Macroeconomics

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Macroeconomics

• 3 main areas of focus

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3 main areas of focus of macro

• problem of unemployment and goal of full
  employment
• problem of inflation/deflation, goal of price
  stability
• problem of recession, depression, goal of
  economic growth

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1. UNEMPLOYMENT

• How is the official unemployment rate calculated?
• In the U.S., the BLS (Bureau of Labor Statistics)
  conducts a monthly household survey.
• Around 55,800 households are interviewed by
  telephone.

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BLS SURVEY

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BLS SURVEY

• First question

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BLS SURVEY

• First question
• Are you presently working?

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BLS SURVEY

• First question
• Are you presently working?
• If the answer is yes you are counted as being
  in the labor force and as being employed.

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BLS SURVEY

• First question
• Are you presently working?
• If the answer is yes you are counted as being
  in the labor force and as being employed.
• If No, then a second question is asked.

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BLS SURVEY

• First question
• Are you presently working?
• If the answer is yes you are counted as being
  in the labor force and as being employed.
• If No, then a second question is asked.
• Second question

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BLS SURVEY

• First question
• Are you presently working?
• If the answer is yes you are counted as being
  in the labor force and as being employed.
• If No, then a second question is asked.
• Second question
• Have you been actively seeking work in the
  past four weeks?

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Actively Seeking Work

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Actively Seeking Work

• Definition includes

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Actively Seeking Work

• Definition includes
• --scheduling a job interview

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Actively Seeking Work

• Definition includes
• --scheduling a job interview
• --applying for a job

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Actively Seeking Work

• Definition includes
• --scheduling a job interview
• --applying for a job
• --contacting an employment agency

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Actively Seeking Work

• Definition includes
• --scheduling a job interview
• --applying for a job
• --contacting an employment agency
• --answering a want ad

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Actively Seeking Work

• Definition includes
• --scheduling a job interview
• --applying for a job
• --contacting an employment agency
• --answering a want ad
• --or the equivalent

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Actively Seeking Work

• Definition includes
• --scheduling a job interview
• --applying for a job
• --contacting an employment agency
• --answering a want ad
• --or the equivalent
• Must have been in the previous four weeks to the
  survey.

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Official Unemployment

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Official Unemployment

• If the answer is yes, I have been actively
  seeking work in the past four weeks, then

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Official Unemployment

• If the answer is yes, I have been actively
  seeking work in the past four weeks, then
• You are counted as being officially unemployed
  and

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Official Unemployment

• If the answer is yes, I have been actively
  seeking work in the past four weeks, then
• You are counted as being officially unemployed
  and
• You are counted as being in the labor force.

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Labor Force

• Labor force employed unemployed (who are
  actively seeking work)

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Out of the labor force

• If you are not presently employed, and you have
  not been actively seeking work in the past four
  weeks, even if you were pounding the pavement
  prior to that and you say you want and need to be
  working, you are not counted as officially
  unemployed and you are not counted as being in
  the labor force.

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Discouraged Workers

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Discouraged Workers

• You are put in a category called discouraged
  workers.

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Discouraged Workers

• You are put in a category called discouraged
  workers.
• This category fluctuates between .5-1.5 million
  persons, depending on the state of the economy
  (more when in a slump, less when in a boom.

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Official Unemployment Rate

• (Officially Unemployed/Labor Force) x 100
• official unemployment rate (as a )
• (labor force
• employed officially unemployed)

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Who are counted as unemployed and who are not?

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Who are counted as unemployed and who are not?

• Not counted as officially unemployed

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Who are counted as unemployed and who are not?

• Not counted as officially unemployed
• Discouraged workers

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Who are counted as unemployed and who are not?

