Title: ParkinBade Chapter 19
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CHAPTER
A First Look at Macroeconomics
2After studying this chapter you will be able to
- Describe the origins and issues of macroeconomics
- Describe the trends and fluctuations in economic
growth and explain the benefits and costs of
economic growth - Describe the trends and fluctuations in
unemployment and explain why unemployment is a
problem - Describe the trends and fluctuations in inflation
and the value of the dollar and explain why
inflation is a problem - Describe the trends and fluctuations in
surpluses, deficits, and debts and explain why
they matter - Identify the macroeconomic policy challenges and
list the tools available for meeting them
3What Will Your World Be Like?
- Will tomorrows world be more prosperous than
today? - Will jobs be plentiful?
- Will the cost of living be stable?
- Will the governments and the nations deficit
continue to increase? - What macroeconomic policy tools does the
government have to steer the course of the
economy?
4Origins and Issues of Macroeconomics
- Economists began to study economic growth,
inflation, and international payments during the
1750s. - Modern macroeconomics dates from the Great
Depression, a decade (1929-1939) of high
unemployment and stagnant production throughout
the world economy. - John Maynard Keynes book, The General Theory of
Employment, Interest, and Money, began the
subject.
5Origins and Issues of Macroeconomics
- Short-Term Versus Long-Term Goals
- Keynes focused on the short-termon unemployment
and lost production. - In the long run, said Keynes, were all dead.
- During the 1970s and 1980s, macroeconomists
became more concerned about the
long-terminflation and economic growth.
6Economic Growth and Fluctuations
- Economic growth is the expansion of the economys
production possibilitiesan outward shifting PPF. - We measure economic growth by the increase in
real GDP. - Real GDP (real gross domestic product) is the
value of the total production of all the nations
farms, factories, shops, and offices, measured in
the prices of a single year.
7Economic Growth and Fluctuations
- Economic Growth in the United States
- Figure 20.1 shows real GDP in the United States
from 1960 to 2005.
- The figure highlights
- Growth of potential GDP
- Fluctuations of real GDP around potential GDP
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9Economic Growth and Fluctuations
- Growth of Potential GDP
- Potential GDP is the value of production when all
the economys labor, capital, land, and
entrepreneurial ability are fully employed. - During the 1970s, the growth of output per person
sloweda phenomenon called the productivity
growth slowdown.
10Economic Growth and Fluctuations
- Fluctuations of Real GDP Around Trend
- Real GDP fluctuates around potential GDP in a
business cyclea periodic but irregular
up-and-down movement in production.
11Economic Growth and Fluctuations
- Every business cycle has two phases
- 1. A recession
- 2. An expansion
- and two turning points
- 1. A peak
- 2. A trough
- Figure 20.2 on the next slide illustrates these
features of the business cycle.
12Economic Growth and Fluctuations
- Most recent business cycle in the United States
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14Economic Growth and Fluctuations
- A recession is a period during which real GDP
decreases for at least two successive quarters. - An expansion is a period during which real GDP
increases.
15Economic Growth and Fluctuations
- Figure 20.3 shows the long-term growth trend and
cycles.
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17Economic Growth and Fluctuations
- Economic Growth Around the World
- Figure 20.4(a) compares the growth rate of real
GDP per person in the United States with that for
the rest of the world as a whole.
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19Economic Growth and Fluctuations
- Figure 20.4(b) compares economic growth in the
United States with that in other countries and
regions from 1996 to 2006. - Among the advanced economies, Japan has grown
slowest and the newly industrialized Asian
economies have grown fastest.
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21Economic Growth and Fluctuations
- Among the developing economies, Central and South
America have grown slowest and Asia has grown
fastest. - The world has grown a bit faster than the United
States.
22Economic Growth and Fluctuations
- The Lucas Wedge and Okun Gap
- How costly are the growth slowdown and the lost
output over the business cycle? - To answer that question we measure
- The Lucas wedge
- The Okun gap
23Economic Growth and Fluctuations
- The Lucas Wedge
- The Lucas wedge is the accumulated loss of output
from the productivity growth slowdown of the
1970s . - Figure 20.5(a) shows that the Lucas wedge is 72
trillion or 6.5 times the real GDP in 2005.
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25Economic Growth and Fluctuations
- The Okun Gap
- Real GDP minus potential GDP is the output gap.
