Transcript Chapter 11 Economic Performance

11.1 Estimating Gross Domestic Product
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Four Economic Eras of the US
Economy
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1) Before & during the Great Depression
2) After the Great Depression
3) From the early 1970s to the early 1980s
4) Since the early 1980s
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1) The Great Depression and Before
In October 1929 - stock market crashed
and began the deepest economic
contraction in the nation’s history.
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USA annual real GDP 1910–60, with the years of
the Great Depression (1929–1939) highlighted
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Unemployment rate in the US 1910–1960, with the 4
years of the Great Depression (1929–1939)
highlighted
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Decrease in Aggregate Demand
Stock market crash of 1929, grim business
expectations
A drop in consumer spending
Widespread bank failures
A sharp decline in the nation’s money
supply
Severe restrictions on world trade
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The Decrease of Aggregate
Demand Between 1929 and 1933
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Figure 13.6
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US industrial production (1928–39)
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Laissez-Faire
Before the Great Depression
macroeconomic policy was based
primarily on this doctrine
Laissez-faire— doctrine that the
government should not intervene in a
market economy beyond the minimum
required to maintain peace and property
rights
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Laissez-Faire (continued)
Doctrine dates back to Adam Smith 
Wealth of Nations (1776)
Argued that if people were allowed to
pursue their self-interest in free markets,
resources would be guided as if by an
“invisible hand” to produce the greatest,
most efficient level of aggregate output
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The Impact of the Great Depression
Severity of the Great Depression
stimulated new thinking on how the
economy worked
1936 – John Maynard Keynes published
The General Theory of Employment,
Interest, and Money (most famous
economics book of the 20th century)
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John
Maynard
Keynes
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John Maynard Keynes
Argued that aggregate demand was
unstable, in part because investment
decisions were often guided by the
unpredictable “animal spirits” of business
expectations.
If pessimistic  cut investment spending
This would reduce aggregate demand 
Would cut output & employment
He saw no natural market forces operating
to ensure a return to a higher level of
output & employment
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John Maynard Keynes (cont’d)
Proposed the government shock the
economy out of depression by increasing
aggregate demand
Government could achieve this directly:
By increasing its own spending
Government could achieve this indirectly:
By cutting taxes to stimulate consumption
and investment
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John Maynard Keynes (cont’d)
Keynes concluded such federal budget
policies would increase aggregate
demand.
This would shift the aggregate demand
curve to the right, back to its original
position.
Such a shift would raise equilibrium real
GDP, which would increase employment.
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2) From the Great Depression
to the Early 1970s
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Demand-side economics—
macroeconomic policy that focuses on
shifting the aggregate demand curve as a
way of promoting full employment and
price stability
World War II and aggregate demand
The golden age of Keynesian economics
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The Golden
Age of
Keynesian
Economics
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One Problem with Keynes
Either influence by the government could
create a federal budget deficit
A federal budget deficit measures the
amount by which total federal spending
exceeds total federal revenues.
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3) The Great Stagflation: 1973–1980
During the 1960s, federal spending
increased on both the war in Vietnam and
social programs at home.
This combined stimulus increased
aggregate demand enough that in 1968,
the inflation rate jumped 4.4% after
averaging only 2.0% during the previous
decade.
Inflation in 1969  4.7%
Inflation in 1970  5.3%
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3) The Great Stagflation: 1973–1980
1973 crop failures & OPEC cuts its supply
of oil (increases oil prices)
This reduced aggregate supply in the
economy
Stagflation—A decline, or stagnation, of
a nation’s output accompanied by a rise,
or inflation in the price level
Stagflation repeats in 1980
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3) The Great Stagflation: 1973–1980
Real GDP declined by nearly $40 billion
between 1973-1975
Price level jumped almost 20%
Unemployment climbed from:
4.9% in 1973
8.5% in 1975
Keynesian demand-management solutions
ineffective
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Stagflation Between 1973 and 1975
Figure 13.7
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4) Since the early 1980s
Supply-Side Economics
The key idea was that cutting tax rates
would stimulate aggregate supply.
Lower tax rates would stimulate economic
growth
Government would compensate in the
long term (with a larger pie) for short term
deficits
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Giant Federal Deficits
Growth in federal spending exceeded the
growth in federal tax revenues during this
period
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