Transcript chapter1
CHAPTER 1 Introduction to Macroeconomics 1-1 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Questions • How much richer are we than our parents were at our age? • How much richer will our children be than our grandparents were? • Will changing jobs be easy or hard in five years? • How many of us will have jobs in five years? 1-2 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Questions • Will the businesses we work for vanish as demand for the products they make dries up? • Will inflation make us poor by destroying our savings or rich by eliminating our debts? 1-3 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomics... • is the subdiscipline of economics that tries to answer these six questions • is the branch of economics related to the economy as a whole 1-4 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomists... • try to figure out why overall economic activity rises and falls • try to understand what determines the level and rate of change of overall prices • study other variables that play a major role in determining the overall levels of production, income, employment, and prices 1-5 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Why Macroeconomics Matters • Cultural Literacy – ability to follow and participate in public debates and discussions – ability to understand news reports on changes in the economy 1-6 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.1 - The Daily Flow of Economic News 1-7 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Why Macroeconomics Matters • Self-Interest – effects of the macroeconomy on our daily lives – understanding of changing opportunities as the economy fluctuates 1-8 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Why Macroeconomics Matters • Civic Responsibility – more informed voting – more responsible macroeconomic policy 1-9 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic Policy • Growth Policy – policies to accelerate or decelerate longrun economic growth – most important policies for the long-run 1-10 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.2 - Long-Run Economic Growth: Sweden and Argentina, 1900-2004 1-11 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic Policy • Stabilization Policy – policies to smooth out the business cycle by diminishing the depth of recessions and depressions – business cycles are fluctuations in production and employment • booms or expansions occur when production grows and unemployment falls • recessions or depressions occur when production falls and unemployment rises 1-12 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.3 - The American Business Cycle: Fluctuations in Total Production Relative to the Long-Run Growth Trend 1-13 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic Policy • Business cycle fluctuations are also felt in the overall level of prices – booms usually bring inflation – recessions bring either disinflation or deflation • Interest rates, the level of the stock market, and other economic variables also rise and fall with the business cycle 1-14 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomics versus Microeconomics • Macroeconomists – examine the economy as a whole – focus on the feedback from one component of the economy to another – study the total level of production and employment – believe that imbalances between supply and demand may be resolved by changes in quantities rather than prices 1-15 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomics versus Microeconomics • Microeconomists – study the markets for single commodities and the behavior of individual households and firms – focus on how competitive markets allocate resources to create consumer and producer surplus – assume that imbalances between demand and supply are resolved by changes in prices 1-16 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Economic Statistics and Economic Activity • Economic activity is the pattern of transactions in which things of real, useful value are created, transformed, and exchanged • Estimates of economic activity are contained in the National Income and Product Accounts (NIPA) – reported by the Commerce Department’s Bureau of Economic Analysis 1-17 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • Real Gross Domestic Product (GDP) – is corrected for changes in the price level (real) – includes the replacement of worn-out and obsolete equipment and structures as well as new investment (gross) – counts economic activity that happens within the United States (domestic) – represents the production of final goods and services (product) 1-18 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • Real Gross Domestic Product – often divided by the number of workers in the economy (real GDP per worker) – measures how well the economy produces goods and services that people find useful – does not indicate the relative distribution of the nation’s economic product – is an imperfect measure of economic well-being 1-19 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.4 - Officially Measured Real GDP per Worker in the United States 1-20 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Unemployment Rate – to be unemployed, a person must want to work and be actively looking for a job (but have not yet found one) – the labor force consists of those who are employed and those who are unemployed – the unemployment rate is equal to the number of unemployed people divided by the labor force 1-21 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.5 - The U.S. Unemployment Rate 1-22 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Unemployment Rate – frictional unemployment occurs because workers and firms spend time searching for the best match – cyclical unemployment occurs during recessions and depressions – the unemployment rate is the best indicator of how well the economy is doing relative to its productive potential 1-23 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Inflation Rate – is a measure of how fast the overall price level is rising – hyperinflation occurs when the price level is rising by more than 20% per month • can cause massive economic destruction 1-24 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.6 - Inflation in the United States 1-25 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Interest Rate – is important because it governs the redistribution of purchasing power across time – there are many different interest rates in the economy that vary by duration and degree of risk • they often move up and down together 1-26 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Interest Rate – the nominal interest rate is the interest rate in terms of money • does not take into account the effects of inflation – the real interest rate is the interest rate in terms of goods and services • does take into account the effects of inflation 1-27 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Interest Rate – when interest rates are low, investment tends to be high – when interest rates are high, investment tends to be low 1-28 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.7 - U.S. Real Interest Rates, 1960-2004 1-29 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Stock Market – is heard about most often (every day) – is an index of expectations for the future • a high value means that investors expect economic growth to be rapid, profits to be high, and unemployment to be low 1-30 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.8 - Real Stock Index Prices 1-31 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – governs the terms on which international trade and investment take place – the nominal exchange rate is the rate at which monies of different countries can be exchanged for one another – the real exchange rate is the rate at which the goods and services produced in different countries can be exchanged for one another 1-32 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – if domestic currency appreciates • its value in terms of other currencies increases • foreign-produced goods are relatively cheap for domestic buyers – imports are likely to be high • domestic-made goods are relatively expensive for foreigners – exports are likely to be low 1-33 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – if domestic currency depreciates • its value in terms of other currencies declines • domestic-produced goods are relatively cheap for foreign buyers – exports are likely to be high • foreign-made goods are relatively expensive for domestic buyers – imports are likely to be low 1-34 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.9 - The U.S. Real Exchange Rate: The Dollar against a Composite Index of Foreign Currencies 1-35 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • The United States – recent past – the collapse of the stock market bubble and the September 11 terrorist act triggered a recession • the U.S. economy lost 0.9 million jobs – in response, the Federal Reserve reduced interest rates and the federal government lowered taxes 1-36 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • The United States – recent past – slowly in 2002 and more rapidly in 2003 the economy began to recover • demand and production grew • employment did not expand much 1-37 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • The United States - 2004 – there are renewed worries among economists • tax cuts and extra defense spending have led to large budget deficits • fear that foreign exchange speculators will lose confidence in the dollar 1-38 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Europe – in the early 2000s, 11 Western European nations adopted the euro as their common currency – the adoption of the euro was followed by stagnation and recession • unemployment rates of close to 10% • real GDP growth at less than 2% per year • consumer prices rising at 2% per year 1-39 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Japan – interest rates are very low (0.03% in the three-month money market) – still undergoing deflation – six straight quarters of positive growth in real GDP – unemployment is still above 5%, but steady 1-40 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Emerging Markets – China and India are experiencing enormous growth • their economies are expected to grow at 8% and 6% in 2005 – foreign investors have appeared to have regained confidences in East Asian economies 1-41 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Emerging Markets – the Argentinean economy crashed at the end of 2001 • problems are still unresolved – elsewhere in Latin America, growth rates continued to be positive but small 1-42 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Summary • Macroeconomics is the study of the overall economy • There are three key reasons to study macroeconomics – to gain cultural literacy – to understand how economic trends affect you personally – to exercise your responsibility as a voter and citizen 1-43 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Summary • The key indicators in macroeconomics are – real GDP – the unemployment rate – the inflation rate – the interest rate – the level of the stock market – the exchange rate 1-44 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.