• Not counted as officially unemployed
• 1. Discouraged workers
• 2. Involuntary part-time workers

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Involuntary Part-Time Workers

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Involuntary Part-Time Workers

• Those who are working part-time, but who want and
  need to be working full time

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Involuntary Part-Time Workers

• Those who are working part-time, but who want and
  need to be working full time
• NOT those working part-time who want to be
  working part-time

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Marginalization Rate

• (Officially Unemployed
• Discouraged Workers
• Involuntary Part Time Workers)/
• (labor force discouraged workers) x 100
• marginalization rate
• (as a )

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Marginalization Rate

• Can be 1½-2 times the official rate

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Not counted asofficially unemployed

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute
• 6. natural disaster

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute
• 6. natural disaster
• 7. long term illness

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute
• 6. natural disaster
• 7. long term illness
• 8. homeless

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute
• 6. natural disaster
• 7. long term illness
• 8. homeless
• 9. phoneless

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Not counted asofficially unemployed

• 3. mothers without adequate or affordable
  childcare
• 4. no transportation
• 5. labor dispute
• 6. natural disaster
• 7. long term illness
• 8. homeless
• 9. phoneless
• 10. working for family business without pay

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underemployment

• -Here meaning those overqualified for their jobs,
  sometimes called disguised unemployment
• -engineers delivering Dominoes Pizza or surgeons
  driving cabs in some developing countries,
  skilled workers selling matches

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Unemployment

• What this all means is that, first, MILLIONS AND
  MILLIONS of people are without work or full-time
  work, and therefore are without a steady income,
  and therefore are financially insecure, spending
  down their savings (if any), borrowing and
  getting over their heads in debt, and may be
  suffering from the many social problems related
  to unemployment.

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Unemployment

• What all this unemployment also means is that
  society is losing all the potential production of
  goods and services these millions would be
  producing if employed.
• The economy is also losing all the potential
  spending that these millions would be engaged in,
  because of the loss of income from unemployment.

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Unemployment

• Unemployment means lower income, so lower
  spending, so lower business sales, so lower
  investment and lower profits, and so layoffs and
  sluggish growth, and this can be a vicious
  downward cycle of the economy into recession or
  depression.

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Unemployment

• In addition to lower production and income and
  spending, unemployment has an impact on
  self-esteem.
• People want to be doing, and want to be seen as
  doing, good works, and so unemployment robs
  individuals of the opportunity to be engaged in
  worthwhile activities that contribute to the
  community.
• (what Amartya Sen calls the recognition aspect)

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Social Impacts of Unemployment

• Unemployment also has tremendous social costs for
  society. It is related to virtually every major
  social problem we have, including crime, family
  disruption, suicide, ill health (physical and
  mental), drug addiction, homelessness,
  malnutrition, poor prenatal care, school
  dropouts, racial and ethnic antagonism, and more.

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Costs of Unemployment

• technological stagnation
• deterioration of labor skills
• destabilizing business expectations
• political instability (and vulnerability to
  extremist ideologies)
• environmental damage

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Benefits of Full Employment

• more output, income, and spending
• less poverty, crime, drugs, racial tensions,
  family disruption, and financial insecurity
• increased and strengthened security, education,
  health, and environmental protection
• better wages and working conditions
• and more!

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Unemploymentandfull employment

• Since unemployment disproportionately affects the
  most disadvantaged groups (poor, historically
  disadvantaged racial and ethnic groups,
  uneducated), full employment can help these
  groups more.
• For example, the Black unemployment rate is
  always twice the white rate, good times and bad.
  Among young, Black men the rate is higher than we
  had in the Great Depression (25), even when the
  economy is not in recession!

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2. INFLATION AND DEFLATION

• Inflation is a persistent increase in the general
  price level or the average level of prices
• Deflation is a persistent decrease in the general
  price level or the average level of prices
• Inflation lowers the real value of money
  deflation increases the real value of money

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Inflation/deflation

• Means we must distinguish between real and
  nominal values
• E.g., real vs. nominal income
• Your nominal income is the money amount of your
  income
• Your real income is the real purchasing power of
  your nominal income
• To calculate real, you must adjust for
  inflation/deflation

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inflation

• If inflation is 3, and your nominal income stays
  the same, then your real income has fallen by 3.
• If you get a 2 raise, and inflation is 3, your
  real income has fallen by 1.

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Deflation

• Just because inflation is bad does not mean
  deflation is good! In fact, as we will see,
  deflation can be very dangerous for the economy.
• Inflation and deflation do not affect everyone
  the same. For example, inflation can help
  borrowers and hurt lenders.

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Real vs. nominal GDP and GNP

• Gross domestic product (GDP) and Gross national
  Product (GNP) are both defined as the total money
  value of final goods and services produced in an
  economy in a year.
• GNP is calculated by citizenship, not residence
  GDP is calculated by residence, not citizenship.

