Download The Macro Goal Variables

Chapter 1 -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 of final goods and
services over a period of time,
expressed in constant prices of a
base year.
Why Real GDP (GDP in constant
dollars), instead of Nominal GDP
(GDP in current dollars)?
Real GDP -- Realistic Goal
Realistic Goal for Real GDP -- to
be as high as possible without
accelerating inflation
(overstimulated economy).
Can state this goal in a more
formal way.
The Natural Level of Real
GDP (Potential Real GDP)
The Natural Level of Real GDP (YN)
-- that level of real GDP in which
inflation has no tendency to
accelerate or decelerate.
Comparing Real GDP to the
Natural Level of Real GDP
Y < YN -- sluggish economy with
decelerating inflation
(inflation rate)
Y > YN -- economy with
accelerating inflation
Y = YN -- economy with constant
inflation rate
Characteristics of YN
Unobservable
Grows at 2.5% per year for the US
Affected by
-- labor productivity
-- the price of energy
-- the capital stock
-- the labor force
Getting and Keeping
Y at YN: The “Two Cars”
If Y = YN, then seek annual real
GDP growth = 2.5%.
If Y < YN, then seek annual real
GDP growth > 2.5%, for awhile.
If Y > YN, then seek annual real
GDP growth < 2.5%, for awhile.
Special Case -- The Recession
Goal Variable #2 -The Inflation Rate
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
Realistic Goal -- Inflation
Ideal Goal: Inflation Rate = 0%.
Realistic Goal (US):
|Inflation Rate| < 3%.
An Inflation Problem Versus
Accelerating Inflation
Inflation Problem -|Inflation Rate| < 3%.
Accelerating Inflation -Inflation Rate
Consider -- Inflation Rates of
1981 versus 1985 (Y = YN)
1981 Inflation Rate = 9.0%
1985 Inflation Rate = 2.5%
Goal Variable #3 -The Unemployment Rate (u)
u = (# of people unemployed)
(total labor force)
Does not measure
-- discouraged workers
-- part-time versus full-time
employment
-- people with multiple jobs
Types of Unemployment
Frictional Unemployment -Unemployment due to normal
labor market frictions.
Structural Unemployment -Unemployment due to a mismatch
of available workers and jobs.
Cyclical Unemployment -Unemployment due to a generally
slow economy.
Realistic Goal -Unemployment Rate
Realistic Goal -- zero cyclical
unemployment
Natural Rate of Unemployment
(uN) -- The unemployment rate in
which inflation has no tendency to
accelerate or decelerate.
Realistic Goal: u = uN
Interpretation: u versus uN
u = uN  Inflation Rate Unchanged
(Desired State of Economy)
u > uN  Inflation Rate
(Sluggish Economy)
u < uN  Inflation Rate
(Overstimulated Economy)
Real GDP and the
Unemployment Rate
u = uN  Y = YN,
(Desired State of Economy)
u > uN  Y < YN,
(Sluggish Economy)
u < uN  Y > YN,
(Overstimulated Economy)
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)
Budget Definitions
Budget < 0 -- Budget Deficit
Budget > 0 -- Budget Surplus
Budget = 0 -- Balanced Budget
Realistic Goal -The Federal Budget
Realistic Goal -- Balanced Budget
when Y = YN.
Sluggish economies tend toward
deficits.
Hierarchy of economic problems.
Goal Variable #5 -The Balance of Trade
Balance of Trade (BOT) -approximated by net exports.
BOT = Exports - Imports
BOT < 0 -- Balance of Trade Deficit
BOT > 0 -- Balance of Trade Surplus
BOT = 0 -- Balanced Trade Position
Realistic Goal -Balance of Trade
Realistic Goal -- BOT close to
zero.
Diagnosing the “Patient” -The Current US Economy
and Prospects For
the Near Future