- A negative output gap is called an Okun gap.
- Figure 20.5(b) shows the Okun gap from recessions
since 1973 is 3.3 trillion or about 30 percent
of real GDP in 2005.
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27Economic Growth and Fluctuations
- Benefits and Costs of Economic Growth
- The Lucas wedge is a measure of the dollar value
of lost real GDP if the growth rate slows. This
cost translates into real goods and services. - It is a cost in terms of less health care for the
poor and elderly, less cancer and AIDS research,
worse roads, and less to spend on clean air, more
trees, and cleaner lakes. - But fast growth is also costly. Its main costs is
forgone current consumption. To sustain growth,
resources must be allocated to advancing
technology and accumulating capital rather than
to current consumption.
28Jobs and Unemployment
- Jobs
- In 2006, 143 million people in the United States
had jobs. - This number is 16 million more than in 1996 and
33 million more than in 1986. - But the pace of job creation fluctuates.
- During the recession, the number of jobs shrinks.
- During the 1990?1991 recession, more than 1
million jobs were lost and during the 2001
recession, 2 million jobs disappeared.
29Jobs and Unemployment
- Unemployment
- Not everyone who wants a job can find one.
- On an average day in a normal year, 7 million
people in the United States are unemployed. - In a recession, the number is larger. For
example, in 1990-1991 recession, 9 million people
were looking for jobs. - The unemployment rate is the number of unemployed
people expressed as a percentage of all the
people who have jobs or are looking for one.
30Jobs and Unemployment
- The unemployment rate is not a perfect measure of
the underutilization of labor. For two reasons - The unemployment rate
- 1. Excludes people who are so discouraged that
they have given up looking for jobs. - 2. Measures unemployed people rather than
unemployed labor hours. So it does not tells us
about the number of part-time workers who want
full-time jobs.
31Jobs and Unemployment
- Unemployment in in United States
- Figure 20.6 shows the unemployment rate from 1926
to 2006.
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33Jobs and Unemployment
- During the 1930s, the unemployment rate hit 25
percent.
34Jobs and Unemployment
- The lowest rate occurred during World War II at
1.2 percent.
35Jobs and Unemployment
During recent recessions, the unemployment rate
increased but was not as high as in the Great
Depression.
36Jobs and Unemployment
The unemployment rate is never zero. Since World
War II, it has averaged 5 percent.
37Jobs and Unemployment
- Unemployment Around the World
- Figure 20.7 compares the unemployment rate in the
United States with those in Japan, Western
Europe, and Canada. - The U.S. unemployment rate has been lower than
that in Western Europe and Canada but higher than
that in Japan.
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39Jobs and Unemployment
- The cycle in unemployment in Canada is similar to
that in the United States. - The cycle in unemployment in Western European is
out of phase with that in the United States. - Unemployment in Japan has drifted upwards since
the mid-1990s.
40Jobs and Unemployment
- Why Unemployment Is a Problem
- Unemployment is a serious economic, social, and
personal problem for two main reasons - Lost production and incomes
- Lost human capital
- The loss of a job brings an immediate loss of
income and productiona temporary problem. - A prolonged spell of unemployment can bring
permanent damage through the loss of human
capital.
41Inflation and the Dollar
- We measure the level of pricesthe price level
as the average of the prices that people pay for
all the goods and services that they buy. - The Consumer Price Indexthe CPIis a common
measure of the price level. - We measure the inflation rate as the percentage
change in the price level. - Inflation arises when the price level is rising
persistently. - If the price level is falling, inflation is
negative and we have deflation.
42Inflation and the Dollar
Inflation in the United States
- Was low in the 1960s.
- Increased in the 1970s and early 1980s.
- Fell during the 1980s and 1990s.
- Increased after 2002.
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44Inflation and the Dollar
- Inflation Around the World
- Figure 20.9(a) shows the inflation rate in the
United States compared with that in other
industrial countries. - U.S. inflation is similar to that in other
industrial countries.
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46Inflation and the Dollar
- Figure 20.9(b) shows the inflation rate in
industrial countries has been much lower than
that in developing countries.
