Macroeconomics: The Big Picture

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Macro-economics The Big Picture

• JMSC 6004
• Feb 4, 2002

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Why the Big Picture?

• To understand the economic backdrop against which
  individual enterprise and the government make
  decisions that are crucial to peoples livelihood
• To acquire the capacity to analyze and explain
  the overall economic situation in a country or
  region

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Tool Kit for reporters

• A working vocabulary
• A grip on history
• A basic library
• Access to the Internet
• (WAB p.6)

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Why Macro-economics?

• A top-down view
• What is produced? In What quantities?
• How are these goods produced?
• For whom are these goods produced?
• Who makes economic decisions?

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The role of government

• Redress market failures
• Redistribute income
• Provide social insurance against risks, e.g.
  unemployment, disability, etc.

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Public Private sectors

• Private markets are more efficient in RESOURCES
  ALLOCATION, but not in the areas of public good,
  e.g.
• Environment hazards
• Granting patents to encourage discovery
• Balance between the two sectors.

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Policy goals

• High growth
• Low inflation
• Full employment

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Gross Domestic Product (GDP)

• Total goods and services produced in a nation
  during a period of time
• Real GDP - adjusted for inflation (vs nominal
  GDP)
• Consumption Investment Government spending
  Exports - Imports

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Gross National Product (GNP)

• Income of residents include income received from
  abroad (wages, returns on investment, interest
  payments), but subtracting similar payments made
  to those abroad

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Recession

• Negative growth for two consecutive quarters or
  more
• Depression - a very severe recession

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Inflation

• CPI - based on a consumer expenditure survey
• PPI - average level of goods sold by producers
• GDP deflator - weighted average of goods and
  services

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Why Inflation is Bad

• Variability in relative prices
• Increased uncertainty
• Psychologically, people worry that their income
  will not keep up with rising prices and their
  living standards will be eroded.
• Investors worry that the dollars they receive in
  the future will be worth less than the dollars
  they invested.

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Unemployment

• Unemployment rate unemployed/labor force (or
  unemployed employed)
• Link between inflation and unemployment

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Problems with unemployment data

• Seasonal unemployment
• Frictional unemployment
• Structural unemployment
• Cyclical unemployment

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Other important figures

• Consumer confidence
• Purchasing managers survey (NAPM)
• Retail sales
• External Trade

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Monetary Policy

• The Central Bank
• Money supply (M1, M2, M3)
• Fed funds rate and discount rate
• Setting bank reserves requirement
• jawboning

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Fiscal Policy

• Use of govt spending and taxes to improve
  macroeconomic performance
• Often works with monetary policy, but not always
  in sync

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Savings Investing

• Savings - function of income and interest rates
  Culture plays a role, too.
• Investing in financial assets and capital goods
• Investment need not equal savings, it can be
  financed from investment abroad.
• Are savings effectively invested?

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Productivity

• Rate of increase in the output per hour worked
• Infrastructure
• Quality of the labor force
• Allocation of resources
• Technological change

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Income Gap

• For whom are goods produced?
• Market efficiency through profit motives and the
  price system, competitive markets lead to
  economic efficiency but the distribution of
  income may be very unequal.
• Income redistribution role of the govt

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New Economy

• Faster growth, higher productivity and lower
  inflation
• Due to info technology, corporate restructuring
  to cut costs, flexibility through deregulation,
  venture capital mkt, etc
• A decade of of continuous growth, falling
  unemployment, budget surplus, stock mkt boom.

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Paradigm Shift?

• Time will tell
• Current global slowdown
• Business cycle is still with us