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real vs. nominal GDP and GNP

• Nominal GNP and GDP are calculated in current
  prices or dollars.
• Real GNP and GDP are calculated in constant
  prices or dollars.
• A price deflator is used to calculate real GDP
  and GNP (to adjust nominal GDP and GNP for
  inflation/deflation)

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Economic Growth

• GDP and GNP statistics are used to measure
  economic growth
• In addition to real GDP and GNP, we also adjust
  GDP and GNP for population ?
• GDP per capita and GNP per capita
• Real GDP per capita
• real GDP/population

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Recessions and Depressions

• a recession is a downturn in output and
  employment (for 3 quarters, or nine months)
• a depression is a larger downturn in output and
  employment (no exact differentiation between the
  two)
• if your friend is out of work it is a recession,
  if you are out of work it is a depression!

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Recessions and Depressions

• must take into account both the depth and length
  of the downturn
• both matter

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Calculating GNP and GDP

• Whats included, whats not?

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Calculating GNP and GDP

• Whats included, whats not?
• 1) non-monetary productive activities are not
  includedvolunteerism, do-it-yourself, unpaid
  housework and child rearing

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Calculating GNP and GDP

• Whats included, whats not?
• 1) non-monetary productive activities are not
  includedvolunteerism, do-it-yourself, unpaid
  housework and child rearing
• 2) some monetary activity not includedillegal,
  unreported, cheating on taxes, etc.

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Calculating GNP and GDP

• Whats included, whats not?
• 1) non-monetary productive activities are not
  includedvolunteerism, do-it-yourself, unpaid
  housework and child rearing
• 2) some monetary activity not includedillegal,
  unreported, cheating on taxes, etc.
• 3) environmental depletion not subtracted

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GDP/GNP should NOT be used as an indicator of
well being

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GDP/GNP should NOT be used as an indicator of
well being

• 1) says nothing about distribution

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GDP/GNP should NOT be used as an indicator of
well being

• 1) says nothing about distribution
• 2) environmental depletion

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GDP/GNP should NOT be used as an indicator of
well being

• 1) says nothing about distribution
• 2) environmental depletion
• 3) bad stuff puffs it upcosts of life
  expenses defensive expenditures

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GDP/GNP should NOT be used as an indicator of
well being

• 1) says nothing about distribution
• 2) environmental depletion
• 3) bad stuff puffs it upcosts of life
  expenses defensive expenditures
• 4) purely quantitative not qualitative

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Economic growth

• goal is no longer simply quantitative growth
• what kind of growth?
• sustainable growth (oxymoron?)
• full or high employment growth

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Aggregate Variables

• As Macroeconomists we are interested in issues
  of output and employment in the economy as a
  whole. Not the output of just one firm, or the
  employment of one firm, but the total in the
  national economy.

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Macroeconomic concepts

• Aggregate Demand or Expenditure or Spending (Y)
  total money amount all consumers, business firms,
  and government agencies spend on final goods and
  services in a year

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Final goods vs. value added

• Why final goods and services?
• To avoid double counting. So we either take the
  final goods and services approach or the value
  added approach.

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Macroeconomic concepts

• Aggregate Consumption (C) - total spending by
  consumers on (newly produced) goods and services
  in a year
• Why newly produced?
• To avoid double-counting!

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• Buying a new homeconsumption or investment?

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• Buying a new homeconsumption or investment?
  Investment, but not clear whydoesnt increase
  the productive capacity of the economy to produce
  goods and services.

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• Educationconsumption or investment?

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• Educationconsumption or investment?
• Consumptionbut probably should be investment.

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• no financial investmentssuch as a cd
  (certificate of deposit)you think of it as
  investment but in economics it is called?

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Macroeconomic concepts

• Aggregate Investment (I)- total spending of
  business firms on new plant and equipment in a
  year no financial investments, no re-sales of
  existing physical assets
• no financial investmentssuch as a cd
  (certificate of deposit)you think of it as
  investment but in economics it is called?
  SAVING!

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Macroeconomic concepts

• Government Spending (G) - total value of
  purchases of goods and services by government in
  a year does not include "transfer payments
  (social security, unemployment benefits,
  etc.)--why?

