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Introductory MaterialsIntroductory MaterialsChapter 1Chapter 1

Professor Steve Cunningham

Intermediate Macroeconomics

ECON 219

What is Macroeconomics?What is Macroeconomics?

Macroeconomics is the study of the structure and performance of large-scale economies (typically national) and of the policies that governments use to try to affect economic performance.

An economy is a collection of people viewed in terms of the ways they organize themselves in efforts to produce and/or acquire the things they value.

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDP is the measure: – Of all goods and services within the

boundaries of the country,– Currently produced,– Evaluated at market prices,– In final sales.

Real GDP and GrowthReal GDP and Growth

Real GDP is the GDP valued at the prices of a base year.

GDP given in current prices is called nominal GDP or money GDP.

The economic growth rate is the percentage change in real GDP.

Macroeconomic IssuesMacroeconomic Issues

GrowthBusiness Cycles and Unemployment InflationTrade DeficitsBudget Deficits and

Government Spending

Output of the U.S. economy, 1869–1996Output of the U.S. economy, 1869–1996

Growth is importantGrowth is important

Provides jobsProvides a higher average standard

of living (or at least maintain the same standard in the face of a growing population)

Provides more opportunities and mobility

What causes growth?What causes growth?

Population (workforce) growthTechnology growth, education, and

training provide higher productivity:– each worker to produce more per period

(higher average labor productivity)– the production of more goods for the

same level of raw materials

Output and Employment in the United States,Output and Employment in the United States,1959–Present1959–Present

Sources: Economic Report of the President, 2002; Economic Indicators (various issues).

Source: International Labor Organization. Figure 1–10

Annual Hours Worked Per Person in Selected NationsAnnual Hours Worked Per Person in Selected Nations

Average labor productivity in the United States, 1900–1996Average labor productivity in the United States, 1900–1996

Source: World Bank, World Development Indicators, 2003.

Per Capita Output ComparisonsPer Capita Output Comparisonsfor Selected Nationsfor Selected Nations

Source: International Monetary Fund, World Economic Outlook, April 2002.

Output Growth ComparisonsOutput Growth Comparisons

Sources: International Monetary Fund, World Economic Outlook, April 2002; Economic Report of the President, 2002; Economic Indicators (various issues).

World Output and World Output and the Declining the Declining

Dominance of the Dominance of the United StatesUnited States

Worldreal GDP($ billions)

U.S. real GDPas percent ofworld real GDP

Business CyclesBusiness Cycles

Refers to short-run, sometimes severe, contractions and expansions in economic activity. Business cycles result in changes in the levels of employment.

UnemploymentUnemployment is the number of people who are available for employment, and actively seeking employment, but who cannot find jobs.

The unemployment rateunemployment rate is the number unemployed divided by the total labor force, expressed as a percentage.

U.S. Unemployment, 1959–PresentU.S. Unemployment, 1959–Present


The U.S. Unemployment rate, 1890–1996The U.S. Unemployment rate, 1890–1996

InflationInflation

The Consumer Price Index (CPI) measures the average level of prices of the goods and services that the typical urban family buys.

The Bureau of Labor Statistics (BLS) calculates the CPI monthly.

Often inflation is measure by the rate of change of the CPI.

Annual Money Growth Rates and Inflation RatesAnnual Money Growth Rates and Inflation Ratesin the United States, 1960–Presentin the United States, 1960–Present


Consumer prices in the United States, 1800–1996Consumer prices in the United States, 1800–1996

Average Inflation Rates forAverage Inflation Rates forSelected Nations and Regions of the WorldSelected Nations and Regions of the World

Source: International Monetary Fund, World Economic Outlook, April 2002.

Open vs. Closed EconomyOpen vs. Closed Economy

An economy is openopen if it engages in a significant amount of trade (importing and exporting) with the rest of the world.

An economy is closedclosed if it does not interact economically with the rest of the world.

U.S. exports and imports, 1896–1996U.S. exports and imports, 1896–1996

The U.S. Balance of Trade, 1949–PresentThe U.S. Balance of Trade, 1949–Present


Budget DeficitBudget Deficit

Government Purchases (G) of goods and services (gross).

Net Taxes (T ) are equal to the taxes paid to the government less the transfer payments received from the government less interest payments made by the government on its debt(T = taxes - transfers - gov’t interest)

A Budget Deficit is G > T A Budget Surplus is G < T

U.S. Federal government spending and tax collections, 1896–1996U.S. Federal government spending and tax collections, 1896–1996

Source: Friedrich Schneider, “The Increase of the Size of the Shadow Economy of Eighteen OECD Countries:Some Preliminary Explanations,” CESifo Working Paper no. 306, June 2000.

Figure 1–12

The Relative Size of the Shadow Economy and the The Relative Size of the Shadow Economy and the Total Tax and Social Security BurdenTotal Tax and Social Security Burden

in Selected Nationsin Selected NationsShadow economy activity as a percentage of official economic activity

Shadow economy activity as a percentage of official economic activity

Why Economists DisagreeWhy Economists Disagree

Different assumptionsDifferent worldview or visionDifferent normative view

Conservatives vs. LiberalsConservatives vs. Liberals(Given in Extreme Characterizations)(Given in Extreme Characterizations)

Conservative

(Constrained Vision)

Liberal

(Unconstrained Vision)Human Nature Cannot and should not be

changed by others.Can and sometimes should be changed.

Decision-making De-centralize. Individual knowledge and judgment are imperfect.

Centralized. Some individuals are better able to decide for others.

Organization of Social Processes

Uncoordinated processes are best. This maximizes freedom, flexibility, use of proximity.

Coordinated processes. Why act without reason?

Social Change Is evolutionary. Follows from human progress. Allowing natural evolution provides stability.

Social engineering (direct design) by knowledgeable leaders is more efficient and leads to chosen outcomes.

Conservative

(Constrained Vision)

Liberal

(Unconstrained Vision)Individual vs. Society

The individual and his/her freedom is more important than the collective. “Society” is nothing more than some total of the individuals who make it up.

The collective is more important than the individual. Society shapes the individual.

Equality Equality means “parity of privileges.” It is process equality.

Equality means nothing outside of social outcomes. It is “end-state equality.”

Justice Process justice must be preserved at all costs. It is the glue that holds society together and directs self-interest into social benefit.

Justice is tied to results. Therefore different standards may apply to different individuals.

Conservatives vs. LiberalsConservatives vs. LiberalsContinuedContinued

Liberals and ConservativesLiberals and Conservatives

Liberal Libertarian (Classical Liberal)

Totalitarian (Populist?)

Conservative

For Against

For

Against

Government Intervention

in Economic Affairs

Government Intervention inSocial/Personal

Affairs

Classicals vs. KeynesiansClassicals vs. Keynesians

Keynesians Marxists/Socialists Institutionalists New Keynesians

Classicals Neoclassicals New Classicals Supply-siders Monetarists Austrians

LiberalsClassical Liberals& Conservatives

Economy & Finance

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