Transcript Macroeconomics

Macroeconomics
What is Macroeconomics?
Important Macro Variables
What is GDP?
Macroeconomic Policy
What is Macroeconomics?
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Microeconomics – studies individual
markets and industries. “How to divide up
Pie”
Macroeconomics – studies the general
conditions of the overall economy. “Size of
the Pie”
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Macroeconomics involves aggregation –
adding up parts of economy to get whole
picture.
Example: National Crime Index
Serious Crime (violent + property) per
100,000 people:
1992:
5,700
1998:
4,600
- Serious crime rate down 19%
- Murder rate down 31%
- Aggregation may obscure real picture
- Aggregation gives overall picture of
crime which may or may not be
represented by your neighborhood.
(i) Amount of aggregation depends on your objective.
(ii) Variables that make up the aggregate tend to
move together.
Important Macroeconomic Variables
(1) National Output – How much total output
a country produces over a period of time
(GDP).
U.S. GDP for 2005 is $11.8 Trillion
($11,800,000,000,000)
Figure 2
Real Gross Domestic Product (GDP)
Since 1959
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A Growing Economy…
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U.S. GDP 4.4 times larger in 2004 versus 1959
U.S. GDP per capita is 2.7 times larger
But with Bumps along the Way
Growth is irregular from year to year
Periods of boom and bust (recession) known as
business cycles or economic fluctuations.
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GDP is produced from labor (“who”) and
capital (“what”).
Labor – measured in number of workers or
total hours worked
Capital – the value of productive assets used
by businesses to produce goods and
services.
(2)
Unemployment Rate – fraction of all
people who are willing and able to work
who don’t have jobs.
U.S. Unemployment Rate is 4.7%
4: Unemployment Rate in the
U.S., 1929-2004
FIGURE
30
Percentage of Civilian Workers
Who are Unemployed
Great
Depression
25
20
1980-83
recessions
15
10
1973-75
recession
World
War II
1980s
boom
1960s
boom
1990s
boom
Who
5 are Unemployed
Percentage of Civilian Workers
0
1929
1939
1949
1959
1969
1979
1989
1999 2004
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Inflation Rate – the rate of increase of overall
(economy-wide) prices.
U.S. inflation rate in 2005 is around 3.8%
Figure 6
The Inflation Rate in the United States
since 1870
Structure of the American Economy
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A Private Enterprise Economy
 Most production completed by private
enterprises in free markets
 Gross Domestic Product (GDP): standard
measure of the economy’s output
 Government spending accounts for about 18
percent of GDP.
Circular Flow of Goods and Money
Households (Consumers):
Supplies Labor and Capital
Receives Goods and Services
Earns and Spends Income
 Businesses:
Receives Capital and Labor
Produces Goods and Services
Earns sales receipts and pays for capital and
labor.
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Figure 11
The Circular Flow of Goods and Money
What’s Missing from the Picture?
Government
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The Government as a Referee
 Enforce laws and act as an arbitrator
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The Government as Business Regulator
 Government activity designed to improve
market activity
 Antitrust laws
 Environmental regulation
What’s Missing from the Picture?
Government
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Government Expenditures
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Government spending on
 Pensions and income security programs
(Social Security and unemployment
compensation
 Health-care expenditures (Medicare and
Medicaid)
 National defense
 Interest on national debt
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Taxes in America
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By international standards, Americans pay a small
share of income to taxes
The Government as a Redistributor
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Socialist idea – equal distribution of income
overrides the decision of the market
Liberal idea – use progressive taxes and transfer
payments to reduce income inequality
GDP: What It Is and What It’s Not
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(1)
(2)
(3)
(4)
(5)
Gross Domestic Product (GDP) is the total market
(dollar) value of all final goods and services
currently and domestically produced within a
period of time (e.g., a year).
Production
Market Value
Final goods
Current
Domestic
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Income-Output-Expenditures Identity
GDP = Y = Total Output = Total Income
= Total Expenditures
Is that Real??
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GDP and other economic quantities are
usually expressed as
(i) Nominal - quantities measured in current
prices or current dollars (nominal GDP is
sometimes called money GDP)
(ii) Real - quantities measured at fixed prices
or constant dollars.
Nominal = (prices)x(quantities)
Real = quantities
 Examples: Apples
Movie Box Office Sales
 Changes in real GDP measures the overall
change in national production.
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Shortcomings of GDP
GDP is not necessarily a perfect indicator of
the well-being of a nation.
(1) Includes Only Market Activities
(2) No Value for Leisure
(3) Some “Goods” are also “Bads”
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Macroeconomic Policy
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Macroeconomic policies are policies designed
by the government to affect the direction and
performance of the economy.
Two types of macroeconomic policies:
(i) Fiscal policy:
- Control of Federal Budget: government
spending and taxes.
- Carried Out by President and Congress.
(ii) Monetary policy:
- Control of the Nation’s Money Supply
- Carried out by the Federal Reserve System
Historical Record of the U.S. Economy
20th Century Events
(1) Great Depression (1929-33)
- largest economic downturn in U.S. history
- Real GDP fell by 30%
- Unemployment rate increased to 25%
- Stock Market lost 80% of value
- Bank failures and huge deflation
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(2) WWII – 1973
- economic expansion and full employment
- Short and moderate recessions
- Low inflation (increases in booms,
decreases in recessions)
(3) The “Great Stagflation”, 1973-81
- historical high inflation from oil price shocks
- Stagflation: High inflation (11%) and high
unemployment (13%)
(4) The Regan Expansion, 1981-91
- Low inflation (3%) and economic
expansion
- Large budget deficits due to tax cuts and
increased military spending.
(5) The New Economy, 1991-2000
- Gulf War, Bush recession, and Clinton
years
- Longest peacetime economic expansion
- Low unemployment and low inflation.
- New economy driven by technological progress
and internet revolution.
(6) Economy in Transition, 2001-Present
- decreasing unemployment following
recession (2000-01)
- low inflation, low but rising interest rates
- Wartime government spending and record
high budget deficits ($400 Billion)
Figure 5
The Growth Rate of U.S. Real Gross
Domestic Product since 1870
Figure 6
The Inflation Rate in the United States
since 1870
The Latest Economic Numbers
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Real GDP Growth: 4.1% annual for 2005:Q3
Civilian Unemployment Rate for Dec: 4.9%
(down).
Inflation: 3.8% for 2005.
Prime Interest Rate: 7.15%
Federal Budget Deficit: $400 billion + (annual)
Foreign Trade Deficit: -$600 billion + (annual)