Download Parkin-Bade Chapter 19

PART 7
Macroeconomic Overview
A First Look at
Macroeconomics
Copyright © 2006 Pearson Education Canada
19
CHAPTER
Objectives (slide #1)
After studying this chapter, you will able to
 Understand the origins and issues of macroeconomics
 Trends and fluctuations:
 (1) in economic growth
 (2) in jobs and unemployment
 (3) in inflation
 (4) in government and international deficits
 (5) underline the macroeconomic policy challenges and
the tools used to rectify these challenges.
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PROJECT THE FUTURE ECONOMIC
STATE (Will Your World Be Like)?(#2)
(1) Increase in prosperity?
(2) Increase in # of jobs?
(3) Stability in the cost of living?
(4) Government surplus or deficit?
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Origins and Issues of Macroeconomics (3)
The study of economic growth, inflation, and international payments
during the 1750s.
Modern macroeconomics began around the Great Depression (19291939)which was characterized with high unemployment and
international stagnation of production.
At the forefront of this development was John Maynard Keynes. His
book, The General Theory of Employment, Interest, and Money,
started the ball rolling.
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Origins and Issues of Macroeconomics (4)
Short-Term Versus Long-Term Goals
Keynes focused on the short-term—i.e. unemployment and lost of
production.
The reason:
“In the long run,” said Keynes, “we’re all dead.”
The 1970s and 1980s, started a growing concern with long-term
economic problems — inflation and economic growth.
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Growth and Fluctuations (5)
One fundamental topic is Economic growth (EC). EC is the
expansion of the economy’s production possibilities— i.e. an outward
shifting of the Production Possibility Frontier ( PPF.
Economic growth is measured by the increase in real gross domestic
product (GDP).
Real GDP— is the total value of the total production of all the nation’s
farms, factories, shops, and offices. It is measured in the prices of a
single year.
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Growth and Fluctuations (#6)
Economic Growth in
Canada
Figure 19.1 shows real
GDP in Canada from 1961
to 2005.
Notice the:
 Growth of potential GDP
 The movement of real
GDP around potential
GDP
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Growth and Fluctuations (#7)
Growth of Potential GDP
Potential GDP is the value
of real GDP when all the
country’s (resources)
labour, capital, land, and
entrepreneurial ability are
fully employed.
During the 1970s and early
1980s, the growth of real
GDP per person (per capita
GDP) slowed down — i.e. a
productivity growth
slowdown.
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Growth and Fluctuations (8)
Movement of Real GDP
Around Potential GDP
(Trend)
Real GDP fluctuates around
potential GDP in a
business cycle—which is a
periodic and irregular upand-down movement in a
country’s output – over
several years.
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Growth and Fluctuations (#9) – pg. 448
Every business cycle has two phases and two turning
points:
Phase: (a) a recession; (b) an expansion
Turning points: (a) a peak; (b) a trough
Figure 19.2 (on page 448) identifies these features of the
business cycle.
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Growth and Fluctuations (#10) – pg. 448
Canada’s most recent business cycle.
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Growth and Fluctuations (#11)
A recession is defined as a period where real GDP
declines for at least two successive quarters.
An expansion is identified with a a period during where
real GDP increases.
A growth recession is identified with a positive real
GDP growth rate but also slows down so real GDP falls
below potential GDP.
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Growth and Fluctuations (#12) – pg.
And the most recent recession is identified below…
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Growth and Fluctuations (#13) – pg 448
and the three growth recessions in the Canadian economy.
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Growth and Fluctuations (#14) – pg. 449.
Figure 19.3 shows the long-term growth trend and business cycles.
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Growth and Fluctuations – Around the
World (15) – pg. 450.
Economic Growth
Around the World
Figure 19.4(a)
compares the growth
rate of real per capita
GDP in Canada with
those of the world’s
three largest
economies.
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Growth and Fluctuations (15b)
 In the 1960s, Japan’s
growth rate was much
faster than the others.
