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Lecture FourLecture Four
Macroeconomic Concerns:Macroeconomic Concerns:
Unemployment, Inflation, Unemployment, Inflation, and Growthand Growth
Macroeconomic ConcernsMacroeconomic Concerns
Aggregate Price Level Aggregate Output Total Employment Rest of the World
Inflation and PricesInflation and Prices
Price levelPrice level: a measure of the behavior of all prices in the economyPrice level is a yardstick -- a tool for comparison of prices over time.InflationInflation: the rate of change in the price level
Percentage change in GDP deflator, 1959 - 1994
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1959 1963 1967 1971 1975 1979 1983 1987 1991
Year
Inflation Rate
Measuring the Price Level:Measuring the Price Level:Price IndexesPrice Indexes
CPICPI: Consumer Price Index: a measure of the price of a market basket of goods purchased monthly by the typical urban consumer.GDP deflatorGDP deflator: a measure of the prices of all goods produced in GDP basket. PPIPPI: Producer Price Index: a measure of prices that producers receive for products at all stages in the production process.
Production in MuletownProduction in Muletown
In Muletown, three goods are produced:
–Mule hides;
–Espresso;
–Sandals.A market basket is 2 Mule hides, 5 Espressos, and 1 pair of sandals.
Production in MuletownProduction in Muletown
1997Price Quantity $3 10 $5 15 $7 20
Mule hidesEspressoSandals
1998Price Quantity $4 20 $4 10 $20 15
What is the price level in Muletown?
Calculating the CPICalculating the CPIMultiply the price of the good by the quantity in the market basket and add over all goods.In 1997: $3(2) + $5(5) + $7(1) = $38In 1998: $4(2) + $4(5) + $20(1) = $48Rate of Inflation:
–($48 - $38)/$38 = 26%.
GDP DeflatorGDP Deflator
Nominal GDP: GDP measured in current year pricesReal GDP: GDP measured in constant prices (prices derived from a base year)
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1997$245
1998
$245 = $3(10) + $5(15) + $7(20)
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1997$245
1998$420
$420 = $4(20) + $4(10) + $20(15)
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1997$245$245
1998$420
$245 = $3(10) + $5(15) + $7(20)
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1991$245$245
1992$420$215
$215 = $3(20) + $5(10) + $7(15)
Note that we have used 1991 prices.
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1991$245$245
100
1992$420$215
100 = 100 * $245/$245
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1991$245$245
100
1992$420$215
195
195 = 100*$420/$215
GDP in MuletownGDP in Muletown
Nominal GDPReal GDPGDP deflator
1991$245$245
100
1992$420$215
195
Rate of Inflation = (195 - 100)/100 = 95%
The Real/Nominal RelationshipThe Real/Nominal Relationship
Real Quantity = Nominal Quantity Price Level/100
Costs of InflationCosts of Inflation
Changing distribution of income
– indexed income: income rises with the rate of inflation
Lending distortionsAdministrative costs and inefficiencies
Aggregate Output (GDP)Aggregate Output (GDP)
Gross Domestic ProductGross Domestic Product (GDP) is the dollar value of all finalfinal goods and services produced.
Final goodFinal good: a product which is ready to be used by consumers
Final goodFinal good: a product which is ready to be used by consumers
Business CycleBusiness Cycle
Periodic movements in output, prices, and employmentBusiness cycles are not created equal.
–Duration–Severity
Business CycleBusiness Cycle
GDP rises and falls over short spans of timeAt any point in time, it may be above or below its long run trendThese fluctuations define the business cyclebusiness cycle
Parts of the Business CycleParts of the Business Cycle
Peak
Trough
Recession
Expansion
AggregateOutput
time
Recession-1Recession-1
A recession recession is a period in which real GDP declines for at least two consecutive quarters. Most recessions are marked by falling output and rising unemployment.
Recession-2Recession-2
Growth rate of GDP falls Firms decrease production Unemployment rises
GDP Unemploy-ment
The Recession of 1980-1982The Recession of 1980-1982
Unemployment
GDP Growth
DepressionDepression
DepressionDepression: a prolonged and deep recession
Great Depression: 1929-1933The Great DepressionGreat Depression was a period of severe
economic contraction and high unemployment that began in 1929 and
continued throughout the 1930’s.
