Download 9-1 - Intro to Macro

Chapter 23
An Introduction
to
Macroeconomics
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
What is Macroeconomics?
Macroeconomics is the study of the large economy
as a whole. It is the study of the big picture.
•
•
Instead of analyzing one consumer, we analyze everyone.
Instead of one business we study all businesses.
Why study the whole economy?
• The field of macroeconomics was born during
the Great Depression.
• Government didn’t understand how to fix a
depressed economy with 25% unemployment.
• Macro was created to:
1. Measure the health of the whole economy.
2. Guide government policies to fix problems.
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Performance and Policy
• Real GDP
–Corrects for price changes
• Nominal GDP
–Uses current prices
• Unemployment
–Actively seeking employment
• Inflation
–Increase in overall level of prices
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For all countries there are three major
economic goals:
1. Promote Economic Growth
2. Limit Unemployment
3. Keep Prices Stable (Limit Inflation)
In this unit we will analyze how each
of these are measured.
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Goal #1
Promote Economic Growth
How does a country measure
economic growth?
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Performance and Policy
• Can governments:
–Promote economic growth?
–Reduce severity of recession?
• Is monetary or fiscal policy more
effective at mitigating recession?
• Is there a tradeoff between
inflation and unemployment?
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Economic Performance
• Output growth – Guess the percent!
– 3.1% per year 1995-2005, less robust
recently
• Unemployment rate – Guess the percent! Target?
– 3-4% has historically been good,
currently 5.5%
• Inflation rate – Guess the percent! Target?
– Target – around 2%, recently it’s been
lower
– Why are we missing our targets in these categories
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recently?
U.S. GDP Growth
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China GDP Growth
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China vs. U.S.
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U.S. Unemployment Rate
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U.S. Inflation Rate
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Economic Growth
• Standard of living measured by
output per person
• No considerable growth in living
standards prior to Industrial
Revolution
• Modern economic growth
–Output per person rises
–Not experienced by all countries
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GDP Per Capita 2011
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GDP Per Capita
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World GDP Distribution
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Savings and Investment
• Saving
–Tradeoff current for future
consumption
• Investment
–Financial investment
• prospecting
–Economic investment
• Newly created capital goods
• Banks and financial institutions
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Expectations
• The future is uncertain
• Expectations affect investment
• Shocks
– What happens is not what you
expected – good or bad
• Demand shocks
– Ex: exchange rates, credit crunch
• Supply shocks
– Ex: drought (crops), war (oil)
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Shocks
• Optimal Output = min ATC
• Demand shocks and flexible prices
– Price falls if demand low
– Sales unchanged
• Demand shocks and sticky prices
– Maintain inventory
– Sales change
– Business cycles - growth and
recession
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Demand Shocks
Flexible Prices
Price
$40,000
$37,000
$35,000
DH
DM
DL
900
Cars per week
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Demand Shocks
Price
Sticky Prices
$37,000
DH
DL
700
900
1150
DM
Cars per week
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Sticky Prices
• Can help explain fluctuations is GDP
• Average months between price changes
• Which goods are more inelastic?
Coin-operated
Laundry Machine 46.4
Newspaper
29.9
Haircut
25.5
Taxi fare
19.7
Veterinary service 14.9
Magazine
11.2
Computer software 5.5
Beer
Microwave Ovens
Milk
Electricity
Airline ticket
Gasoline
4.3
3.0
2.4
1.8
1.0
0.6
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Sticky Prices
• Many prices sticky in short run
– Consumers prefer stable prices
– Firms want to avoid price wars
– Menu costs
– Elasticity
• All prices flexible in long run
– Firms adjust to unexpected, but
permanent changes in demand
– “sticky,” not “stuck”
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