Download The Macro Goal Variables

A First Look at
Macroeconomics
The Study of Economics
Economics -- The study of the
production, allocation, and
distribution of (limited) resources
to most efficiently meet (unlimited)
human wants and needs.
Microeconomics Versus
Macroeconomics
Microeconomics -- The study of
economic decisions of individuals
and firms.
Macroeconomics -- The study of
the economy as a whole
(aggregates or totals).
The Macro Goal Variables
Measures of Economy’s “Health”
Definitions, Realistic Goals, and
Recent (US) Performance
#1 -- Real Gross Domestic
Product (Real GDP)
Real GDP (Y) -- The total
production or output of final goods
and services over a period of time,
expressed in constant prices of a
base year.
Real Versus Nominal GDP
Nominal GDP (unadjusted GDP) -Total production at current prices.
Real GDP (GDP adjusted for
changes in prices) -- Total
production at constant prices of a
base year.
Why is Production or
Output Important?
The Macro Connection -- Firms
produce goods and services in
order to sell them. Because when
they sell the newly produced
goods and services, they generate
income for the business.
Total Production or Output
 Total Sales  Total Income
Real GDP -- Realistic Goal
Realistic Goal for Real GDP -- to
be as high as possible without
accelerating inflation
(overstimulated economy).
The Full Sustainable Level
of Real GDP (Potential GDP)
The Full Sustainable Level of Real
GDP (Full GDP or YF) – the
maximum level of real GDP the
economy can produce without
bringing on accelerating inflation.
Describing the Economy:
Real GDP Versus Full GDP
Y < YF -- sluggish economy
Y > YF -- economy with
accelerating inflation
Y = YF -- economy with constant
inflation rate (desired
state)
Characteristics of YF
Unobservable
Grows at 2.5% per year for the US
(historically)
Primarily affected by:
-- labor productivity
-- the capital stock
-- the labor force
Recession -- A Special Case
Recession -- The situation where
the level of real GDP decreases for
at least two consecutive quarters.
Clearly, in a recession, Y < YF.
Goal Variable #2 -- Inflation
Measured by the Inflation Rate -the growth or percentage change
in the overall price level.
First, measure the price level (P).
-- Consumer Price Index (CPI)
-- GDP Deflator
Inflation Rate = Percentage
Change in P.
Why is Inflation a Problem?
Inflation erodes the purchasing
power of money.
-- Why hold money?
-- Why lend money?
Inflation can erode people’s
standard of living
-- Fixed incomes.
-- Workers with insufficient raises.
Realistic Goal -- Inflation
Ideal Goal: Inflation Rate = 0%.
Realistic Goal (US):
|Inflation Rate| < 3%.
Goal Variable #3 -Unemployment
Measured by the unemployment rate
u = (# of people unemployed)
(labor force)
Unemployed -- those people out of
work and seeking work.
Labor Force -- people employed +
people unemployed
Realistic Goal -Unemployment Rate
Realistic Goal -- as low as
possible without inflation
accelerating (overstimulated
economy).
Natural Rate of Unemployment
(uN) -- The lowest unemployment
rate the economy can achieve
without accelerating inflation.
Interpretation: u Versus uN
u = uN  Desired State of
Economy
u > uN  Sluggish Economy
u < uN  Accelerating Inflation
(Overstimulated Economy)
Where is uN for the US?
Historically -- uN = 5.5%
Is uN now maybe 5%?
Real GDP and the
Unemployment Rate
u = uN  Y = YF,
(Desired State of Economy)
u > uN  Y < YF,
(Sluggish Economy)
u < uN  Y > YF,
(Overstimulated Economy)
Unemployment -- Not an
Independent Problem
Real GDP Growth 
Employment Growth  u
Real GDP and unemployment -not independent problems.
Focus on getting one of them to
the desired goal, and the other one
will automatically follow (although
not a perfect correlation).
Goal Variable #4 -The Federal Budget
Budget = Tax Revenues Government Expenditure
(over a given period)
Budget = Tax Revenues (Government purchases of goods
and services + Transfer Payments
+ Interest on the National Debt)
Federal Budget -- Notation
Let T = Net Taxes = Tax Revenues (Transfer Payments + Interest on
the National Debt).
Let G = Government purchases of
goods and services.
Then The Federal Budget = (T - G).
Characterization of the
Federal Budget
(T - G) < 0 -- Budget Deficit
(T - G) > 0 -- Budget Surplus
(T - G) = 0 -- Balanced Budget
Realistic Goal -The Federal Budget
Realistic Goal -- Balanced Budget
when Y = YF.
Sluggish economies tend to have
deficits.
Hierarchy of economic problems:
cure Real GDP and Inflation first,
then look to the Budget.
Goal Variable #5 -The Balance of Trade
Balance of Trade (BOT) -approximated by net exports.
Net Exports (or the BOT) = Exports
(X) - Imports (M)
(X - M) < 0 -- BOT Deficit
(X - M) > 0 -- BOT Surplus
(X - M) = 0 -- Balanced Trade
Position
Realistic Goal -Balance of Trade
Realistic Goal -- Balance of Trade
(X - M) close to zero.
Again, a hierarchy of economic
problems