22.199 --> 00:08:24.599
that you got, right?

00:08:24.599 --> 00:08:27.202
I think regardless of where the teacher is,

00:08:27.202 --> 00:08:30.849
many teachers have this issue that

00:08:30.849 --> 00:08:32.612
they have to deal with.

00:08:32.612 --> 00:08:35.734
I think Kahn Academy helps you do that quite a bit

00:08:35.734 --> 00:08:38.643
because you eliminate the fact that you need to

00:08:38.643 --> 00:08:42.237
have to entertain the entire class in one way

00:08:42.237 --> 00:08:44.356
and one way only, everyone gets to go

00:08:44.356 --> 00:08:46.814
at their own pace and then you can track

00:08:46.814 --> 00:08:48.979
where everyone is so you can intermediate.

00:08:48.979 --> 00:08:51.816
Otherwise, it's hard to understand where it is

00:08:51.816 --> 00:08:53.799
that you really should focus in your time.

00:08:53.799 --> 00:08:55.068
Sal: Yeah, very cool.

00:08:55.068 --> 00:08:55.821
Minli: Yeah.


Cost-push inflation

WEBVTT
Kind: captions
Language: en

00:00:00.681 --> 00:00:04.802
In the last two videos, we
explored situations where
the aggregate demand curve

00:00:04.802 --> 00:00:06.143
shifted to the right

00:00:06.143 --> 00:00:08.345
and that caused inflation.
That's actually called

00:00:08.345 --> 00:00:10.342
demand-pull inflation.

00:00:10.342 --> 00:00:14.270
What I want to do in this video is study
a situation where the short-run aggregate

00:00:14.270 --> 00:00:16.939
supply curve shifts to the
left and that causes inflation.

00:00:16.939 --> 00:00:27.543
And that's called cost-push inflation.

00:00:27.543 --> 00:00:32.071
So let's just start off
with our standard graph.

00:00:32.071 --> 00:00:34.511
So this is aggregate prices.

00:00:34.511 --> 00:00:37.429
This is real aggregate
productivity. Real GDP right here.

00:00:37.429 --> 00:00:41.862
I'm going to focus
things on the short run.

00:00:41.862 --> 00:00:44.472
Aggregate demand right over here.

00:00:44.472 --> 00:00:46.809
That is our aggregate demand curve.

00:00:46.809 --> 00:00:50.677
Aggregate supply in the short-run.

00:00:50.677 --> 00:00:53.842
This is what we're going to focus
on, might look something like that.

00:00:53.842 --> 00:00:57.869
So this is aggregate
supply in the short-run.

00:00:57.869 --> 00:01:02.340
And this is our current level of prices.

00:01:02.340 --> 00:01:06.763
And the reason why I draw aggregate supply
in the short-run as this curve that keeps

00:01:06.763 --> 00:01:08.200
getting steeper and steeper.

00:01:08.200 --> 00:01:10.940
Or if you think in algebraic terms, the
slope keeps getting larger and larger

00:01:10.940 --> 00:01:13.269
as you go to the right, one
way to think about it is:

00:01:13.269 --> 00:01:17.001
if the real GDP is down here and
maybe performing well below potential,

00:01:17.001 --> 00:01:19.003
there is a lot of excess
capacity in the economy:

00:01:19.003 --> 00:01:21.873
excess labor capacity,
excess factory capacity.

00:01:21.873 --> 00:01:27.677
So if you want more productivity
out of that economy, people
aren't going to demand much more.

00:01:27.677 --> 00:01:29.403
Prices won't have to go up more.
There's a lot of slack in the economy.

00:01:29.403 --> 00:01:34.937
While as GDP gets higher and higher,
maybe even going beyond its potential,

00:01:34.937 --> 00:01:39.098
starts to get overheated and
in order for people to get very
high levels of utilization,

00:01:39.098 --> 00:01:45.346
essentially get more people to
enter the labor market, work
longer hours, work overtime,

00:01:45.346 --> 00:01:47.873
the prices are going to
essentially have to go up.

00:01:47.873 --> 00:01:52.536
So over here, for some increment in
GDP, prices don't have to go up so much.

00:01:52.536 --> 00:01:54.600
So you have a lower slope than over here.

00:01:54.600 --> 00:01:58.543
For that same increment in GDP,
prices have to go up dramatically.

00:01:58.543 --> 00:02:02.428
With that out of the way, let's
think about what would happen
if the aggregate supply curve

00:02:02.428 --> 00:02:03.927
were to shift to the left.

00:02:03.927 --> 00:02:06.209
We can also think about "Why
would it shift to the left?"

