1 / 21

Chapter 1 -- 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).

leoma
Download Presentation

Chapter 1 -- The Macro Goal Variables

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 1 -- The Macro Goal Variables • Measures of Economy’s “Health” • Definitions, Realistic Goals, and Recent (US) Performance

  2. #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)?

  3. 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.

  4. 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.

  5. 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

  6. 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

  7. 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

  8. 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

  9. Realistic Goal -- Inflation • Ideal Goal: Inflation Rate = 0%. • Realistic Goal (US): |Inflation Rate| < 3%.

  10. 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%

  11. 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

  12. 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.

  13. 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

  14. 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)

  15. 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)

  16. 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)

  17. Budget Definitions • Budget < 0 -- Budget Deficit • Budget > 0 -- Budget Surplus • Budget = 0 -- Balanced Budget

  18. Realistic Goal -- The Federal Budget • Realistic Goal -- Balanced Budget when Y = YN. • Sluggish economies tend toward deficits. • Hierarchy of economic problems.

  19. 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

  20. Realistic Goal -- Balance of Trade • Realistic Goal -- BOT close to zero.

  21. Diagnosing the “Patient” -- The Current US Economy and Prospects For the Near Future

More Related