Great DepressionGreat Depression
-15
-10
-5
0
5
10
15
20
25
30
1929 1930 1931 1932 1933
Unemployment
GDP Growth
ExpansionExpansion
GDP growth rate rises Firms increase production Unemployment falls
GDPUnemploy-
ment
Real GDP in the U.S., 1959 - 1994
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
5,500.0
1959 1963 1967 1971 1975 1979 1983 1987 1991
Year
Rea
l GD
P
1994
Real GDP in the U.S., 1959 - 1994
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
5,500.0
1959 1963 1967 1971 1975 1979 1983 1987 1991
Year
Rea
l GD
P
Trend Line
1994
UnemploymentUnemployment
The unemployment rateunemployment rate refers to the percentage of people in the labor force who can’t find a job.
Labor ForceLabor Force: peoplewho are actively seekingor are currently holding
a job
Labor ForceLabor Force: peoplewho are actively seekingor are currently holding
a job
Unemployment Rate, 1959 - 1994
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1959 1963 1967 1971 1975 1979 1983 1987 1991
Year
Unemployment Rate
Unemployment Rate in Selected Unemployment Rate in Selected CountriesCountries
0
5
10
15
20
25
U.S. Sweden Canada
1929 1933
Defining Unemployment - 1Defining Unemployment - 1
EmployedEmployed: Any person 16 years old or older,
(1) who works for pay, either for someone else or in their own business, for one or more hours a week,
(2) who works without pay for 15 hours a week in a family business, or
(3) who has a job but has been temporarily absent, with or without pay.
Defining Unemployment - 2Defining Unemployment - 2
UnemployedUnemployed: A person 16 years or older who is not working, is available for work, and has made specific efforts to find work during the previous four weeks.
Labor forceLabor force: The number of people employed plus the number of unemployed.
Defining Unemployment - 3Defining Unemployment - 3
Labor ForceLabor Force = Employed + Unemployed PopulationPopulation = Labor Force + Not in Labor Force Unemployment RateUnemployment Rate =
Labor Force Participation RateLabor Force Participation Rate =
UnemployedLabor Force
Labor Force
Population
UnemploymentPoolEntrants
5% Unemployment
Job FindersDiscouraged
WorkersLabor Force
Leavers
New Entrants: 11% Re-entrants: 26%Job Leavers: 12%Job Losers: 63%
Types of UnemploymentTypes of Unemployment
CyclicalCyclical
–due to business cycle movements in GDPFrictionalFrictional
–due to job search activitiesStructuralStructural
–due to changes in economic institutions
–geographic displacement, technological change, discrimination
Natural Rate of UnemploymentNatural Rate of Unemployment
The natural rate of unemploymentnatural rate of unemployment refers to the unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment. (The rate of unemployment that occurs at full full employmentemployment).
Costs of UnemploymentCosts of Unemployment
Personal costsSocietal costsEconomic costs
Government Policies for Government Policies for Influencing the MacroeconomyInfluencing the Macroeconomy
Fiscal PolicyFiscal Policy: Government policies regarding taxes and expendituresMonetary PolicyMonetary Policy: The tools used by the Federal Reserve to control the money supplySupply-side PoliciesSupply-side Policies: policies that focus on aggregate supply and increasing production
Aggregate DemandAggregate Demand
Aggregate demandAggregate demand represents the total demand for goods and services in an economy.
Aggregate Demand CurveAggregate Demand Curve
PriceLevel
Aggregate Output
P1
Y1
AD
Aggregate SupplyAggregate Supply
Aggregate supplyAggregate supply represents the total supply of goods and services in an economy.
Aggregate Supply CurveAggregate Supply Curve
PriceLevel
Aggregate Output
P1
Y1
AS
EquilibriumEquilibrium
Aggregate equilibriumequilibrium is a level of prices and GDP such that the quantity of goods and services purchased equals the overall quantity of goods and services produced
EquilibriumEquilibrium
PriceLevel
Aggregate Output
P*
Y*
AS
AD
Equilibrium