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A FIRST LOOK AT MACROECONOMICS
–Origins of macroeconomics and the problems it deals with–Macroeconomic issues.• Economic growth• Unemployment• Inflation• Government budget deficits or surpluses.• Trade deficits or surpluses• Macroeconomic policy challenges •Tools for meeting macroeconomic goals.
Origins and Issues of Macroeconomics
• Study of economic growth, inflation, and international payments began during the 1750s.
• Modern macro dates to Great Depression (1929-39)– John Maynard Keynes, The General Theory
of Employment, Interest, and Money• focused on short run - unemployment and lost
production.• “In the long run, we’re all dead.”
• During the 1970s and 1980s, macroeconomists became more concerned about the long-term—inflation and economic growth.
Economic Growth and Fluctuations
–Economic growth• An outward shift of the Production Possibilities Curve.• An increase in “potential GDP”
– Sources of growth• technology• more resources–Land, labor, capital, human capital
–Pro-growth policies
Economic Growth and Fluctuations• Real GDP
$ value of all goods & services produced in an economy during one year, measured with a fixed set of prices.
• Potential GDP$ value of real GDP when all the economy’s labor, capital, land, and entrepreneurial ability are fully employed.
• Signs that Real GDP < Potential GDP?
• Can policies be implemented to correct problem?
Economic Growth and Fluctuations
During the 1970s and 1980s, there was a “slowdown in economic growth”
What could have caused this?
Economic Growth and Fluctuations
• Over time, real GDP fluctuates more than potential GDP because of the business cycle
Economic Growth and Fluctuations
• Every business cycle has four stages:1. Recession period during which real GDP decreases for at least
two successive quarters
2. Trough turning point between recession and expansion
3. Expansion period during which real GDP increases.
4. Peak
Economic Growth and Fluctuations
–The most recent U.S. cycle.
Economic Growth and Fluctuations
–Long-term growth trend and cycles.
Economic Growth and Fluctuations
–Why do growth rates vary across countries?
• The Lucas Wedge– accumulated
loss of output from a slowdown in the growth rate of real GDP per person.
– approximately $50 trillion, or five year’s GDP, since 1960
Economic Growth and Fluctuations
• The Okun Gap– gap between
potential GDP and actual real GDP
– another name for the output gap.
– totaled $2.7 trillion since 1973 or about 3 months real GDP.
Economic Growth and Fluctuations
• Benefits and Costs of Economic Growth– Benefits:
• expanded consumption possibilities.
– Costs: • Forgone consumption in the present• More rapid depletion of nonrenewable natural
resources & environmental effects• More frequent job changes.• Distributional consequences
Economic Growth and Fluctuations
Jobs and Unemployment
• Jobs– The U.S. economy created around 2 million
jobs a year, on the average during the 1990s. – But the number fluctuates and since 2001 the
pace of job creation has been slow.
Jobs and Unemployment
• Unemployment– person does not have a job but is available for work,
willing to work, and has made some effort to find work within the previous four weeks.
• labor force – total number of people who are employed and
unemployed.• unemployment rate
– % of the labor force who are unemployed.• discouraged worker
– available for work, willing to work, but who has given up the effort to find work.
Jobs and Unemployment
• Unemployment rate– rises during recession, falls during expansion.– During the 1930s, the unemployment rate almost hit 25 percent– The lowest rate occurred during WWII at 1.2 percent
Unemployment Around the World
– U.S. unemployment, on average, lies in the middle of the other countries shown.
Inflation
– Inflation is a process of rising prices. – We measure the inflation rate as the
percentage change in the average level of prices or the price level.
– The Consumer Price Index—the CPI—is a common measure of the price level.
Inflation• The inflation rate fluctuates, but is usually positive. • A falling price level—a negative inflation rate—is called
deflation.
Inflation Around the World
• U.S. inflation has been similar to that in other industrial countries
• U.S. inflation has been much lower than that in developing countries
Is Inflation a Problem?
• Income redistribution between borrowers and lenders
• Tax system.
• Diverts resources from productive activities to inflation forecasting.
• Eradicating can be costly in terms of unemployment.
Surpluses and Deficits
• Government Budget Surplus and Deficit– If taxes > spending: surplus. – If spending > taxes: deficit– Deficits tend to be countercyclical.
Surpluses and Deficits
• International Surplus and Deficit– If a nation imports more than it exports, it has
a trade deficit (or “international deficit”).– If a nation exports more than it imports, it has
a trade surplus.– The current account deficit or surplus is the
balance of exports minus imports plus net interest paid to and received from the rest of the world.
Macro Policy Challenges and Tools
Five widely agreed policy challenges for macroeconomics are to:1.Boost economic growth
2.Keep inflation low
3.Stabilize the business cycle
4.Maintain low levels of unemployment
5.Reduce government and international deficits
Macro Policy Challenges and Tools
Macro policy tools 1. Monetary policy
Federal ReserveInterest rates
2. Fiscal policyTaxesGovernment spending
