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Introduction to Macroeconomics Mr. Way Economics 2/9/2012 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels. What is Macroeconomics? • Micro = small scale • Macro = large scale • Microeconomics: study of a small part of an economy, e.g. a market for one good. • Macroeconomics: study of the economy as a whole. What do Macroeconomists study? • There are three main numbers that we focus on when looking at the economy as a whole: – Total production (GDP) – Price level (inflation) – Unemployment What is GDP? • GDP stands for Gross Domestic Product • It is the total market value of all goods and services produced within a country • It is also seen largely as an indication of how powerful a country is -- for example, Americans are starting to fear China because its GDP is rising so rapidly. How does one calculate GDP? • GDP = C + I + G + X, • C = Consumption – money people spend on goods and services • I = Investment – money businesses or people spend on acquiring and maintaining capital or stocking up inventory • G = Government spending - Duh • X = (Exports – Imports) – Total value of goods we exported minus total value of goods we imported. Calculating GDP example: • If people bought goods and services worth $5 trillion, • People and businesses spent $2 trillion investing in new capital and inventory • The government spent $3 trillion • We exported $1.5 trillion worth of goods • We imported $3.5 trillion worth of goods, • GDP = 5 + 2 + 3 + 1.5 – 3.5 = $8 trillion What is the “Price Level?” • Price level refers to how many dollars it will cost to buy a “basket of goods” • For instance, 100 years ago $20 was a lot of money; $20 worth of stuff back then would be about $500 worth of stuff today. • The decrease in the value of dollars over time is called “inflation” • Conversely, an increase in the value of dollars over time is called “deflation.” How is the price level determined? • Every year, the U.S. Department of Labor pays a bunch of people to go out and buy the same “basket of goods” and report how much it cost them. • Then, they compare the average price of the basket this year with previous years. • How much the price of the basket increases tells us how much inflation happened that year. Calculating inflation • If a basket of goods cost $100 last year and then the same basket of goods cost $105 this year, • Inflation = (105 – 100)/100 = 5% • If a basket of goods cost $75 in 1987 and the same basket cost $145 in 2012, Inflation = (145-75)/75 = 93.3% Inflation is considered bad. • Most people agree that inflation is bad because: – It means they can’t buy the same amount of stuff if they get paid the same amount. – Businesses have to keep paying for new menus with higher prices listed – Any money you had saved up is worth less and less over time – However, people who owe money love inflation because it makes it easy to pay back their debts. What is “Unemployment?” • You’d think the unemployment level is just the proportion of people who aren’t working. You would be wrong. • Unemployment level = people looking for work / Total workforce Total workforce = people with jobs and people looking for jobs. Calculating unemployment • If there are 150 million people who are employed and 30 million people looking for work, Unemployment = 30 / (150 + 30) = 16.7% • If there are 190 million people who are employed and 10 million people looking for work, Unemployment = 10 / (190 + 10) = 5% Problems with this calculation • There are lots of problems with this simple calculation: – “Discouraged workers” are people who would like a job but never found one and stopped looking – they aren’t counted. – “Underemployed” workers have skills for a better job but couldn’t find one, so they work at McDonalds. They still count as employed – Part time employment counts as a job, even if you’re looking for a full time job • Therefore, the unemployment rate is often a under-estimate of real social problems. Conclusion • These are the basics of macroeconomic analysis. • All of these calculations are far too simple to be of much use in making policy, but they are what you’ll see in the news. • Be aware that politicians manipulate these numbers and their implications for political ends while economists shake their heads in disbelief. • For instance, the unemployment rate is down to 8.3% and President Obama is taking credit. But does that mean we got more jobs, or more people gave up looking for one?