Download Parkin-Bade Chapter 19

ECO102
Principles of Macroeconomics
Module Outline
Week
Topics
1
A First Look at Macroeconomics
2
Measuring GDP and Economic Growth
3
Monitoring Cycles, Jobs, and the Price Level
4
Expenditure Multipliers: The Keynesian Model
5
Aggregate Supply and Aggregate Demand
6
Money, Banks, and the Central Bank
7
Money, Interest, Real GDP, and the Price Level
8
Inflation
9
The Business Cycle
10
Fiscal Policy
11
Monetary Policy
12-13
14
IS-LM Model
International Finance
Textbook and References
Textbook
Parkin, M (2008) Economics, 9th edition.
Reference
Mankiw, N.G. (2003) Macroeconomics, 5th edition.
•Specifically for the Topic on IS-LM model.
ECO102: Topic 1
A First Look at Macroeconomics
After studying this chapter you will be able to
Describe the origins and issues of macroeconomics
Describe the trends and fluctuations in economic growth
and explain the benefits and costs of economic growth
Describe the trends and fluctuations in unemployment
and explain why unemployment is a problem
Describe the trends and fluctuations in inflation and
explain why inflation is a problem
Describe the trends and fluctuations in surpluses, deficits,
and debts and explain why they matter
Identify the macroeconomic policy challenges and list the
tools available for meeting them
Origins of Macroeconomics
Modern macroeconomics dates from the Great
Depression, a decade (1929-1939) of high unemployment
and stagnant production throughout the world economy.
John Maynard Keynes book, The General Theory of
Employment, Interest, and Money, began the subject.
Issues of Macroeconomics
Business Cycles and Economic Growth
Job and Unemployment
Inflation and Deflation
Surpluses, Deficits, and Debts at a National Level
Macroeconomic Policies and Schools of Economic
Thought
Economic Growth and Business Cycles
Economic growth is the expansion of the economy’s
production possibilities—an outward shifting PPF.
•Real GDP (real gross domestic product) is the value of the total
production of all the nation’s farms, factories, shops, and offices,
measured in the prices of a single year.
•In real GDP, the effect of price change (i.e. inflation or deflation)
is eliminated.
We measure economic growth by the increase in real
GDP.
Economic Growth and Business Cycles
Economic Growth in the
United States
Figure 20.1 shows real
GDP in the United States
from 1960 to 2005.
The figure highlights:
 Growth of potential GDP
 Fluctuations of real GDP
around potential GDP
Economic Growth and Business Cycles
Growth of Potential GDP
Potential GDP is the value
of production when all the
economy’s labor, capital,
land, and entrepreneurial
ability are fully employed.
Economic Growth and Business Cycles
Fluctuations of Real GDP
Around Trend
Real GDP fluctuates
around potential GDP in a
business cycle—a
periodic but irregular upand-down movement in
production.
Economic Growth and Business Cycles
Every business cycle has two phases:
1. A recession
2. An expansion
and two turning points:
1. A peak
2. A trough
Figure 20.2 on the next slide illustrates these features of
the business cycle.
Economic Growth and Business Cycles
A recent business cycle in the United States
Economic Growth and Business Cycles
A recession is a period during which real GDP
decreases.
An expansion is a period during which real GDP
increases.
Economic Growth and Business Cycles
Figure 20.3 shows the long-term growth trend and cycles.
Economic Growth and Business Cycles
Benefits and Costs of Economic Growth
Benefits:
•Higher future consumption, e.g. more health care for the needy,
more fund for medical research, better roads, and more to spend on
clean air, etc..
•i.e. higher living standard in the future.
Costs:
•The main cost of growth is forgone current consumption, i.e. lower
consumption now.
•To sustain growth, resources must be allocated to advancing
technology and accumulating capital (e.g. more infrastructure) rather
than to current consumption.
•i.e. giving up current living standard for higher future living standard.
Jobs and Unemployment
Jobs
In 2006, 143 million people in the United States had jobs.
This number is 16 million more than in 1996 and 33 million
more than in 1986.
The pace of job creation fluctuates with business cycles.
During a recession, the number of jobs shrinks.
During the 19901991 recession, more than 1 million jobs
were lost and during the 2001 recession, 2 million jobs
disappeared.
Jobs and Unemployment
Unemployment
Not everyone who wants a job can find one.
In a recession, the number of unemployed is larger. For
example, in 1990-1991 recession, 9 million people were
looking for jobs.
The unemployment rate is the number of unemployed
people expressed as a percentage of all the people who
have jobs or are looking for one.
Jobs and Unemployment
Unemployment in the United States
Figure 20.6 shows the unemployment rate from 1926 to
2006.
Jobs and Unemployment
During the 1930s, the unemployment rate hit 25 percent.
Jobs and Unemployment
The lowest rate occurred during World War II at 1.2 percent.
Jobs and Unemployment
During recent recessions, the unemployment rate increased
but was not as high as in the Great Depression.