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48Inflation and the Dollar
- Hyperinflation
- The most serious type of inflation is
hyperinflationan inflation rate that exceeds 50
percent a month. - Why Inflation is a Problem
- Inflation is a problem for many reasons, but the
main one is that once it takes hold, it is
unpredictable. - Unpredictable inflation is a problem because it
- Redistributes income and wealth
- Diverts resources from production
49Inflation and the Dollar
- Unpredictable changes in the inflation rate
redistribute income in arbitrary ways between
employers and workers and between borrowers and
lenders. - A high inflation rate is a problem because it
diverts resources from productive activities to
inflation forecasting. - From a social perspective, this waste of
resources is a cost of inflation. - Eradicating inflation is costly because it brings
a period of greater than average unemployment.
50Inflation and the Dollar
- The Value of the Dollar
- The value of the U.S. dollar in terms of other
currencies is called the exchange ratea measure
of how much your dollar will buy in other parts
of the world. - An example is the number of pesos that 1 U.S.
dollar will buy.
51Surpluses, Deficits, and Debts
- Figure 20.10 shows the U.S. dollar exchange rate.
- When value of the dollar decreases, the U.S.
dollar depreciates against other currencies. - When value of the dollar increases, the U.S.
dollar appreciates against other currencies.
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53Inflation and the Dollar
- Why the Exchange Rate Matters
- When the U.S. dollar appreciates, U.S. consumers
pay less for imported goods. - But the higher dollar makes it harder for U.S.
producers to complete in foreign markets. A
higher dollar hurts U.S producers. - When the U.S. dollar depreciates, U.S. consumers
pay more for imported goods. So a lower dollar
hurts consumers. - But the lower dollar makers it easier for U.S.
producers to complete in foreign markets.
54Surpluses, Deficits, and Debts
- Government Budget Balance
- If a government collects more in taxes than it
spends, it has a government budget surplus. - If a government spends more than it collects in
taxes, it has a government budget deficit.
55Surpluses, Deficits, and Debts
- Figure 20.11(a) shows the U.S. federal government
budget balance from 1960 to 2005. - The budget deficit as a percentage of GDP
increases in recessions and shrinks in expansions - In 1998, a budget surplus emerged, but the budget
deficit reappeared in 2001.
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57Surpluses, Deficits, and Debts
- International Surplus and Deficit
- If a nation imports more than it exports, it has
an international deficit. - If a nation exports more than it imports, it has
an international surplus. - The balance on the current account equals U.S.
exports minus U.S. imports but also takes into
account interest payments paid to and received
from the rest of the world.
58Surpluses, Deficits, and Debts
- Figure 20.11(b) shows the U.S. current account
balance from 1960 to 2005. - During the 1980s expansion, a large deficit
appeared but it almost disappeared during the
19901991 recession. - The current account deficit in 2005 was 6.3
percent of GDP.
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60Surpluses, Deficits, and Debts
- Deficits Bring Debts
- A debt is the amount that is owed.
- When a government or a nation has a deficit, its
debt grows. - A governments or a nations debt equals the sum
of all past deficits minus past surpluses. - A governments debt is called national debt.
61Surpluses, Deficits, and Debts
- Figure 20.12(a) shows the U.S. government debt
from 1945 to 2005. - Budget surpluses and rapid economic growth shrink
the debt. - Budget deficits and slower economic growth
swelled the debt.
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63Surpluses, Deficits, and Debts
- Figure 20.12(b) shows the U.S. international debt
from 1975 to 2005. - Until 1986, the United States was a net lender to
the world. - But with increased deficits, the United States is
now a net borrower from the world.
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65Macroeconomic Policy Challengesand Tools
- Classical and Keynesian Views
- Economists views fall into two broad schools
- Classical view The economy behaves best if the
government leaves people free to pursue their own
self-interest. Attempts by the government to
improve macroeconomic performance will not
succeed. - Keynesian view The economy behaves badly if left
alone and that government action is needed to
achieve and maintain full employment.
66Macroeconomic Policy Challengesand Tools
- Five widely agreed policy challenges for
macroeconomics are to - 1. Boost economic growth
- 2. Keep inflation low
- 3. Stabilize the business cycle
- 4. Reduce unemployment
- 5. Reduce government and international deficits
67Macroeconomic Policy Challengesand Tools
- Two broad groups of macroeconomic policy tools
are - Fiscal policymaking changes in tax rates and
government spending - Monetary policychanging interest rates and
changing the amount of money in the economy - The government conducts fiscal policy.
- The Federal Reserve (the Fed) conducts monetary
policy.
68THE END