 After the 1970s, all
four growth rates were
similar.
 Canada’s growth rate
has fallen behind the
U.S. growth rate.
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Growth and Fluctuations (# 16) –pg. 450.
Figure 19.4(b) compares
Canada’s economic
growth with several
countries and regions for
the period 1980 to 2004.
Asia was the fastest
growing region in the
world economy.
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Growth and Fluctuations (#17) pg. 451
The Lucas Wedge and the Okun Gap
Productivity slowdowns in a business cycle create the
lost of output as real GDP fluctuates around potential
GDP in a business cycle. To measures these losses
we can use the following methods:
(1) the Lucas wedge and
(2) the Okun gap.
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Growth and Fluctuations (#18) (fig. 19-5)pg. 451.
The Lucas Wedge
The Lucas wedge is the
accumulated loss of output
from a slowdown in the growth
rate of real per capita GDP.
Figure 19.5(a) shows that the
Lucas wedge, from the
productivity slowdown in
Canada during the 1970s, was
estimated as $11.5 trillion or 10
times the GDP at the 2005 level.
(Blk Lne).
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Growth and Fluctuations (fig 19) (#20)pg.
451
The Okun Gap
The Okun gap is the gap
between the potential GDP and
actual real GDP. Another name
for the Okun Gap is the output
gap.
Figure 19.5(b) shows that the
Okun gap, from the recessions
since 1974, is estimated at
$173 billion or about 2 months
of 2005 real GDP.
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Growth and Fluctuations (#21) – pg 452.
Benefits and Costs of Economic Growth
The Lucas wedge is a measure of the dollar value of lost
real GDP if the growth rate slows. This cost is identified
with the decline or loss of real goods and services.
It translates into an inferior Canadian health-care system,
fewer child-care services, worsen roads and less
improvements in environment control activites.
But fast growth is also costly. Its main costs is forgone
current consumption. To sustain growth, resources must
be allocated to advancing technology and accumulating
capital rather than to current consumption.
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Jobs and Unemployment (#22) – pg. 452.
Jobs
The Canadian economy creates, on average about
220,000 additional jobs a year.
This number fluctuates. For example, since 2000, the
economy has created about 1.6 additional jobs, but during
the 1991 recession, 260,000 jobs disappeared.
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Jobs and Unemployment (# 23) pg. 452.
Unemployment
Unemployment, in Canada, is defined as a state in which
a person does not have a job but is available for work, is
willing to work, and has made some effort to find work
within the previous four weeks.
The labour force is the total number of people who are
employed and unemployed.
The unemployment rate is the percentage of the people
in the labour force who are unemployed.
A discouraged worker is a person who is available for
work, willing to work, but who has given looking for a job.
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Jobs and Unemployment (#24) Fig.19.6(a)
– pg. 453
Unemployment in
Canada
Figure 19.6 shows the
unemployment rate in
Canada from 1926 to
2005.
 During the 1930s,
the unemployment
rate hit 20 percent.
 The lowest rate
occurred during World
War II at 1.2 percent.
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Jobs and Unemployment Fig (#25) 19.6b
– pg. 453.
 During recent
recessions, the
unemployment rate
increased but not as
high as in the Great
Depression.
 The unemployment
rate is never zero.
Since World War II, it
has averaged 6.7
percent.
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Jobs and Unemployment (#26) Fig 19.7
pg. 454.
Unemployment Around
the World
Figure 19.7 compares the
unemployment rate in
Canada with those in
Japan, Western Europe,
and the United States.
Compared to the other
countries, on the average,
unemployment is highest
in Canada.
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Jobs and Unemployment (# 27) pg. 454.
Why Unemployment Is a Problem
Unemployment has a serious economic, social, and
personal problems for two main reasons:
(a) lost production and incomes; and
(b) lost human capital
The loss of a job brings an immediate loss of income and
production. This can be a temporary problem.