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Macroeconomic concepts

• Government Spending (G) - total value of
  purchases of goods and services by government in
  a year does not include "transfer payments
  (social security, unemployment benefits,
  etc.)--why?
• to avoid DOUBLE COUNTING

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Macroeconomic concepts

• Aggregate Exports (X) - value of goods and
  services sold to other countries in a year
• Aggregate Imports (M)- value of goods and
  services bought from other countries in a year
• Net Exports (X - M)- total difference between
  value of exports and imports

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Macroeconomic concepts

• If (X M) gt 0, then (X gt M) and the country has
  a?

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Macroeconomic concepts

• If (X M) gt 0, then (X gt M) and the country has
  a?
• TRADE SURPLUS

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Macroeconomic concepts

• If (X M) lt 0, then (X lt M) and the country has
  a?

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Macroeconomic concepts

• If (X M) lt 0, then (X lt M) and the country has
  a?
• TRADE DEFICIT

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Macroeconomic concepts

• If (X M) 0, then (X M) and the country has
  BALANCED TRADE

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Macroeconomic concepts

• Net exports for the world as a whole are?

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Macroeconomic concepts

• Net exports for the world as a whole are 0.
• Must be the case (unless we are trading with
  other planets). Your surplus is my deficit, your
  deficit is my surplus. So, except for
  statistical error, net exports for the world
  must be 0. This is important, because suppose I
  try to decrease my deficit. I can only do so by
  decreasing your surplus. Countries dont only
  import and export goods, they also import and
  export recessions and depressions.

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Macroeconomic concepts

• Aggregate National Income (Y) - total incomes of
  all individuals in economy earned in the form of
  wages, interest, rent, profits in a year no
  transfer payments no taxes deducted out

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Macroeconomic concepts

• Aggregate Personal Disposable income (Yd) -
  National income minus taxes plus transfer
  payments income available for spending (Yd Y
  T)

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Macroeconomic concepts

• Aggregate Personal Disposable income (Yd) -
  National income minus taxes plus transfer
  payments income available for spending (Yd Y
  T)
• Aggregate Taxes (T) - total value of all taxes in
  a year
• if t average income tax rate, then T tY

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Macroeconomic concepts

• Aggregate Personal Disposable income (Yd) -
  National income minus taxes plus transfer
  payments income available for spending (Yd Y
  T)
• then Yd Y tY
• (abstracting from transfer payments)

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Macroeconomic concepts

• Aggregate Savings (S) - disposable income minus
  consumption income not spent
• Yd C S
• S Yd - C

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National Income Accounting Identity

• National Product National Income
• (aggregate output aggregate income)
• Why?

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National Income Accounting Identity

• National Product National Income
• (aggregate output aggregate income)
• Why?
• If a firm sells 100 worth of output, that money
  is used to pay wages, rent, and interest to
  workers, landlords, and banks, and what's left
  over is profit (or loss), which is also an income!

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National Income Equation

• Y C I G X M
• simple, but useful

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Macro equations

• Also
• I G X S T M
• (Total injections into the expenditure flow
• total withdrawals from the expenditure flow)

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macro equations

• (S I) (G T) (X M)
• The private sector surplus is equal to the budget
  deficit plus the foreign sector surplus (trade
  deficit).

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macro equations

• (T G) (M X) (I S)
• The public sector surplus is equal to the trade
  deficit plus the private sector deficit.

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final goods and value added approaches

• GDP and GNP and aggregate output and aggregate
  expenditureall are calculated either by the
  FINAL GOODS approach or the VALUE ADDED approach.

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final goods vs. value added

• production stage value of sales value added

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50
• Refining 0.65 0.15

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50
• Refining 0.65 0.15
• Shipping 0.80 0.15

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50
• Refining 0.65 0.15
• Shipping 0.80 0.15
• Retail sales 1.00 0.20

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50
• Refining 0.65 0.15
• Shipping 0.80 0.15
• Retail sales 1.00 0.20
• total value added .100

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final goods vs. value added

• production stage value of sales value added
• Drilling 0.50 0.50
• Refining 0.65 0.15
• Shipping 0.80 0.15
• Retail sales 1.00 0.20
• total value added .100

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