Are you here today? yes no 20 Chapter 4: A First Look at Macroeconomics Origins and issues of macroeconomics Economic growth Unemployment & inflation Government budget surpluses/deficits International trade surpluses and deficits Macroeconomic policy challenges and tools
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Keynes focused on the short-term
on unemployment and lost production.
“In the long run, we’re all dead.”
During the 1970s and 1980s, macroeconomists became more concerned about long-term—inflation and economic growth.
Real Gross Domestic Product (GDP)
Economic Growth is measured by growth in Real GDP
1. A recession: real GDP declining
2. An expansion: real GDP rising
Business cycle dates officially determined by NBER
Economic Growth and Fluctuations: 1980-2008
How costly are the growth slowdown and the lost output over the business cycle?
To answer that question we measure:
accumulated loss of output from the productivity growth slowdown of the 1970s
(4.3 percent from 1960s versus actual growth realized).
$72 trillion or 6.5 times the real GDP in 2005.
Real GDP minus potential GDP is the output gap (Okun gap)
Okun gap from recessions since 1973 is $3.3 trillion or about 30 percent of real GDP in 2005.
Pain of an Okun gap not equally distributed across society.
In 2008, 145.3 million people in the United States had jobs.
This number is 18 million more than in 1996 and 35 million more than in 1986.
But the pace of job creation fluctuates.
During a recession, the number of jobs shrinks.
19901991 recession: >1 million jobs lost
2001 recession, 2 million jobs lost
2008 recession: 2 million jobs lost in 4th quarter, how many more??
On an average day in a normal year, 7 million people in the U.S. are unemployed (not employed, but searching for a job).
Labor force statistics:
Civilian Labor force = employed + unemployed (excludes military)
Unemployment rate = unemployed/Civilian labor force
The unemployment rate is not a perfect measure of the underutilization of labor. For two reasons:
The unemployment rate
2. Excludes “under-employment”
–part-time workers who want full-time jobs.
During the 1930s, the unemployment rate hit 25 percent.
We measure the price level as the average of the prices that people pay for all the goods and services that they buy.
Consumer Price Index (CPI) is a common measure of the price level.
Inflation rate:percentage change in the price level.
Inflation occurs when the price level is rising persistently.
Deflation occurs when inflation is negative and prices are falling.
The most serious type of inflation is hyperinflation -- an inflation rate that exceeds 50 percent a month.
Why Inflation is a Problem
Inflation is a problem for many reasons, but the main one is that once it takes hold, it is unpredictable.
Unpredictable inflation is a problem because it
in terms of other currencies is called the exchange rate —a measure of how much your dollar will buy in other parts of the world.
An example is the number of pesos that 1 U.S. dollar will buy (pesos/dollar)
A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that circulate widely outside the country of issue. Major currencies index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.
When the U.S. dollar appreciates,
When the U.S. dollar depreciates, the opposite occurs.
When the dollar appreciates relative to other currencies, the cost of U.S. exports to other countries ______ and the cost of U.S. imports from other countries _____.
If a government collects more in taxes than it spends, it has a government budget surplus.
If a government spends more than it collects in taxes, it has a government budget deficit.
A debt is the amount that is owed.
When a government or a nation has a deficit, its debt grows.
A government’s or a nation’s debt equals the sum of all past deficits minus past surpluses.
A government’s debt is called national debt.
The budget deficit as a percentage of GDP increases in recessions and shrinks in expansions
During the 1980s expansion, a large deficit appeared but it almost disappeared during the 1990–1991 recession.
The current account deficit in 2005 was 6.3 percent of GDP.
Trade surplus: imports > exports
Trade deficit: exports> imports
The balance on the current account equals U.S. exports minus U.S. imports but adds interest received and substracts interest paid to rest of the world.
Current account surplus: net lender to rest of world
Curernt account deficit: net borrower from rest of world
Until 1986, the United States was a net lender to the world.
But with increased deficits, the United States is now a net borrower from the world.
Two broad groups of macroeconomic policy tools are
changes in tax rates and government spending
Conducted by government
changing interest rates and the amount of money in the economy
Conducted by Federal Reserve