Transcript Lecture 9
Lecture 9: focusing on
Macro Issues
Macro Questions
What are the facts
What is Real GDP?
Policy issues
Role of Government
Practice with EIA to illustrate
What will the exam cover?????
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Overheating?
Production expanded quickly in the United
States during 1994/95/96.
This rapid growth caused fear that the
economy was overheating.
An overheated economy is prone to
increasing inflation and a balance of
payments deficit.
What, if anything, can be done?
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Origins and Issues of
Macroeconomics
Modern macroeconomics emerged
during the Great Depression.
People began to doubt the free
market economy.
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John Maynard Keynes, in 1936,
published The General Theory of
Employment, Interest, and Money.
Origins and Issues of
Macroeconomics
Macroeconomic Problems
1) Economic Growth
2) Unemployment
3) Inflation
4) Deficits
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Origins and Issues of
Macroeconomics
Short-Term Versus Long-Term Goals
Keynes focused on the short-term
primarily
• He felt the depression was caused by insufficient
private spending
• Government should increase its spending
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Origins and Issues of
Macroeconomics
Short-Term Versus Long-Term Goals
Long-term consequences were virtually
disregarded
• “In the long run, we’re all dead”
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Origins and Issues of
Macroeconomics
Short-Term Versus Long-Term Goals
Today, macroeconomics is concerned
with:
• Long-term economic growth and inflation
• Short-term business fluctuations and unemployment
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Origins and Issues of
Macroeconomics
The Road Ahead
The focus of macroeconomics has
shifted:
• Depression
• Inflation of the 1970’s
• International economics of today
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Economic Growth
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Economic growth is the expansion of
the economy’s production
possibilities.
Measured by real gross domestic
product (Real GDP)
The value of the total production of all
the nation’s farms, factories, shops, and
offices linked back to the prices of a
single year (1992)
Economic Growth in the
United States
The Growth of Potential GDP
When an economy’s labor, capital, land,
and entrepreneurial ability are fully
employed
Real GDP fluctuates around potential
GDP
Growth slowed during the 1970s
Productivity growth slowdown
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Economic Growth in the
United States
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Economic Growth in the
United States
Fluctuations Around Potential GDP
The business cycle is the periodic but
irregular up-and-down movement in
production.
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Economic Growth in the
United States
Phases of the Business Cycle
Recession
• Period during which real GDP decreases for two
successive quarters
Expansion
• Period during which real GDP increases
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Economic Growth in the
United States
Turning Points
Peak
• Expansion ends, recession begins
Trough
• Recession ends, expansion begins
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The Most Recent
U.S. Business Cycle
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Long-Term Economic
Growth
in the United States
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Economic Growth Around
the World
Real GDP per person
The growth rate of real GDP divided by
the population is used to compare
growth rates over time and across
countries.
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Economic Growth Around
the World
Growth rates in the U.S., Germany,
and Japan have features that are
distinct
Similar productivity growth slowdowns
Similar business cycles
Different long-term trends in potential
GDP
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Economic Growth in
Three Large Economies
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Growth Rates Around the
World
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Benefits and Costs of
Economic Growth
Benefits
Expanded production possibilities
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health care
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space exploration
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roads
environmental improvements (if resources are
devoted to solving environmental problems)
Benefits and Costs of
Economic Growth
Costs
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1) Foregone consumption
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2) Depletion of natural resources
3) Increased pollution
4) More frequent job and location
changes