A FIRST LOOK AT MACROECONOMICS

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A FIRST LOOK AT MACROECONOMICS

• Origins of macroeconomics and the problems it
  deals with
• Macroeconomic issues.
• Economic growth
• Unemployment
• Inflation
• Government budget deficits or surpluses.
• Trade deficits or surpluses
• Macroeconomic policy challenges
• Tools for meeting macroeconomic goals.

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Origins and Issues of Macroeconomics

• Study of economic growth, inflation, and
  international payments began during the 1750s.
• Modern macro dates to Great Depression (1929-39)
• John Maynard Keynes, The General Theory of
  Employment, Interest, and Money
• focused on short run - unemployment and lost
  production.
• In the long run, were all dead.
• During the 1970s and 1980s, macroeconomists
  became more concerned about the
  long-terminflation and economic growth.

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Economic Growth and Fluctuations

• Economic growth
• An outward shift of the Production Possibilities
  Curve.
• An increase in potential GDP
• Sources of growth
• technology
• more resources
• Land, labor, capital, human capital
• Pro-growth policies

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Economic Growth and Fluctuations

• Real GDP
• value of all goods services produced in an
  economy during one year, measured with a fixed
  set of prices.
• Potential GDP
• value of real GDP when all the economys labor,
  capital, land, and entrepreneurial ability are
  fully employed.
• Signs that Real GDP lt Potential GDP?
• Can policies be implemented to correct problem?

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Economic Growth and Fluctuations
During the 1970s and 1980s, there was a slowdown
in economic growth What could have caused this?
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Economic Growth and Fluctuations

• Over time, real GDP fluctuates more than
  potential GDP because of the business cycle

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Economic Growth and Fluctuations

• Every business cycle has four stages
• Recession
• period during which real GDP decreases for at
  least two successive quarters
• Trough
• turning point between recession and expansion
• Expansion
• period during which real GDP increases.
• Peak

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Economic Growth and Fluctuations

• The most recent U.S. cycle.

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Economic Growth and Fluctuations

• Long-term growth trend and cycles.

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Economic Growth and Fluctuations

• Why do growth rates vary across countries?

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Economic Growth and Fluctuations

• The Lucas Wedge
• accumulated loss of output from a slowdown in the
  growth rate of real GDP per person.
• approximately 50 trillion, or five years GDP,
  since 1960

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Economic Growth and Fluctuations

• The Okun Gap
• gap between potential GDP and actual real GDP
• another name for the output gap.
• totaled 2.7 trillion since 1973 or about 3
  months real GDP.

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Economic Growth and Fluctuations

• Benefits and Costs of Economic Growth
• Benefits
• expanded consumption possibilities.
• Costs
• Forgone consumption in the present
• More rapid depletion of nonrenewable natural
  resources environmental effects
• More frequent job changes.
• Distributional consequences

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Jobs and Unemployment

• Jobs
• The U.S. economy created around 2 million jobs a
  year, on the average during the 1990s.
• But the number fluctuates and since 2001 the pace
  of job creation has been slow.

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Jobs and Unemployment

• Unemployment
• person does not have a job but is available for
  work, willing to work, and has made some effort
  to find work within the previous four weeks.
• labor force
• total number of people who are employed and
  unemployed.
• unemployment rate
• of the labor force who are unemployed.
• discouraged worker
• available for work, willing to work, but who has
  given up the effort to find work.

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Jobs and Unemployment

• Unemployment rate
• rises during recession, falls during expansion.
• During the 1930s, the unemployment rate almost
  hit 25 percent
• The lowest rate occurred during WWII at 1.2
  percent

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Unemployment Around the World

• U.S. unemployment, on average, lies in the middle
  of the other countries shown.

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Inflation

• Inflation is a process of rising prices.
• We measure the inflation rate as the percentage
  change in the average level of prices or the
  price level.
• The Consumer Price Indexthe CPIis a common
  measure of the price level.

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Inflation

• The inflation rate fluctuates, but is usually
  positive.
• A falling price levela negative inflation
  rateis called deflation.

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Inflation Around the World

• U.S. inflation has been similar to that in other
  industrial countries
• U.S. inflation has been much lower than that in
  developing countries

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Is Inflation a Problem?

• Income redistribution between borrowers and
  lenders
• Tax system.
• Diverts resources from productive activities to
  inflation forecasting.
• Eradicating can be costly in terms of
  unemployment.

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Surpluses and Deficits

• Government Budget Surplus and Deficit
• If taxes gt spending surplus.
• If spending gt taxes deficit
• Deficits tend to be countercyclical.

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Surpluses and Deficits

• International Surplus and Deficit
• If a nation imports more than it exports, it has
  a trade deficit (or international deficit).
• If a nation exports more than it imports, it has
  a trade surplus.
• The current account deficit or surplus is the
  balance of exports minus imports plus net
  interest paid to and received from the rest of
  the world.

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Macro Policy Challenges and Tools

• Five widely agreed policy challenges for
  macroeconomics are to
• Boost economic growth
• Keep inflation low
• Stabilize the business cycle
• Maintain low levels of unemployment
• Reduce government and international deficits

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Macro Policy Challenges and Tools

• Macro policy tools
• Monetary policy
• Federal Reserve
• Interest rates
• Fiscal policy
• Taxes
• Government spending