A prolonged spell of unemployment can bring permanent
damage through the loss of human capital.
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Inflation (#28) – pg. 455.
Inflation is a process of rising prices or an increase in the price level.
We measure the inflation rate as the percentage change in the
average level of prices or the price level.
The Consumer Price Index -the CPI -is a common measurement of
the price level.
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Inflation (#29a) pg. 455
Inflation in Canada
 Was low in the first
half of the 1960s.
 Increased in the
1970s and early
1980s.
 Was lowered in the
1980s and 1990s.
 Since 1990s, it has
kept inside the
target band.
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Inflation (#29b)
The inflation rate
fluctuates, but it is
always positive.
the price level has
not fallen below
zero for the years
shown in the
figure.
A falling price
level—a negative
inflation rate—is
called deflation.
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Inflation (#30) pg. 456
Inflation Around the
World
Figure 19.9(a) compares
the inflation rate of
Canada compared with
other countries.
 Canadian inflation rate
has been similar to those
in other industrial
countries.
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Inflation (#31) pg. 456
Figure 19.9(b) shows that
the inflation rates in
industrial countries has
been much lower than
those in developing
countries.
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Inflation (#32) –pg. 456
Is Inflation a Problem?
Unpredictable changes in the inflation rate are a problem
because they redistribute income in arbitrary ways
between employers and workers and between borrowers
and lenders.
A high inflation rate is a problem because it diverts
resources from productive activities to the forecasting of
inflation and speculation activities.
Reducing/ removing inflation has its costs because it
brings a period of greater than average unemployment.
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Surpluses and Deficits (# 33) – pg 457.
Government Budget Surplus and Deficit
If a government collects more in taxes than it spends, it
has a government budget surplus.
If a government spends more than it collects in taxes, it
has a government budget deficit.
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Surpluses and Deficits (#34 a) –pg. 458
Figure 19.10(a) shows
the changing surplus
and deficit of the
federal and provincial
governments in
Canada since 1960.
 Persistent federal
deficits during the
1970s through the
1990s and
 Federal surpluses
since 1998.
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Surpluses and Deficits (#34b) –pg 458
Provincial governments
had
 Surpluses during the
1960s and 1970s and
 Large deficits in the
early 1990s.
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Surpluses and Deficits (#35a) –pg 458
International Surplus and Deficit
If a nation imports more than it exports, it has an
international deficit.
If a nation exports more than it imports, it has an
international surplus.
The balance on the current account is the balance of
exports minus imports, plus net interest paid to and
received from the rest of the world.
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Surpluses and Deficits (#35b) –pg. 458
Figure 19.10(b) shows
Canada’s current
account balance from
1960 to 2005.
 Persistent current
account deficit most of
the time
 Surpluses during the
past five years
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Macroeconomic Policy Challenges
and Tools (#36a) – pg. 459.
Five widely agreed policy challenges for macroeconomics
are to:
1. Reduce unemployment
2. Boost economic growth
3. Stabilize the business cycle
4. Keep inflation low
5. Reduce government and international deficits
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Macroeconomic Policy Challenges
and Tools (#36b) – pg. 459.
Two broad groups of macroeconomic policy tools are
Fiscal policy—making changes in tax rates and
government spending
Monetary policy—changing interest rates and changing
the amount of money in the economy
The government conducts fiscal policy.
The Bank of Canada conducts monetary policy.
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Implications from Reading Between The
Lines (# 37) – pgs. 460- 461. (Application)
(1) What did the paper clipping forecast in each sector
of the economy?
(2) What official sources did the clipping used?
(3) How did the authors evaluate these forecasts?
(4) What methodologies were employed to analyze the
correctness of the analysis?
(5) What are your conclusions on this exercise?
(6) What tools, lessons and information have you learnt
from this exercise? From this chapter ?
L. Paul (Jan 07)
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Copyright © 2006 Pearson Education Canada