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