(3) who has a job but has been temporarily absent, with o

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Lecture Four

• Macroeconomic Concerns
• Unemployment, Inflation, and Growth

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Macroeconomic Concerns

• Aggregate Price Level
• Aggregate Output
• Total Employment
• Rest of the World

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Inflation and Prices

• Price level a measure of the behavior of all
  prices in the economy
• Price level is a yardstick -- a tool for
  comparison of prices over time.
• Inflation the rate of change in the price level

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Measuring the Price LevelPrice Indexes

• CPI Consumer Price Index a measure of the price
  of a market basket of goods purchased monthly by
  the typical urban consumer.
• GDP deflator a measure of the prices of all
  goods produced in GDP basket.
• PPI Producer Price Index a measure of prices
  that producers receive for products at all stages
  in the production process.

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Production in Muletown

• In Muletown, three goods are produced
• Mule hides
• Espresso
• Sandals.
• A market basket is 2 Mule hides, 5 Espressos, and
  1 pair of sandals.

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Production in Muletown
1997 Price Quantity 3 10 5 15 7 20
1998 Price Quantity 4 20 4 10 20 15
Mule hides Espresso Sandals
What is the price level in Muletown?
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Calculating the CPI

• Multiply the price of the good by the quantity in
  the market basket and add over all goods.
• In 1997 3(2) 5(5) 7(1) 38
• In 1998 4(2) 4(5) 20(1) 48
• Rate of Inflation
• (48 - 38)/38 26.

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GDP Deflator

• Nominal GDP GDP measured in current year prices
• Real GDP GDP measured in constant prices (prices
  derived from a base year)

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GDP in Muletown
1997 245
1998
Nominal GDP Real GDP GDP deflator
245 3(10) 5(15) 7(20)
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GDP in Muletown
1997 245
1998 420
Nominal GDP Real GDP GDP deflator
420 4(20) 4(10) 20(15)
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GDP in Muletown
1997 245 245
1998 420
Nominal GDP Real GDP GDP deflator
245 3(10) 5(15) 7(20)
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GDP in Muletown
1991 245 245
1992 420 215
Nominal GDP Real GDP GDP deflator

• 215 3(20) 5(10) 7(15)
• Note that we have used 1991 prices.

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GDP in Muletown
1991 245 245 100
1992 420 215
Nominal GDP Real GDP GDP deflator
100 100 245/245
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GDP in Muletown
1991 245 245 100
1992 420 215 195
Nominal GDP Real GDP GDP deflator
195 100420/215
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GDP in Muletown
Nominal GDP Real GDP GDP deflator
Rate of Inflation (195 - 100)/100
95
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The Real/Nominal Relationship
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Costs of Inflation

• Changing distribution of income
• indexed income income rises with the rate of
  inflation
• Lending distortions
• Administrative costs and inefficiencies

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Aggregate Output (GDP)

• Gross Domestic Product (GDP) is the dollar value
  of all final goods and services produced.

Final good a product which is ready to be used
by consumers
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Business Cycle

• Periodic movements in output, prices, and
  employment
• Business cycles are not created equal.
• Duration
• Severity

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Business Cycle

• GDP rises and falls over short spans of time
• At any point in time, it may be above or below
  its long run trend
• These fluctuations define the business cycle

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Parts of the Business Cycle
Aggregate Output
Peak
Recession
Expansion
time
Trough
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Recession-1

• A recession is a period in which real GDP
  declines for at least two consecutive quarters.
• Most recessions are marked by falling output and
  rising unemployment.

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Recession-2

• Growth rate of GDP falls
• Firms decrease production
• Unemployment rises

Unemploy- ment
GDP
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The Recession of 1980-1982
Unemployment
GDP Growth
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Depression

• Depression a prolonged and deep recession
• Great Depression 1929-1933
• The Great Depression was a period of severe
  economic contraction and high unemployment that
  began in 1929 and continued throughout the 1930s.

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Great Depression
Unemployment
GDP Growth
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Expansion

• GDP growth rate rises
• Firms increase production
• Unemployment falls

Unemploy- ment
GDP
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Real GDP in the U.S., 1959 - 1994
5,500.0
5,000.0
4,500.0
4,000.0
3,500.0
Real GDP
3,000.0
2,500.0
2,000.0
1,500.0
1959
1963
1967
1971
1975
1979
1983
1987
1991
1994
Year
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Real GDP in the U.S., 1959 - 1994
5,500.0
5,000.0
4,500.0
4,000.0
3,500.0
Real GDP
3,000.0
Trend Line
2,500.0
2,000.0
1,500.0
1959
1963
1967
1971
1975
1979
1983
1987
1991
1994
Year
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Unemployment

• The unemployment rate refers to the percentage of
  people in the labor force who cant find a job.

Labor Force people who are actively seeking or
are currently holding a job
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Unemployment Rate in Selected Countries
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Defining Unemployment - 1

• Employed Any person 16 years old or older,
• (1) who works for pay, either for someone else or
  in their own business, for one or more hours a
  week,
• (2) who works without pay for 15 hours a week in
  a family business, or
• (3) who has a job but has been temporarily
  absent, with or without pay.

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Defining Unemployment - 2

• Unemployed A person 16 years or older who is
  not working, is available for work, and has made
  specific efforts to find work during the previous
  four weeks.
• Labor force The number of people employed plus
  the number of unemployed.

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Defining Unemployment - 3

• Labor Force Employed Unemployed
• Population Labor Force Not in
  Labor Force
• Unemployment Rate
• Labor Force Participation Rate

Unemployed Labor Force
Labor Force Population
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• New Entrants 11
• Re-entrants 26
• Job Leavers 12
• Job Losers 63

Unemployment Pool Entrants
5 Unemployment

• Job Finders
• Discouraged
• Workers
• Labor Force
• Leavers

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Types of Unemployment

• Cyclical
• due to business cycle movements in GDP
• Frictional
• due to job search activities
• Structural
• due to changes in economic institutions
• geographic displacement, technological change,
  discrimination

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Natural Rate of Unemployment

• The natural rate of unemployment refers to the
  unemployment that occurs as a normal part of the
  functioning of the economy. Sometimes taken as
  the sum of frictional unemployment and structural
  unemployment. (The rate of unemployment that
  occurs at full employment).

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Costs of Unemployment

• Personal costs
• Societal costs
• Economic costs

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Government Policies for Influencing the
Macroeconomy

• Fiscal Policy Government policies regarding
  taxes and expenditures
• Monetary Policy The tools used by the Federal
  Reserve to control the money supply
• Supply-side Policies policies that focus on
  aggregate supply and increasing production

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Aggregate Demand

• Aggregate demand represents the total demand for
  goods and services in an economy.

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Aggregate Demand Curve
Price Level
P1
AD
Y1
Aggregate Output
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Aggregate Supply

• Aggregate supply represents the total supply of
  goods and services in an economy.

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Aggregate Supply Curve
Price Level
AS
P1
Aggregate Output
Y1
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Equilibrium

• Aggregate equilibrium is a level of prices and
  GDP such that the quantity of goods and services
  purchased equals the overall quantity of goods
  and services produced

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Equilibrium
Price Level
AS
Equilibrium
P
AD
Y
Aggregate Output