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Frank and Bernanke Ch. 5: Macroeconomics: The Bird’sEye View of the Economy Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html Econ 202 2 The United States Business Cycle, 1890-1940 Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html Econ 202 3 The United States Business Cycle, 1950-1990 Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html Econ 202 4 Great Depression Roaring twenties: by September 1929 stock prices were 40% above their fundamental value. The Fed tried to cool off the market by raising interest rates (providing less money in the economy). The slow-down was viewed in terms of typical market adjustments. Econ 202 5 Great Depression Governments tried to balance budgets, further slowing down the economy. Huge deflation made bank collateral worthless in defaults. Bank failures triggered bank panics. Financial system ground to a stop. Falling prices provided incentives to postpone investment. Econ 202 6 Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html Econ 202 7 Great Depression Gold standard restricted countries to expand money supply only when they acquired gold as a result of trade surpluses. Those countries that abandoned the gold standard (Scandinavian countries, Japan) slipped away from the Great Depression. To acquire gold, countries passed protectionist policies (Smoot-Hawley in US). Econ 202 8 Spiral of World Trade: Jan. 1929 to Mar. 1933 Dec Jan 3000 2500 Feb 2000 Nov Mar 1500 1000 500 0 Oct Apr Sep May Aug Jun Jul Imports of 75 Countries. Source: E. Ray Canterbury, A Brief History of Economics, (World Scientific, Singapore: 2001), p. 209. Econ 202 9 Macroeconomics The need to view the economy beyond the supply and demand of individual markets grew from the experience of the Great Depression. John Maynard Keynes published his General Theory in 1936. Econ 202 10 Keynesian Macroeconomics Keynes claimed that in the short run total expenditures (aggregate demand) can fall creating unemployment, recessions, depressions. It is the responsibility of the government to stimulate the economy in these cases through monetary and fiscal policies. Econ 202 11 Modern Macroeconomics Keynesian macroeconomics only concentrates on the short run. Living standards depend on long run behavior of the economy. Living standards rise as a result of productivity. Econ 202 12 Real GDP (Chained 2000 Dollars) 12000 Billion $ 10000 8000 6000 4000 2000 0 1925 1945 1965 1985 2005 Source: U.S. Department of Commerce, Bureau of Economic Analysis http://research.stlouisfed.org/fred/data/gdp/gdpca Econ 202 13 Population and Employment 300000 250000 (000) 200000 150000 100000 50000 0 1945 1955 1965 1975 Years CE16OV 1985 1995 2005 POP Source: http://www.stls.frb.org/fred/data/employ.html Econ 202 14 Source: http://www.economist.com/displayStory.cfm?story_id=346598 Econ 202 15 http://www.dallasfed.org/research/swe/2005/swe0502.pdf Econ 202 16 From about 1750, this iron law of history was broken. Growth began to be no longer invisibly slow nor confined, as it largely had been before, to farming. The new increase in human productivity was staggeringly large: it not only supported a hitherto unimaginable 7 1/2-fold rise in the world’s population, but entirely transformed the lives of ordinary people throughout the West. Source: http://www.economist.com/displayStory.cfm?story_id=346598 Econ 202 17 Source: http://www.economist.com/displayStory.cfm?story_id=346605 Econ 202 18 Source: Bureau of Labor Statistics: http://www.bls.gov/cps/home.htm Econ 202 19 Source: http://www.newyorkfed.org/research/directors_charts/i-bcd_15.pdf Econ 202 20 Econ 202 21 US Trade The goods and services deficit in 2004 was $617.7 billion, the highest on record. As a percentage of U.S. gross domestic product, the goods and services deficit increased from 4.5 percent in 2003 to 5.3 percent in 2004. Exports increased $125.6 billion in 2004 to $1,146.1 billion. Goods were $807.6 billion and services were $338.6 billion. Imports increased $246.9 billion in 2004 to $1,763.9 billion. Goods were $1,473.8 billion and services were $290.1 billion. For goods, the deficit was $666.2 billion in 2004, the highest on record. For services, the surplus was $48.5 billion in 2004, down from $51.0 billion in 2003. Source: http://www.census.gov/indicator/www/ustrade.html Econ 202 22 Econ 202 23 Types of Macroeconomic Policies Monetary Fiscal Structural Econ 202 24 Types of Analysis Positive Normative Econ 202 25 Types of Data Aggregate Detailed Econ 202 26