00:02:06.209 --> 00:02:10.539
So let's just shift it to the left.

00:02:10.539 --> 00:02:12.543
It might look something like that.

00:02:12.543 --> 00:02:14.431
At any given point, I try
to shift it to the left.

00:02:14.431 --> 00:02:19.204
You see a new equilibrium
price and equilibrium GDP.

00:02:19.204 --> 00:02:23.878
This is the old equilibrium price
and the old equilibrium GDP.

00:02:23.878 --> 00:02:29.604
This is the new equilibrium price
and the new equilibrium GDP.

00:02:29.604 --> 00:02:31.536
You see, you definitely had inflation.

00:02:31.536 --> 00:02:35.936
Price went up, but this is worse,
depending on how you view things.

00:02:35.936 --> 00:02:39.067
But generally, this is worse
than demand-pull inflation.

00:02:39.067 --> 00:02:44.009
Because at least with demand-pull
inflation, you had inflation happening,

00:02:44.009 --> 00:02:47.604
but real GDP increased

00:02:47.604 --> 00:02:49.266
more as things get overheated.

00:02:49.266 --> 00:02:56.133
Prices went up, but your
GDP actually contracts.

00:02:56.133 --> 00:03:00.745
This is a situation where
you might have heard the word
before: this is stagflation.

00:03:00.745 --> 00:03:03.182
Inflation with stagnation.

00:03:03.182 --> 00:03:07.209
So this is stagflation.

00:03:07.209 --> 00:03:11.768
There's two very notable examples
of this in recent US history.

00:03:11.768 --> 00:03:16.269
In 1973, you had the Arab oil embargo.

00:03:16.269 --> 00:03:23.763
It was apparently due in
response to the US support of
Israel in the Yom Kippur War.

00:03:23.763 --> 00:03:27.804
So you had the 1973 oil embargo.

00:03:27.804 --> 00:03:32.599
In 1979, you have your revolution in Iran.

00:03:32.599 --> 00:03:34.513
Iran was a major oil producer then.

00:03:34.513 --> 00:03:38.003
It continues to be, but it
was particularly so in 1979.

00:03:38.003 --> 00:03:44.092
So, during all the chaos, during
the revolution, Iran's oil
productivity dropped dramatically.

00:03:44.092 --> 00:03:47.139
So you had an oil crisis.

00:03:47.139 --> 00:03:54.761
The reason why oil crises would
shift the curve to the left...

00:03:54.761 --> 00:03:58.602
In both of these situations, the
supply of oil drops dramatically.

00:03:58.602 --> 00:04:03.202
So if the supply of oil, and this
is kind of a micro-phenomenon,

00:04:03.202 --> 00:04:09.206
if the supply of something drops
dramatically, the price of that
thing is going to go up dramatically.

00:04:09.206 --> 00:04:13.868
And in the 70's, oil was an even bigger
part of the economy than it is now.

00:04:13.868 --> 00:04:15.938
You probably remember if
you were around in the 70's.

00:04:15.938 --> 00:04:19.199
Very very large cars that
had very bad gas mileage.

00:04:19.199 --> 00:04:23.810
Other uses of oil were also much
less efficient in the 1970s.

00:04:23.810 --> 00:04:26.004
So it was a big input into the US economy.

00:04:26.004 --> 00:04:34.735
If all of a sudden, a major input's
price becomes much more expensive,

00:04:34.735 --> 00:04:36.718
you could view it as one of two ways:

00:04:36.718 --> 00:04:42.220
For a given level of productivity,
suppliers will want to charge more.

00:04:42.220 --> 00:04:46.300
If you want me to deliver to your
house, if you want me to run a truck,

00:04:46.300 --> 00:04:50.005
so for a given level of productivity,
suppliers will charge more.

00:04:50.005 --> 00:04:57.067
Or you could view that at a
given level of price, suppliers
will want to produce less.

00:04:57.067 --> 00:05:04.137
So at a given price, say this
price over here, a supplier
will want to produce less.

00:05:04.137 --> 00:05:07.468
Because they are not
getting as much real profit.

00:05:07.468 --> 00:05:09.134
So you could view it
as a shift to the left.

00:05:09.134 --> 00:05:12.390
Or you could even view it at
a given level of productivity,

00:05:12.390 --> 00:05:16.529
if you want to produce at that level,
you're going to have to pay me more
so I can offset my price increases.

00:05:16.529 --> 00:05:18.258
So you can also view it as a shift up.

00:05:18.258 --> 00:05:19.223
Either one.

