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Lecture 9: focusing on Macro Issues Macro Questions What are the facts What is Real GDP? Policy issues Role of Government Practice with EIA to illustrate What will the exam cover????? ECON 111 HOFFMAN MACRO HAPPENS Overheating? Production expanded quickly in the United States during 1994/95/96. This rapid growth caused fear that the economy was overheating. An overheated economy is prone to increasing inflation and a balance of payments deficit. What, if anything, can be done? ECON 111 HOFFMAN MACRO HAPPENS Origins and Issues of Macroeconomics Modern macroeconomics emerged during the Great Depression. People began to doubt the free market economy. ECON 111 HOFFMAN MACRO HAPPENS John Maynard Keynes, in 1936, published The General Theory of Employment, Interest, and Money. Origins and Issues of Macroeconomics Macroeconomic Problems 1) Economic Growth 2) Unemployment 3) Inflation 4) Deficits ECON 111 HOFFMAN MACRO HAPPENS Origins and Issues of Macroeconomics Short-Term Versus Long-Term Goals Keynes focused on the short-term primarily • He felt the depression was caused by insufficient private spending • Government should increase its spending ECON 111 HOFFMAN MACRO HAPPENS Origins and Issues of Macroeconomics Short-Term Versus Long-Term Goals Long-term consequences were virtually disregarded • “In the long run, we’re all dead” ECON 111 HOFFMAN MACRO HAPPENS Origins and Issues of Macroeconomics Short-Term Versus Long-Term Goals Today, macroeconomics is concerned with: • Long-term economic growth and inflation • Short-term business fluctuations and unemployment ECON 111 HOFFMAN MACRO HAPPENS Origins and Issues of Macroeconomics The Road Ahead The focus of macroeconomics has shifted: • Depression • Inflation of the 1970’s • International economics of today ECON 111 HOFFMAN MACRO HAPPENS ECON 111 HOFFMAN Economic Growth MACRO HAPPENS Economic growth is the expansion of the economy’s production possibilities. Measured by real gross domestic product (Real GDP) The value of the total production of all the nation’s farms, factories, shops, and offices linked back to the prices of a single year (1992) Economic Growth in the United States The Growth of Potential GDP When an economy’s labor, capital, land, and entrepreneurial ability are fully employed Real GDP fluctuates around potential GDP Growth slowed during the 1970s Productivity growth slowdown ECON 111 HOFFMAN MACRO HAPPENS Economic Growth in the United States ECON 111 HOFFMAN MACRO HAPPENS Economic Growth in the United States Fluctuations Around Potential GDP The business cycle is the periodic but irregular up-and-down movement in production. ECON 111 HOFFMAN MACRO HAPPENS Economic Growth in the United States Phases of the Business Cycle Recession • Period during which real GDP decreases for two successive quarters Expansion • Period during which real GDP increases ECON 111 HOFFMAN MACRO HAPPENS Economic Growth in the United States Turning Points Peak • Expansion ends, recession begins Trough • Recession ends, expansion begins ECON 111 HOFFMAN MACRO HAPPENS The Most Recent U.S. Business Cycle ECON 111 HOFFMAN MACRO HAPPENS Long-Term Economic Growth in the United States ECON 111 HOFFMAN MACRO HAPPENS Economic Growth Around the World Real GDP per person The growth rate of real GDP divided by the population is used to compare growth rates over time and across countries. ECON 111 HOFFMAN MACRO HAPPENS Economic Growth Around the World Growth rates in the U.S., Germany, and Japan have features that are distinct Similar productivity growth slowdowns Similar business cycles Different long-term trends in potential GDP ECON 111 HOFFMAN MACRO HAPPENS Economic Growth in Three Large Economies ECON 111 HOFFMAN MACRO HAPPENS Growth Rates Around the World ECON 111 HOFFMAN MACRO HAPPENS Benefits and Costs of Economic Growth Benefits Expanded production possibilities • • • • • health care ECON medical research 111 HOFFMAN space exploration MACRO HAPPENS roads environmental improvements (if resources are devoted to solving environmental problems) Benefits and Costs of Economic Growth Costs ECON 111 HOFFMAN 1) Foregone consumption MACRO HAPPENS 2) Depletion of natural resources 3) Increased pollution 4) More frequent job and location changes