Transcript Introduction to Macroeconomics

Introduction to
Macroeconomics
Mr. Way
Economics
2/9/2012
12.3.3 Describe the aims of
government fiscal policies (taxation,
borrowing, spending) and their
influence on production, employment,
and price levels.
What is Macroeconomics?
• Micro = small scale
• Macro = large scale
• Microeconomics: study of a small part of
an economy, e.g. a market for one good.
• Macroeconomics: study of the economy as
a whole.
What do Macroeconomists study?
• There are three main numbers that we
focus on when looking at the economy as
a whole:
– Total production (GDP)
– Price level (inflation)
– Unemployment
What is GDP?
• GDP stands for Gross Domestic Product
• It is the total market value of all goods and
services produced within a country
• It is also seen largely as an indication of
how powerful a country is -- for example,
Americans are starting to fear China
because its GDP is rising so rapidly.
How does one calculate GDP?
• GDP = C + I + G + X,
• C = Consumption – money people spend on
goods and services
• I = Investment – money businesses or people
spend on acquiring and maintaining capital or
stocking up inventory
• G = Government spending - Duh
• X = (Exports – Imports) – Total value of goods
we exported minus total value of goods we
imported.
Calculating GDP example:
• If people bought goods and services worth
$5 trillion,
• People and businesses spent $2 trillion
investing in new capital and inventory
• The government spent $3 trillion
• We exported $1.5 trillion worth of goods
• We imported $3.5 trillion worth of goods,
• GDP = 5 + 2 + 3 + 1.5 – 3.5 = $8 trillion
What is the “Price Level?”
• Price level refers to how many dollars it
will cost to buy a “basket of goods”
• For instance, 100 years ago $20 was a lot
of money; $20 worth of stuff back then
would be about $500 worth of stuff today.
• The decrease in the value of dollars over
time is called “inflation”
• Conversely, an increase in the value of
dollars over time is called “deflation.”
How is the price level determined?
• Every year, the U.S. Department of Labor
pays a bunch of people to go out and buy
the same “basket of goods” and report
how much it cost them.
• Then, they compare the average price of
the basket this year with previous years.
• How much the price of the basket
increases tells us how much inflation
happened that year.
Calculating inflation
• If a basket of goods cost $100 last year
and then the same basket of goods cost
$105 this year,
• Inflation = (105 – 100)/100 = 5%
• If a basket of goods cost $75 in 1987 and
the same basket cost $145 in 2012,
Inflation = (145-75)/75 = 93.3%
Inflation is considered bad.
• Most people agree that inflation is bad because:
– It means they can’t buy the same amount of
stuff if they get paid the same amount.
– Businesses have to keep paying for new
menus with higher prices listed
– Any money you had saved up is worth less
and less over time
– However, people who owe money love
inflation because it makes it easy to pay back
their debts.
What is “Unemployment?”
• You’d think the unemployment level is just
the proportion of people who aren’t
working. You would be wrong.
• Unemployment level =
people looking for work / Total workforce
Total workforce = people with jobs and
people looking for jobs.
Calculating unemployment
• If there are 150 million people who are
employed and 30 million people looking for
work,
Unemployment = 30 / (150 + 30) = 16.7%
• If there are 190 million people who are
employed and 10 million people looking for
work,
Unemployment = 10 / (190 + 10) = 5%
Problems with this calculation
• There are lots of problems with this simple
calculation:
– “Discouraged workers” are people who would like a
job but never found one and stopped looking – they
aren’t counted.
– “Underemployed” workers have skills for a better job
but couldn’t find one, so they work at McDonalds.
They still count as employed
– Part time employment counts as a job, even if you’re
looking for a full time job
• Therefore, the unemployment rate is often a
under-estimate of real social problems.
Conclusion
• These are the basics of macroeconomic
analysis.
• All of these calculations are far too simple to be
of much use in making policy, but they are what
you’ll see in the news.
• Be aware that politicians manipulate these
numbers and their implications for political ends
while economists shake their heads in disbelief.
• For instance, the unemployment rate is down to
8.3% and President Obama is taking credit. But
does that mean we got more jobs, or more
people gave up looking for one?