00:05:19.223 --> 00:05:22.386
But we'll think of it as a
shift left in this context.

00:05:22.386 --> 00:05:28.123
So you see, this does describe
what happened during these
two oil crises in the 1970's.

00:05:28.123 --> 00:05:30.992
Because of this increase
in the price of oil,

00:05:30.992 --> 00:05:34.449
at any given price, suppliers
were willing to supply less.

00:05:34.449 --> 00:05:37.285
Aggregate short-run
supply shifts to the left.

00:05:37.285 --> 00:05:40.725
You have the inflation, and
you also have the stagnation.

00:05:40.725 --> 23:59:59.999
Real GDP goes down.


Real GDP driving price

WEBVTT
Kind: captions
Language: en

00:00:00.341 --> 00:00:04.007
Male: In our earlier justifications
for an upward sloping

00:00:04.007 --> 00:00:06.404
aggregate supply curve in the short run,

00:00:06.404 --> 00:00:08.735
we kind of viewed price as
the independent variable.

00:00:08.735 --> 00:00:10.339
What I want to explore a
little bit in this video

00:00:10.339 --> 00:00:11.791
is that you could view
it the other way around.

00:00:11.791 --> 00:00:15.605
You could view that real
GDP is driving price.

00:00:15.605 --> 00:00:19.196
Just to review, this
is our upward sloping,

00:00:19.196 --> 00:00:20.996
the thing that we want to happen.

00:00:20.996 --> 00:00:23.945
Aggregate supply in the short run.

00:00:23.945 --> 00:00:25.654
In the previous videos we said, hey,

00:00:25.654 --> 00:00:29.726
when price increases,
this would cause real GDP

00:00:29.726 --> 00:00:32.273
to maybe expand even beyond its potential,

00:00:32.273 --> 00:00:34.125
beyond its natural rate.

00:00:34.125 --> 00:00:36.457
Let's say that this is
where it is in the long run,

00:00:36.457 --> 00:00:37.457
right over here.

00:00:37.457 --> 00:00:38.691
Let me draw it.

00:00:38.691 --> 00:00:39.991
This is where it is in the long run,

00:00:39.991 --> 00:00:40.795
right over here.

00:00:40.795 --> 00:00:43.280
This is an aggregate
supply in the long run.

00:00:43.280 --> 00:00:45.458
This is the current level of prices.

00:00:45.458 --> 00:00:46.654
This is all review.

00:00:46.654 --> 00:00:48.858
Right over here, this is
our current level of prices.

00:00:48.858 --> 00:00:50.727
This is where we're sitting on GDP.

00:00:50.727 --> 00:00:55.914
In the past we said, hey,
if we increase prices

00:00:55.914 --> 00:00:59.958
because of a bunch of
factors, that might cause,

00:00:59.958 --> 00:01:02.254
in aggregate, the economy to produce even

00:01:02.254 --> 00:01:06.336
above its natural rate,
so you would actually have

00:01:06.336 --> 00:01:08.666
real GDP expanding, so you have

00:01:08.666 --> 00:01:11.336
an upward sloping aggregate supply curve.

00:01:11.336 --> 00:01:14.264
We gave reasons why price
might drive this to happen.

00:01:14.264 --> 00:01:16.261
We talked about the misperception theory,

00:01:16.261 --> 00:01:18.995
that individual actors in the economy,

00:01:18.995 --> 00:01:20.732
individual firms, might misperceive

00:01:20.732 --> 00:01:23.928
the increases in prices as a microeconomic

00:01:23.928 --> 00:01:25.664
phenomenon and so they would,

00:01:25.664 --> 00:01:27.061
because of the law of supply,

00:01:27.061 --> 00:01:29.197
they'd think they were
making more real profit.

00:01:29.197 --> 00:01:31.328
It would take them some time
to realize that they aren't.

00:01:31.328 --> 00:01:33.667
It's just nominal profits
that they're getting.

00:01:33.667 --> 00:01:36.062
On top of that, we talked about the whole

00:01:36.062 --> 00:01:37.644
sticky wage, sticky cost theory,

00:01:37.644 --> 00:01:40.928
that some part of the
economy there will be

00:01:40.928 --> 00:01:44.059
increased real profits
because in the short term,

00:01:44.059 --> 00:01:46.276
some players' costs aren't going to go up

00:01:46.276 --> 00:01:47.857
as much as their revenue are,

00:01:47.857 --> 00:01:49.393
so they would also want to essentially

00:01:49.393 --> 00:01:52.474
produce more beyond their
natural productivity

00:01:52.474 --> 00:01:54.471
and maybe overheat their factories

00:01:54.471 --> 00:01:55.977
and their people a little bit.

