Transcript new

Chapter 1
Introduction to
Macroeconomics
© 2008 Pearson Addison-Wesley. All rights reserved
What are your top macro issues?
• Based on your understanding about the current
economic condition, what is your ranking of the following
issues?
• (1) unemployment; (2) inflation; (3) economic growth; (4)
stagnant incomes; (5) the trade deficit;
• (6) social security; (7) the government budget; and (8)
income inequality.
• YOU answered: inflation, unemployment, income,
budget
© 2008 Pearson Addison-Wesley. All rights reserved
1-2
Let’s Forecast!
• Current Key Macro Variables (from www.bea.gov ):
– GDP growth rate: 2nd Q08 1.9%
• 1st Q08, 0.9%, 4th Q07, -0.2%
• 2007 Annual, 2%; 2006 Annual, 2.8%
– Inflation: CPI (1st half 08) 6%
• 2007, 4.4%; 2006, 2%
– Unemployment rate: 5.7% as of 7/1/2008
• 6/1/08, 5.5%, 4/1/08, 5.0%;1/1/08, 4.9%;1/1/07, 4.6%
– Fed Funds Target Rate: 2%
• 4/29/2008, 2.25%; 12/31/2007, 4.25%; 6/30/2007 5.25%
– What are your forecasts for this year?
– WILL COMPARE TO PROFESSIONAL ESTIMATES LATER
© 2008 Pearson Addison-Wesley. All rights reserved
1-3
Chapter Outline
• What Macroeconomics Is About
• What Macroeconomists Do (skip)
• Why Macroeconomists Disagree
© 2008 Pearson Addison-Wesley. All rights reserved
1-4
What Macroeconomics Is About
•
•
Macroeconomics: the study of structure and performance of national
economies and government policies that affect economic performance
Issues addressed by macroeconomists:
–
–
–
–
–
–
•
Long-run economic growth (ch6)
Business cycles (ch8)
Unemployment (ch3,12)
Inflation (ch12)
The international economy (ch13)
Macroeconomic policy (ch14,15)
Aggregation: from microeconomics to macroeconomics
© 2008 Pearson Addison-Wesley. All rights reserved
1-5
What Macroeconomics Is About
• Long-run economic growth
– Figure 1.1: Output of United States since 1869
© 2008 Pearson Addison-Wesley. All rights reserved
1-6
Figure 1.1 Output of the U.S. economy,
1869-2005
© 2008 Pearson Addison-Wesley. All rights reserved
1-7
What Macroeconomics Is About
• Long-run economic growth
– Figure 1.1: Output of United States since 1869
– Decline in output in recessions; increase in output in
expansion or war
– Two main sources of growth
• Population growth
• Increases in average labor productivity
– Driving forces: technology, education (human capital)
– Other resources: saving rate (next page), investment, R&D,
human capital
© 2008 Pearson Addison-Wesley. All rights reserved
1-8
Saving Rate of the U.S. 2000-2008
© 2008 Pearson Addison-Wesley. All rights reserved
1-9
What Macroeconomics Is About
• Average labor productivity
– Output produced per unit of labor input (employed worker)
– Figure 1.2 shows average labor productivity for United
States since 1900
© 2008 Pearson Addison-Wesley. All rights reserved
1-10
Figure 1.2 Average labor productivity in the
United States, 1900-2005
© 2008 Pearson Addison-Wesley. All rights reserved
1-11
What Macroeconomics Is About
• Average labor productivity growth:
– About 2.5% per year from 1949 to 1973
– 1.1% per year from 1973 to 1995
– 2.0% per year from 1995 to 2005
• In analyzing macroeconomic data during the past year, you have
discovered that average labor productivity fell, but total output
increased. What was most likely to have caused this?
A) There is nothing unusual in this outcome because this is what
normally occurs.
B) The capital/output ratio probably rose.
C) There was an increase in labor input.
D) Unemployment probably increased.
© 2008 Pearson Addison-Wesley. All rights reserved
1-12
What Macroeconomics Is About
• Business cycles
– Business cycle: Short-run contractions and expansions in
economic activity
– Downward phase is called a recession
– Upward phase: expansion or boom
– Great Depression (1929-1933): 30%
– WWII (1939-1944): 100%
© 2008 Pearson Addison-Wesley. All rights reserved
1-13
What Macroeconomics Is About
• Unemployment
– Unemployment: the number of people who are available for
work and actively seeking work but cannot find jobs
– U.S. experience shown in Fig. 1.3
– Recessions cause unemployment rate to rise
• Question: Can unemployment rate reach zero?
© 2008 Pearson Addison-Wesley. All rights reserved
1-14
Figure 1.3 The U.S. unemployment rate,
1890-2005
1.2%
© 2008 Pearson Addison-Wesley. All rights reserved
1-15
What Macroeconomics Is About
• Inflation
– General and sustained increase in prices of most goods and
services
– How to measure? Change in CPI
– U.S. experience shown in Fig. 1.4
© 2008 Pearson Addison-Wesley. All rights reserved
1-16
Figure 1.4 Consumer prices in the
United States, 1800-2005
© 2008 Pearson Addison-Wesley. All rights reserved
1-17
What Macroeconomics Is About
• Inflation:
– Deflation: when prices of most goods and services decline
– Inflation rate: the percentage increase in the level of prices
– Hyperinflation: an extremely high rate of inflation
• How high is hyper?
