Download A first look at macroeconomics

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Chapter 4: A First Look at Macroeconomics
 Origins and issues of macroeconomics
 Economic growth
 Unemployment & inflation
 Government budget surpluses/deficits
 International trade surpluses and deficits
 Macroeconomic policy challenges and tools
Origins and Issues of Macroeconomics
Economists began to study economic growth, inflation,
and international payments during the 1750s.
Modern macro 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.
Origins and Issues of Macroeconomics
Short-Term Versus Long-Term Goals
Keynes focused on the short-term
on unemployment and lost production.
“In the long run, we’re all dead.”
During the 1970s and 1980s, macroeconomists became
more concerned about long-term—inflation and economic
growth.
Economic Growth and Fluctuations
Economic growth
•expansion of the economy’s production possibilities
• outward shifting Production possibilities frontier (PPF).
• results from more resources (land, labor, capital) or
improved technology
Real Gross Domestic Product (GDP)
•total market value of all the goods and services
produced by domestically located factors of producing
during a year, measured using a fixed prices.
• inflation alone does not cause an increase in real GDP
Economic Growth is measured by growth in Real GDP
Economic Growth and Fluctuations
•Potential GDP is GDP
if economy operates at
“full employment”
•Real GDP<Potential
GDP below full
employment
• A recession occurs
when real GDP
declines.
Economic Growth and Fluctuations
Business cycles:
• Fluctuations of real GDP around potential
• 2 stages
1. A recession: real GDP declining
2. An expansion: real GDP rising
• 2 turning points
1. Peak
2. Trough
Business cycle dates officially determined by NBER
http://www.nber.org/cycles.html
Economic Growth and Fluctuations: 1866-2006
Economic Growth and Fluctuations: 1980-2008
Economic Growth and Fluctuations
How costly are the growth slowdown and the lost
output over the business cycle?
To answer that question we measure:
 The Lucas wedge
 The Okun gap
The Cost of a Productivity Slowdown
The Lucas Wedge
accumulated loss of output from
the productivity growth slowdown
of the 1970s
Productivity=RGDP/labor hours
(4.3 percent from 1960s versus
actual growth realized).
$72 trillion or 6.5 times the real
GDP in 2005.
The Cost of a Recessions
The Okun Gap
Real GDP minus
potential GDP is the
output gap (Okun
gap)
Okun gap from
recessions since 1973
is $3.3 trillion or about
30 percent of real GDP
in 2005.
Pain of an Okun gap
not equally distributed
across society.
A larger Okun gap would be caused by
___ . A larger Lucas wedge would be
caused by ______:
1. A longer recession;
slower productivity
growth
2. A shorter recession;
slower productivity
growth
3. Slower productivity
growth; longer
recession
4. None of the above.
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Determinants of Economic Growth
Rate of growth in resources (land, labor, capital)
– Tax policy
– Social Insurance programs
– Immigration
– Environmental regulations
– Government spending
– Technological change
– Education policy
Which tax would be likely to lead to
greater economic growth?
1. A tax rebate to
households.
2. A tax credit to
business
subsidizing the
purchase of new
capital.
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Stricter environmental regulations would
likely lead to _____ economic growth.
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More generous unemployment insurance
benefits would likely lead to ____
economic growth
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More immigration would lead to ____
economic growth
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Jobs and Unemployment
Jobs
In 2008, 145.3 million people in the United States had jobs.
This number is 18 million more than in 1996 and 35 million
more than in 1986.
But the pace of job creation fluctuates.
During a recession, the number of jobs shrinks.
19901991 recession:
>1 million jobs lost
2001 recession,
2 million jobs lost
2008 recession:
2 million jobs lost in 4th quarter,
how many more??
.
Jobs and Unemployment
Unemployment
On an average day in a normal year, 7 million people in
the U.S. are unemployed (not employed, but searching
for a job).