00:01:55.977 --> 00:01:57.646
But I want to talk in this video,

00:01:57.646 --> 00:01:59.727
and this is true of a
lot of economic models,

00:01:59.727 --> 00:02:01.999
you don't have to view
price as driving real GDP.

00:02:01.999 --> 00:02:03.861
You could really just view
it the other way around.

00:02:03.861 --> 00:02:09.469
As real GDP, if you get
utilization really, really high,

00:02:09.469 --> 00:02:10.552
approaching 100%,

00:02:10.552 --> 00:02:11.993
and depending on how
you define utilization,

00:02:11.993 --> 00:02:13.331
maybe going even above 100%,

00:02:13.331 --> 00:02:15.529
that that might actually drive prices,

00:02:15.529 --> 00:02:18.070
or that maybe they are driving each other.

00:02:18.070 --> 00:02:21.337
One way to think of it, and really this is

00:02:21.337 --> 00:02:23.273
just another justification
for an upward sloping

00:02:23.273 --> 00:02:24.894
aggregate supply curve,

00:02:24.894 --> 00:02:26.332
but we're just doing it a different way.

00:02:26.332 --> 00:02:28.477
Now we're saying this is our
natural rate of productivity.

00:02:28.477 --> 00:02:31.674
If we're asking people to produce more,

00:02:31.674 --> 00:02:33.401
then they're going to want to charge more.

00:02:33.401 --> 00:02:36.400
The way to think about
this, and at the end

00:02:36.400 --> 00:02:38.471
it's really not going to help them

00:02:38.471 --> 00:02:40.198
because everything's going
to get more expensive.

00:02:40.198 --> 00:02:42.469
They're going to produce more
but they're not going to,

00:02:42.469 --> 00:02:46.118
on a per unit basis, not
get much more real profit.

00:02:46.118 --> 00:02:47.695
But in the short run they might,

00:02:47.695 --> 00:02:49.122
or they might think they are,

00:02:49.122 --> 00:02:50.193
so they might want to do it.

00:02:50.193 --> 00:02:51.945
The one way to think about this is

00:02:51.945 --> 00:02:55.121
if you view this bar,
the area of this bar,

00:02:55.121 --> 00:02:58.989
as the capacity of a firm,
the capacity of a market,

00:02:58.989 --> 00:03:00.723
capacity of an entire economy,

00:03:00.723 --> 00:03:02.942
then maybe its natural, its potential,

00:03:02.942 --> 00:03:06.249
maybe it's sitting here
at maybe 85% utilization.

00:03:06.249 --> 00:03:10.529
If the factory could be
producing widgets or cars

00:03:10.529 --> 00:03:14.385
or whatever 100 hours a week, its natural

00:03:14.385 --> 00:03:16.053
state is it's actually only producing

00:03:16.053 --> 00:03:18.191
85 hours a week and
that's because it needs

00:03:18.191 --> 00:03:20.353
to use that other 15
hours to let the factory

00:03:20.353 --> 00:03:22.605
cool down, or to do
repairs and maintenance

00:03:22.605 --> 00:03:24.451
or inspections of some sort.

00:03:24.451 --> 00:03:26.404
But let's say that for whatever reason,

00:03:26.404 --> 00:03:27.786
maybe a war starts, and the government

00:03:27.786 --> 00:03:29.604
demands that more things get built,

00:03:29.604 --> 00:03:31.254
more widgets get built,
more tanks get built,

00:03:31.254 --> 00:03:34.531
more materials need to be developed,

00:03:34.531 --> 00:03:37.055
that they're essentially
asking people not to do

00:03:37.055 --> 00:03:38.654
some of these things that
they would have to do

00:03:38.654 --> 00:03:40.357
if they want to be
sustainable in the long run,

00:03:40.357 --> 00:03:42.652
and they ask the
factories to produce more,

00:03:42.652 --> 00:03:47.122
to start getting to 90%, 95%,
maybe even 100% utilization.

00:03:47.122 --> 00:03:49.719
You can imagine in this situation all of

00:03:49.719 --> 00:03:53.532
the firms ... a firm
is all about maximizing

00:03:53.532 --> 00:03:56.194
profit ... they will
raise prices when they

00:03:56.194 --> 00:03:58.461
can raise prices even
though in the long run

00:03:58.461 --> 00:04:00.656
it will just be a nominal increase.

