Introduction to Macroeconomics

Mr. Way

Economics

2/9/2012

12.3.3 Describe the aims of government fiscal policies (taxation,

borrowing, spending) and their influence on production, employment,

and price levels.

What is Macroeconomics?

• Micro = small scale

• Macro = large scale

• Microeconomics: study of a small part of an economy, e.g. a market for one good.

• Macroeconomics: study of the economy as a whole.

What do Macroeconomists study?

• There are three main numbers that we focus on when looking at the economy as a whole:– Total production (GDP)– Price level (inflation)– Unemployment

What is GDP?

• GDP stands for Gross Domestic Product

• It is the total market value of all goods and services produced within a country

• It is also seen largely as an indication of how powerful a country is -- for example, Americans are starting to fear China because its GDP is rising so rapidly.

How does one calculate GDP?

• GDP = C + I + G + X,• C = Consumption – money people spend on

goods and services• I = Investment – money businesses or people

spend on acquiring and maintaining capital or stocking up inventory

• G = Government spending - Duh• X = (Exports – Imports) – Total value of goods

we exported minus total value of goods we imported.

Calculating GDP example:

• If people bought goods and services worth $5 trillion,

• People and businesses spent $2 trillion investing in new capital and inventory

• The government spent $3 trillion

• We exported $1.5 trillion worth of goods

• We imported $3.5 trillion worth of goods,

• GDP = 5 + 2 + 3 + 1.5 – 3.5 = $8 trillion

What is the “Price Level?”

• Price level refers to how many dollars it will cost to buy a “basket of goods”

• For instance, 100 years ago $20 was a lot of money; $20 worth of stuff back then would be about $500 worth of stuff today.

• The decrease in the value of dollars over time is called “inflation”

• Conversely, an increase in the value of dollars over time is called “deflation.”

How is the price level determined?

• Every year, the U.S. Department of Labor pays a bunch of people to go out and buy the same “basket of goods” and report how much it cost them.

• Then, they compare the average price of the basket this year with previous years.

• How much the price of the basket increases tells us how much inflation happened that year.

Calculating inflation

• If a basket of goods cost $100 last year and then the same basket of goods cost $105 this year,

• Inflation = (105 – 100)/100 = 5%

• If a basket of goods cost $75 in 1987 and the same basket cost $145 in 2012,

Inflation = (145-75)/75 = 93.3%

Inflation is considered bad.

• Most people agree that inflation is bad because: – It means they can’t buy the same amount of

stuff if they get paid the same amount.– Businesses have to keep paying for new

menus with higher prices listed– Any money you had saved up is worth less

and less over time– However, people who owe money love

inflation because it makes it easy to pay back their debts.

What is “Unemployment?”

• You’d think the unemployment level is just the proportion of people who aren’t working. You would be wrong.

• Unemployment level =

people looking for work / Total workforce

Total workforce = people with jobs and people looking for jobs.

Calculating unemployment

• If there are 150 million people who are employed and 30 million people looking for work,

Unemployment = 30 / (150 + 30) = 16.7%

• If there are 190 million people who are employed and 10 million people looking for work,

Unemployment = 10 / (190 + 10) = 5%

Problems with this calculation

• There are lots of problems with this simple calculation:– “Discouraged workers” are people who would like a

job but never found one and stopped looking – they aren’t counted.

– “Underemployed” workers have skills for a better job but couldn’t find one, so they work at McDonalds. They still count as employed

– Part time employment counts as a job, even if you’re looking for a full time job

• Therefore, the unemployment rate is often a under-estimate of real social problems.

Conclusion

• These are the basics of macroeconomic analysis.

• All of these calculations are far too simple to be of much use in making policy, but they are what you’ll see in the news.

• Be aware that politicians manipulate these numbers and their implications for political ends while economists shake their heads in disbelief.

• For instance, the unemployment rate is down to 8.3% and President Obama is taking credit. But does that mean we got more jobs, or more people gave up looking for one?