Download ECON 521 Special Topics in Economic Policy

ECON 521
Special Topics in Economic Policy
CHAPTER ONE
Introduction to
Macroeconomics
Variables
The Macro Goal Variables
• The coverage of Macroeconomics is to study how
the economy works as a whole.
• In this chapter, we define the key variables to
measure the “health” of an economy, and briefly
discuss how the variables are measured and
interpreted.
• Also, we will define Definitions, Realistic Goals,
and Recent Performance.
Goal one: Production or Output
• Measured by 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.
• Why Real GDP (GDP in constant dollars), instead
of Nominal GDP (GDP in current dollars)?
• Why is Production or Output Important ?
• Realistic Goal :
Realistic Goal for Real GDP -- to be as high as
possible without accelerating inflation
(overstimulated economy).
• The Natural Level of the goal:
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 -- economy with constant
inflation rate
Y < YN -- sluggish economy with
decelerating inflation
(inflation rate)
Y > YN -- economy with
accelerating inflation
Example: USA case
• 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
Recession -- A Special Case
• Recession -- The situation where the level of
real GDP decreases, or exhibits negative
growth, for at least two consecutive
quarters.
• Clearly, in a recession, Y < YF.
Converting Nominal GDP to Real GDP
• Example -- find Real GDP2008
Real GDP2008 = Nominal GDP2008
P2008
• Real GDP for other years is computed the same
way.
• Real GDP Growth = Percentage Change in Real
GDP.
Goal Two: The Inflation Rate
• Inflation Rate is the growth or percentage change in the overall
price level.
• Inflation rate measures the price level (P), through:
-- Consumer Price Index (CPI)
-- GDP Deflator
• Inflation Rate = Percentage Change in (P)
• Inflation erodes the purchasing power of money, causes distortions
in decisions.
• Inflation can erode people’s standard of living, put pressure on
labor markets.
Example -- Compute the Inflation Rate for 2008, given
that the CPI for 2007 and 2008 have been calculated.
Inflation =
Rate2008
CPI2008 – CPI2007 x 100
CPI2007
• Ideal Goal:
Inflation Rate = 0%
• Realistic Goal :
For USA ----- |Inflation Rate| < 3%.
Goal Three: The Unemployment Rate
• Realistic Goal :
As low as possible without inflation accelerating
(overstimulated economy).
• The Natural Level of the goal:
Natural Rate of Unemployment (uN) -- The lowest
unemployment rate the economy can achieve
without accelerating inflation.
• Recall Realistic Goal :
Realistic Goal: u = uN
Interpretation for the three goals
• u = uN  Inflation Rate Unchanged
(Desired)
• u > uN  Inflation Rate
(Sluggish Economy)
• u < uN  Inflation Rate
(Overstimulated Economy)
As a Result:
• u = uN  Y = YN,
(Desired)
• u > uN  Y < YN,
(Sluggish Economy)
• u < uN  Y > YN,
(Overstimulated Economy)
• 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 Four: The Government 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 -- Balanced Budget when Y =
YN.
Note: Sluggish economies tend toward deficits.
Goal Five: 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 -- BOT close to zero.