00:04:00.656 --> 00:04:02.118
It won't necessarily be a real increase,

00:04:02.118 --> 00:04:03.659
but they'll feel in the
short run that it is

00:04:03.659 --> 00:04:05.991
kind of a real increase in prices,

00:04:05.991 --> 00:04:07.529
and so they will do that.

00:04:07.529 --> 00:04:11.719
Instead of them trying
to build more capacity,

00:04:11.719 --> 00:04:13.454
they might even view it
as a short run thing,

00:04:13.454 --> 00:04:15.529
so they'll say, hey,
no, you're going to have

00:04:15.529 --> 00:04:17.279
to pay us a lot of money for our employees

00:04:17.279 --> 00:04:18.853
to work overtime.

00:04:18.853 --> 00:04:20.609
Maybe that's even in some of the contracts

00:04:20.609 --> 00:04:23.020
that you have to pay more
for them to work overtime,

00:04:23.020 --> 00:04:25.789
for me to defer some of my maintenance

00:04:25.789 --> 00:04:27.724
and other things that I
was going to going to do,

00:04:27.724 --> 00:04:30.252
or kind of defer investment for me to just

00:04:30.252 --> 00:04:32.854
produce all out right over here.

00:04:32.854 --> 00:04:36.194
I'm just describing the
same upward sloping curve

00:04:36.194 --> 00:04:37.450
but with a different narrative.

00:04:37.450 --> 00:04:40.141
Instead of saying that price
is driving real GDP expansion

00:04:40.141 --> 00:04:43.294
because of the misperception
theory and sticky prices,

00:04:43.294 --> 00:04:46.722
I'm saying that an increase in real GDP

00:04:46.722 --> 00:04:49.594
and an increase in
utilization will drive prices.

00:04:49.594 --> 00:04:51.654
They're just two ways to
look at the same thing.

00:04:51.654 --> 00:04:53.698
You can even apply that
to some of the ideas

00:04:53.698 --> 00:04:55.253
that we talked about in the last video.

00:04:55.253 --> 00:04:57.534
In the last video, you might
not have even had to resort

00:04:57.534 --> 00:05:00.383
to the Aggregate Demand
Aggregate Supply model.

00:05:00.383 --> 00:05:02.273
You might not even need

00:05:02.273 --> 00:05:04.875
Aggregate Demand Aggregate
Supply to understand

00:05:04.875 --> 00:05:08.363
why we had inflation in 1966 and 1967

00:05:08.363 --> 00:05:10.858
and really the late '60s generally.

00:05:10.858 --> 00:05:12.718
All you would have to do is think about

00:05:12.718 --> 00:05:15.665
entering into, or the beginning of LBJ's

00:05:15.665 --> 00:05:17.530
administration, the economy was already

00:05:17.530 --> 00:05:18.855
at high utilization.

00:05:18.855 --> 00:05:21.917
Unemployment was only at around 4% or 5%;

00:05:21.917 --> 00:05:26.271
95%-96% of the labor force was employed.

00:05:26.271 --> 00:05:28.316
Factories were operating
at high utilization.

00:05:28.316 --> 00:05:30.318
Now we escalate the war.

00:05:30.318 --> 00:05:32.858
We're taking people who could have been

00:05:32.858 --> 00:05:34.784
employed in the domestic economy

00:05:34.784 --> 00:05:36.528
and they're going and fighting in battle.

00:05:36.528 --> 00:05:38.054
We need bullets, we need boats,

00:05:38.054 --> 00:05:39.831
we need fuel, we need all of these things.

00:05:39.831 --> 00:05:42.271
We need to utilize more
of domestic capacity

00:05:42.271 --> 00:05:44.441
to produce all of these things, so you can

00:05:44.441 --> 00:05:46.959
imagine that this dynamic was occurring;

00:05:46.959 --> 00:05:50.455
that you had to get firms
and people to tap out

00:05:50.455 --> 00:05:53.191
all of their extra
capacity, and then to do so

00:05:53.191 --> 00:05:54.665
they're essentially going to demand

00:05:54.665 --> 00:05:57.117
higher wages and higher prices.

00:05:57.117 --> 00:05:59.280
We wouldn't have necessarily
even had to resort

00:05:59.280 --> 00:06:01.734
to this to predict this higher inflation.

00:06:01.734 --> 00:06:03.939
Another way to think about
it is this is another

00:06:03.939 --> 00:06:05.895
way to justify an upward sloping

00:06:05.895 --> 00:06:07.734
aggregate supply curve in the short run,

00:06:07.734 --> 00:06:11.064
which is another way that we
described the same dynamic.

00:06:11.064 --> 00:06:14.067
They're all heavily, heavily related.