Download of Macroeconomics

Chapter 1
What Is
Macroeconomics?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
How Macroeconomics Affects our Everyday
Lives
•
Macroeconomics is concerned with the big economic issues
that determine our economic well-being.
•
Macroeconomic issues involves the overall economic
performance of the nation.
•
There are three central concepts in macroeconomics; the
unemployment rate, the inflation rate and productivity growth.
• The basic task of macroeconomics is to study the causes of
good or bad performance of these three concepts, and how the
government can do to improve macroeconomic performance.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-2
The “Big Three” Concepts of
Macroeconomics
1.
•
•
•
•
•
The unemployment rate
The higher the overall unemployment rate, the harder for
individuals who want to work to find work.
Unemployed people will not be able to pay their bills. When
unemployment is high, crime, mental illness and suicide also
increase.
There is a consensus that unemployment is the single most
important macroeconomic issue.
“Indolence is justly considered the mother of misery”, Robert
Burton said (1621).
U = (# of Unemployed) / Labor Force
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-3
The “Big Three” Concepts of
Macroeconomics
2.
•
•
•
•
The Inflation Rate
A high inflation means that prices, on average are rising
rapidly. A zero inflation rate means that prices remain the
same.
In inflationary periods, retired people lose the most, as their
savings buy less as prices go up. While inflation harms savers,
it helps borrowers, i.e inflation redistributes income.
Inflation increases uncertainty about the future
∏ = %ΔP = (P1 – P0) / P0
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-4
The “Big Three” Concepts of
Macroeconomics
3. Productivity growth
• Productivity is the average output per hour of work that a
nation produces in total goods and services ($61 in USA in
2010).
• The faster average productivity grows, the easier is for
individuals to raise their standards of living, i.e., there will be
more houses, roads, cars, hospitals, schools ..etc.
• An economy with no productivity growth is called the “zero
sum society” (the rate of growth is zero), any extra good or
service enjoyed by one person requires that something else is
taken from someone else. For example in order to build more
houses, the economy has to sacrifice building fewer hospitals.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-5
Macroeconomics vs.
Microeconomics
• Macroeconomics deals with the totals, or aggregates, of the
economy such as:
– The unemployment rate (of all U.S. workers)
– Inflation (i.e. the rise of all prices in the U.S.)
• Microeconomics deals with parts of the economy like:
– The unemployment rate of low-skilled workers in a certain state
– The price of cars
• Economic theory helps us understand the economy by
simplifying complexity, by examining the behavior of
aggregates. By learning a few basic relations we can tell where
the economy is going
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-6
Actual and Natural Real GDP
• The official measure of the economy is “the real GDP” includes
all currently produced goods and services sold on the market
within a given time period, i.e., reflects the quantity produced
corrected for any changes in prices.
• Actual real GDP is the amount an economy actually produces
at any given time. Too much production of real GDP causes
inflation, while too little causes a waste of resources. Neither
are desirable.
• Natural real GDP is the actual real GDP when inflation rate is
constant with no tendency to accelerate or decelerate (when
actual and natural GDP are equal)
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-7
Figure 1-1 The Relation Between Actual and
Natural Real GDP and the Inflation Rate
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-8
• Note:
• When real GDP equals natural GDP the inflation rate will be
constant.
• During periods of low actual real GDP, inflation slows down.
• During periods of high actual real GDP, inflation accelerates
(excessive actual real GDP is called overheating the economy).
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-9
Unemployment: Actual and real
•
Actual Unemployment (U) is the unemployment rate
observed in the economy.
• The Natural Rate of Unemployment (U*) is the rate of
unemployment at which there is no tendency for inflation to
rise or fall.
– If U > U*  ∏ rises
– If U < U*  ∏ falls
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-10
Figure 1-2 The Behavior Over Time of Actual and
Natural Real GDP and the Actual and Natural Rates
of Unemployment
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-11
Unemployment: Actual and real
• GDP gap is the percentage difference between actual real GDP
and natural real GDP, sometimes is called output gap.
• Unemployment gap is the difference between the actual
unemployment and the natural rate of unemployment.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-12
Unemployment: Actual and real
• When actual real GDP is low, actual unemployment rate rises
above its natural level (note that inflation slows down here).
•
When actual real GDP is high, actual unemployment rate falls
below its natural level (inflation accelerates).
• Whenever actual real GDP equals natural real GDP actual
unemployment equals natural rate of unemployment NRU.
• NRU corresponds exactly to natural real GDP. A situation in
which there is no tendency for inflation to change.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-13
Figure 1-6 Actual and Natural GDP and
Unemployment, 1900–2010 (1 of 2)
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-14
Figure 1-6 Actual and Natural GDP and
Unemployment, 1900–2010 (2 of 2)
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
Sources: See Appendix A-1 and C-4.
1-15
Macroeconomics in the Short
Run and Long Run
• The “short run” lasts from 1-5 years and the main issue is the
stability of the economy.
– The ups and downs (or “economic fluctuations”) of an economy are part
of the business cycle. Consist of expansions occurring at about the same
time in many economic activities, followed by similarly general
recessions and recoveries.
– The business cycle has the following phases:
• Expansion
• Contraction
• The “long run” ranges from one to several decades and is
concerned with economic growth. Knowledge of growth helps
us predict whether successive generations will be better off than
their predecessors
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-16
Figure 1-4 Basic Business-Cycle
Concepts
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-17
The short run business cyles
• The concern of macroeconomists in the short run is to minimize
fluctuations in economic activity.
• The stabilia case: both actual and natural GDP are almost
identical.
• The volatilia case: large gaps between actual and natural GDP.
• Two schools. Activists, do something.
• Non-activists. Do nothing or hands off policies.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-18
Figure 1-3 Business Cycles in Volatilia
and Stabilia
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-19
Figure 1-5 Economic Growth
in Stag-Nation and Speed-Nation
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-20
Taming Business Cycles
• Macroeconomic analysts have two main tasks:
– Analyze the causes of changes in macroeconomic variables
– Predict the consequences of alternative policy changes
• Macroeconomic target variables are important to analysts and
policy makers include:
– Inflation
– Unemployment
– Long-term growth of productivity
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-21
The Role of Stabilization Policy
• A Stabilization Policy is any policy that seeks to influence the
level of aggregate demand.
– Monetary policy tries to influence aggregate demand by changing the
money supply and/or interest rates.
– Fiscal policy tries to influence aggregate demand by changing
government spending and/or tax rates.
• New Challenges: The global economic crisis has brought forth
novel and controversial strategies in both monetary and fiscal
policy (see Chapters 5 and 6).
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-22
The “Internationalization” of
Macroeconomics
• A closed economy has no trade in goods, services or financial
assets with any other nations.
– In the 1940s and 50s, the U.S. was relatively closed:
• Trade was 5% of the U.S. economy
• Exchange rates were fixed
• Financial flows to and from the U.S. were restricted
• An open economy exports and imports goods and services to and
from other nations, and has financial flows to and from foreign
nations.
– Today the U.S. is increasingly open:
• Imports equal 17% of U.S. GDP
• Since 1973, the exchange rate of the $ has been flexible
• International financial flows are massive and almost instantaneous
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-23
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
1-24