Labor force statistics:
Civilian Labor force = employed + unemployed (excludes
military)
Unemployment rate = unemployed/Civilian labor force
Jobs and Unemployment
The unemployment rate is not a perfect measure of the
underutilization of labor. For two reasons:
The unemployment rate
1. Excludes discouraged workers.
•
Workers who are discouraged about job prospects and quit
searching.
2. Excludes “under-employment”
–part-time workers who want full-time jobs.
Jobs and Unemployment
During the 1930s, the unemployment rate hit 25 percent.
Jobs and Unemployment
Inflation
We measure the price level as the average of the prices
that people pay for all the goods and services that they
buy.
Consumer Price Index (CPI) is a common measure of the
price level.
Inflation rate:percentage change in the price level.
Inflation occurs when the price level is rising persistently.
Deflation occurs when inflation is negative and prices are
falling.
Inflation
Hyperinflation
The most serious type of inflation is hyperinflation -- an
inflation rate that exceeds 50 percent a month.
Why Inflation is a Problem
Inflation is a problem for many reasons, but the main one is
that once it takes hold, it is unpredictable.
Unpredictable inflation is a problem because it
 Redistributes income and wealth
Borrowers and lenders
Taxes
 Diverts resources from production toward forecasting
inflation & contracts to deal with inflation
If inflation is higher than borrowers and
lenders expected, borrowers will ____
and lenders will _____.
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2. Win; win
3. Lose; win
4. Lose; lose
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Value of the dollar
The Value of the Dollar
in terms of other currencies is called the exchange rate —
a measure of how much your dollar will buy in other parts
of the world.
An example is the number of pesos that 1 U.S. dollar will
buy (pesos/dollar)
Value of the dollar
Depreciation
value of the dollar
decreases relative to
other currencies.
Appreciation
 Value of the dollar
increasesincreases
relative to other
currencies.
A weighted average of the foreign exchange value of the U.S. dollar against a
subset of the broad index currencies that circulate widely outside the country of
issue. Major currencies index includes the Euro Area, Canada, Japan, United
Kingdom, Switzerland, Australia, and Sweden.
Value of the Dollar
Why the Exchange Rate Matters
When the U.S. dollar appreciates,
U.S. consumers pay less for imported goods
 more imports and less demand for domestic goods.
Foreign consumers pay more for U.S. exports
 fewer exports and less demand for domestic goods.
When the U.S. dollar depreciates, the opposite occurs.
When the dollar appreciates relative to
other currencies, the cost of U.S. exports
to other countries ______ and the cost of
U.S. imports from other countries _____.
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4. Falls; rises.
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Government 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.
Deficits Bring Debts
A debt is the amount that is owed.
When a government or a nation has a deficit, its debt grows.
A government’s or a nation’s debt equals the sum of all past deficits
minus past surpluses.
A government’s debt is called national debt.
If the U.S. debt grows from 2008 to 2009,
the government must have experienced a
budget deficit.
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Surpluses, Deficits, and Debts
The budget deficit
as a percentage of
GDP increases in
recessions and
shrinks in
expansions
Surpluses, Deficits, and Debts
Surpluses, Deficits, and Debts
During the 1980s
expansion, a large
deficit appeared but it
almost disappeared
during the 1990–1991
recession.
The current account
deficit in 2005 was 6.3
percent of GDP.
International Surpluses, Deficits, and Debts
International Surplus and Deficit
Trade surplus: imports > exports
Trade deficit: exports> imports
The balance on the current account equals U.S. exports
minus U.S. imports but adds interest received and
substracts interest paid to rest of the world.
Current account surplus: net lender to rest of world
Curernt account deficit: net borrower from rest of world
International Surpluses, Deficits, and Debts
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.
U.S. borrowing from the rest of the world
rises as imports ____ or exports _____.
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1. Rise; rise
2. Rise; fall
3. Fall; fall
4. Fall; rise
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Macroeconomic Policy Challenges and Tools
Two broad groups of macroeconomic policy tools are
Fiscal policy
changes in tax rates and government spending
Conducted by government
Monetary policy
changing interest rates and the amount of money in the economy
Conducted by Federal Reserve