Download 23-2

Chapter 23
An Introduction
to
Macroeconomics
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Long-run economic growth and
short-run fluctuations
• GDP, inflation, and
unemployment
• Sustained increase in living
standards
• Savings and investment
• Shocks and sticky prices
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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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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
– 3.1% per year 1995-2005, less robust
recently
• Unemployment rate
– Somewhere near 3% is pretty good,
currently almost double that
• Inflation rate
– Target – around 2%, recently it’s been
lower
– Why are we missing our targets in these
categories recently?
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U.S. GDP Growth
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China GDP Growth
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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 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 Person 2007
U.S. dollars based on purchasing power parity
United States
Canada
United Kingdom
Japan
France
South Korea
Saudi Arabia
Russia
Mexico
China
India
North Korea
Tanzania
Burundi
Zimbabwe
$45,845
$38,345
$35,134
$33,576
$33,187
$24,782
$23,243
$14,692
$12,774
$5,292
$2,659
$1,900
$1,256
$371
$188
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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
• 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
–Elasticity
• All prices flexible in long run
–Firms adjust to unexpected, but
permanent changes in demand
–“sticky,” not “stuck”
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Key Terms
•
•
•
•
•
•
•
business cycle
recession
real GDP
nominal GDP
unemployment
inflation
modern economic
growth
• savings
• investment
• financial investment
• economic investment
• expectations
• shocks
• demand shocks
• supply shocks
• inventory
• inflexible prices
(“sticky prices”)
• flexible prices
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Next Chapter Preview…
Measuring
Domestic Output
and National
Income
23-20