Jobs and Unemployment
The unemployment rate is never zero. Since World War II, it
has averaged 5 percent.
Jobs and Unemployment
Why Unemployment Is a Problem
Unemployment is a serious economic, social, and
personal problem for two main reasons:
 Lost production and incomes
•The loss of a job brings an immediate loss of income and
production—a temporary problem.
 Lost human capital
•A prolonged spell of unemployment can bring permanent damage
through the loss of human capital.
Inflation and Deflation
We measure the level of prices—the price level— as the
average of the prices that people pay for all the goods and
services that they buy.
The Consumer Price Index—the CPI—is a common
measure of the price level.
We measure the inflation rate as the percentage change
in the price level.
Inflation arises when the price level is rising persistently.
If the price level is falling, inflation is negative and we have
deflation.
Inflation and Deflation
Inflation in the United States
Was low in
the 1960s.
Increased in
the 1970s
and early
1980s.
Fell during
the 1980s
and 1990s.
Increased
after 2002.
Inflation and Deflation
Unpredictable changes in the inflation rate redistribute
income between employers and workers and between
borrowers and lenders.
A high inflation rate is a problem because it diverts
resources from productive activities to inflation forecasting.
From a social perspective, this waste of resources is a
cost of inflation.
Eliminating inflation is costly because it brings a period of
greater than average unemployment.
Surpluses, Deficits, and Debts
Government Budget Balance
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.
Surpluses, Deficits, and Debts
Figure 20.11(a) shows the
U.S. federal government
budget balance from 1960
to 2005.
The budget deficit as a
percentage of GDP
increases in recessions
and shrinks in expansions
In 1998, a budget surplus
emerged, but the budget
deficit reappeared in
2001.
Surpluses, Deficits, and Debts
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.
Deficits (International or Governmental) Bring Debts
Surpluses, Deficits, and Debts
Figure 20.12(b) shows
the U.S. international
debt from 1975 to 2005.
Until 1986, the United
States was a net lender
to the world.
But with increased
deficits, the United
States is now a net
borrower from the world.
Macroeconomic Policies and Schools of
Economic Thought
Five widely agreed policy challenges for macroeconomics
policies:
1. Boost economic growth
2. Keep inflation low
3. Stabilize business cycle
4. Reduce unemployment
5. Reduce government and international deficits
Macroeconomic Policies and Schools of
Economic Thought
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 Federal Reserve (the Fed) or Central Bank conducts
monetary policy.
Macroeconomic Policies and Schools of
Economic Thought
Short-Term Versus Long-Term Goals
Keynes focused on the short-term—on unemployment and
lost production.
“In the long run,” said Keynes, “we’re all dead.”
During the 1970s and 1980s, macroeconomists became
more concerned about the long-term—inflation and
economic growth.
Macroeconomic Policies and Schools of
Economic Thought
Classical and Keynesian Views
Economists’ views fall into two broad schools:
Classical view: The economy behaves best if the
government leaves people free to pursue their own selfinterest. Attempts by the government to improve
macroeconomic performance will not succeed.
Keynesian view: The economy behaves badly if left alone
and that government action is needed to achieve and
maintain full employment.
After studying this chapter you will be
able to
 Describe the origins and issues of macroeconomics
• Macroeconomics started with J.M. Keynse in 1930’s.
 Describe the trends and fluctuations in economic growth and explain
the benefits and costs of economic growth
• Normally real GDP shows upward trend – economic growth
• With fluctuation around the trend line – business cycle
• Major benefits and costs of economic growth: tradeoff between
current and future consumption
 Describe the trends and fluctuations in unemployment and explain
why unemployment is a problem
• Unemployment fluctuates with business cycles
• Cost of unemployment: lost of production and income, damage on
human capital
After studying this chapter you will be
able to
 Describe the trends and fluctuations in inflation and
explain why inflation is a problem
• In the US, after WWII, inflation rate peaked in 1970s and was
tamed that.
• The redistribution effect of unpredictable inflation is a problem.
 Describe the trends and fluctuations in surpluses, deficits,
and debts and explain why they matter
• After WWII, the US ran government deficit most of the time.
• Since mid-1980s, the US had been running international deficit.
• Deficits bring debts, which incur interest payments.
 Identify the macroeconomic policy challenges and list the
tools available for meeting them
After studying this chapter you will be
able to
 Identify the macroeconomic policy challenges and list the tools
available for meeting them
•
•
•
•
•
•
1. Boost economic growth
2. Keep inflation low
3. Stabilize business cycle
4. Reduce unemployment
5. Reduce government and international deficits
Fiscal policy and monetary policy are two broad groups of
macroeconomic policy tools
• While traditional Keynesian stresses short-term policy goals, e.g.
unemployment and lost income, modern macroeconomists
emphasized on long-term goals, e.g. growth and inflation.
• Classical school believes that the market works well to achieve full
employment if it is left alone; Keynesian school believes that market
does work and need government intervention to achieve full
employment.
THE END