• Yogolsavia dinar: 1993, 500billion. now (1$ around 50dinar)
• Theory and whose fault? MV=PY
© 2008 Pearson Addison-Wesley. All rights reserved
1-18
What Macroeconomics Is About
• The international economy
– Open vs. closed economies
• Open economy: an economy that has extensive trading and
financial relationships with other national economies
• Closed economy: an economy that does not interact
economically with the rest of the world
– Trade imbalances
• U.S. experience shown in Fig. 1.5
• Trade surplus: exports exceed imports
• Trade deficit: imports exceed exports
© 2008 Pearson Addison-Wesley. All rights reserved
1-19
Figure 1.5 U.S. exports and imports,
1869-2005
© 2008 Pearson Addison-Wesley. All rights reserved
1-20
What Macroeconomics Is About
• Macroeconomic Policy
– Fiscal policy: government spending and taxation
• U.S. experience in Fig. 1.6
• Relation to trade deficit? “Twin deficits”
– Monetary policy: growth of money supply; determined by
central bank; the Fed in U.S.
© 2008 Pearson Addison-Wesley. All rights reserved
1-21
Figure 1.6 U.S. Federal government
spending and tax collections, 1869-2005
© 2008 Pearson Addison-Wesley. All rights reserved
NEW DEAL: FHA, FDIC, SEC,
Social Security
1-22
What Macroeconomics Is About
• Aggregation
– Aggregation: summing individual economic variables to
obtain economywide totals
– Distinguishes microeconomics (disaggregated) from
macroeconomics (aggregated)
© 2008 Pearson Addison-Wesley. All rights reserved
1-23
What Macroeconomists Do (SKIP)
•
•
•
•
Macroeconomic forecasting
Macroeconomic analysis
Macroeconomic research
Data development
•
“Economics is the only field in which two people can get a Nobel Prize for
saying exactly the opposite thing.”
"Economics is the only field in which two people can get a Nobel Prize for
saying the opposite thing"
"Economics is the only field in which two people can share a Nobel Prize for
saying opposing things." Specifically, Gunnar Myrdal (social
democracy/intervention) and Friedrich Hayek (libralism) shared one.
•
•
© 2008 Pearson Addison-Wesley. All rights reserved
1-24
Why Macroeconomists Disagree
– Often macro analysis tends to be of “on the one hand, on the
other hand”.
– If you laid all macroeconomists on the earth end to end, they
still wouldn’t reach an conclusion.
• Positive vs. normative analysis
– Positive analysis: examines the economic consequences of
a policy (Mspi)
– Normative analysis: determines whether a policy should be
used (often disagreement)
© 2008 Pearson Addison-Wesley. All rights reserved
1-25
Why Macroeconomists Disagree
• Classicals vs. Keynesians
Important!
– The classical approach (Adam Smith)
• Assumptions: (1) rationally purse self interest (2) wages and
prices adjust rapidly to get to equilibrium
• Mechanism: the “invisible hand”, or the price system
– changes in wages and prices are signals that coordinate people’s
actions
• The “invisible hand”: the idea that if there are free markets and
individuals conduct their economic affairs in their own best
interests, the overall economy will work well
• Policy implications: Government should have only a limited role
in the economy
© 2008 Pearson Addison-Wesley. All rights reserved
1-26
Why Macroeconomists Disagree
• Classicals vs. Keynesians
– The Keynesian approach (John M. Keynes)
• Why this theory? The Great Depression: Classical theory failed
because high unemployment was persistent
• Assumption: price rigidity or stickiness
– Prices and wages adjust slowly, markets remain out of equilibrium
for long periods.
• Mechanism: (1) long-term contracts (2) firms are slow to adjust
wages (3) menu costs
• Policy implications: Government should intervene to restore full
employment.
© 2008 Pearson Addison-Wesley. All rights reserved
1-27
Why Macroeconomists Disagree
• Classicals vs. Keynesians
– The evolution of the classical-Keynesian debate
•
•
•
•
Classicals: pre-depression 1930’s
Keynesians dominated from WWII to 1970
Stagflation led to a classical comeback in the 1970s
Last 30 years: excellent research with both approaches
– Monetarists, new classicals, new keynesians…
– New classicals: work on business cycles
– New keyesians: work on microfoundations, stagflation
© 2008 Pearson Addison-Wesley. All rights reserved
1-28
Why Macroeconomists Disagree
• A unified approach to macroeconomics
– Textbook uses a single model to present both classical and
Keynesian ideas
– Three markets: goods, assets, labor
– Model starts with microfoundations: individual behavior
– Long run: wages and prices are perfectly flexible
– Short run: Classical case—flexible wages and prices;
Keynesian case—wages and prices are slow to adjust
© 2008 Pearson Addison-Wesley. All rights reserved
1-29