Intro to Economics - Macroeconomics

7/31/2019 Intro to Economics - Macroeconomics

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Macroeconomic Basics

Dr. Katherine Sauer

A Citizens Guide to Economics

ECO 1040


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Overview:

I. Economic FluctuationsII. GDP

III. Inflation

IV. Unemployment

V. Government Policy


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I. Economic Fluctuations

Economic activity is not constant.

Chart from chapter 15 in the Brief Principles of Macroeconomics textbook

by Greg Mankiw.


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The Parts of a Business Cycle:

RGDP

GrowthRate

(%RGDP)

0

+

-

time

expansion

peak

slowdown

contraction recovery

trough

expansion


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The US economy has had mostly expansions andslowdowns.

- troughs at positive growth

It has had very few contractions and recoveries.


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A recession is 2 consecutive quarters of falling Real GDP.

- contract for 2 quarters

A depression is a severe recession.


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The Recent Recession:

Part 1: Housing Bubble Burst

Part 2: Financial Sector

Part 3: Financial System Seizes Up

Part 4: Recession Spreads Internationally


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Key Facts about Economic Fluctuations

1. They are unpredictable and varied.

- describing them after the fact is easy, predicting

them is not

2. Many macroeconomic variables fluctuate together.

- different amounts, different directions

3. As output falls, unemployment rises.

4. Fluctuations occur in both the short run and long run.


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II. Gross Domestic Product (GDP)

An economy is measured by the value of the goods andservices it produces.

Gross Domestic Product

is the market valueof all final goods and services

produced

within a countrys borders

in a given time.


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2010 GDP

Source: IMF

Rank Country GDP (millions of USD)

World 61,963,429 European Union 16,106,896

1 United States 14,624,184

2 China 5,745,133

3 Japan 5,390,8974 Germany 3,305,898

5 France 2,555,439

6 United Kingdom 2,258,565

7 Italy 2,036,687

8 Brazil 2,023,528

9 Canada 1,563,664

10 Russia 1,476,912


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GDP has 4 components:

Consumption (C) = spending by households on goods and

services

Business Investment (I) = spending by firms on capital

equipment, inventories, and structures

Government Spending (G) = spending on goods and

services by local, state, and federal government

Net Exports (NX) = value of exportsvalue of imports


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There are 2 types of GDP: Real and Nominal

Nominal GDP = the production of goods and services

valued at current prices

Real GDP = the production of goods and services

valued at base year prices. (adjusted for inflation)


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GDP Growth (aka economic growth):

Economic growth is measured by the percent change in

RGDP over a time period.

%RGDP = RGDP2RGDP1 x 100

RGDP1

Economic growth can be negative.


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GDP is calculated quarterly by the Bureau of

Economic Analysis. www.bea.gov


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GDP is a decent measure of economic well-being.

Explain:

GDP per capita tells us more about economic well-

being than GDP does.


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Using GDP as a measure of social progress has its

problems.

1. unpaid economic activity

2. environmental issues

3. value judgments

4. leisure

5. distribution of income


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III. Inflation

Inflation is an increase in the overall price level.

The inflation rate is the percent change in the price level.

formula:

Inflation Rate = Price Level Year 2Price Level Year 1 x 100

Price Level Year1


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The Consumer Price Index is a way to measure theprice level

It measures changes in the overall cost of the goods and

services that a typical household buys

Compiled monthly by the Bureau of Labor Statistics.

www.bls.gov


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BLS has classified all expenditure items into more than

200 categories, arranged into eight major groups:

43.4

15.3

15.7

6.3

6.4

5.7

3.7 3.4

Contents of the Basket

Housing

Transportation

Food and Beverages

Education andCommunicationMedical Care

Recreation

Apparel

Other Goods and Services


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Source: Bureau of Labor Statistics


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Calculate the inflation rate for December 2010:

inflation December 2010 =

219.179218.803 x 100218.803

= 0.17%

= 0.2% (typically round to 1 decimal place)

Calculate the inflation rate from January 2000 to December 2010:

inflation Jan 2000 to December 2010 =

219.179168.8 x 100

168.8

= 29.8%


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Inflation is a normal occurrence in an economy.- some inflation is just fine

- high inflation erodes purchasing power

It is usually the job of the central bankto keep inflation

under control.

In general, if a countrys economic growth rate is faster

than its inflation rate, then inflation isnt very harmful.


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Deflation is actually quite harmful to an economy.

- consistently falling prices lead consumers to delaypurchases

- firms see a reduction in sales and cut back on

production and employees

- consumers fear job losses and so delay purchases

- the cycle is very hard to break


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IV. Unemployment

A person is unemployed if they are available to workand are actively seeking work, but cannot find a job.

-just because a person doesnt have a job, doesnt

mean they are unemployed


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Start with the entire population, then omit:

children (age < 16)

institutionalized

active military

Children and institutionalized persons are not eligible to

work.

Active military personnel are often excluded forstatistical reasons.


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Of the remaining population, some people voluntarilychoose not to be employed:

- retirees

- stay-at-home caregivers

- full-time college students- other

These types of people are not unemployed. They arecategorized as not in the labor force.


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The Labor Force is the total number of workers in the

economy, whether they are employed or unemployed.

Labor Force = number employed + number unemployed

The labor force is not a fixed number of people.

- It increases with the long-term growth of the

population.

- It responds to economic forces and social trends

- Its size changes with the seasons.


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The unemployment rate is the percentage of the labor

force who are actively seeking employment.

unemployment rate = people looking for work x 100people in the labor force


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In January 2010, the US civilian labor force had153,353,000 people in it. Of this, 14,842,000 were

unemployed. Calculate the unemployment rate:

U = # unemployed x 100 =# labor force

U = 14,842,000 x 100 =

153,353,000

= 9.7%


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The unemployment rate is never zero.

Some unemployment is normal for an economy.

- Even if a job exists and a person exits with matching

skills, it takes time for the person to find the job and go

through the hiring process. (frictional unemployment)

- As an economy grows and changes, some jobs become

obsolete and new industries are created. When a personloses a job due to a fundamental change in the structure

of the economy, it takes time for them to get retrained

for the new jobs. (structural unemployment)


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The rate of unemployment that an economy normally

experience is called the natural rate of unemployment.

- different countries have different natural rates

of unemployment

- depends on the structure of the labor market

- minimum wage laws- hiring/firing laws

- unemployment benefits

When the economy goes into a recession andunemployment rises above the natural rate, that is the

bad kind of unemployment. (cyclical unemployment).


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V. Government Policy

Fiscal Policy is when the government taxes or spends

money.

Explain the recent stimulus bill.

Spending:

Taxes:


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In reality, fiscal policy might not be a good answer to a

recession.

Three requirements for successful fiscal policy:1.

2.

3.


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Monetary policy refers to the actions undertaken by the

Federal Reserve, specifically the raising and lowering ofinterest rates.


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Summary:

The economy fluctuates in the short and long run.

GDP, Inflation, and Unemployment are three basic

indicators of the health of the economy.


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What did you learn today?

Please explain 2 concepts from todays class.

Documents

Intro to Economics - Macroeconomics