Macroeconomics: Economic growth and fluctuations

Chapter 1

The point of Chapter 1

• Macro economics and its uses

• Historical performance of the US economy

• Explaining the basic framework used in this text

• Some agreed-upon facts in practical macro economics

Macroeconomics

• Fundamental concern of macroeconomics is the overall performance of the economy.

• Output (Income) and output per capita are the usual barometers of performance.

• Gross domestic product (GDP) is most comprehensive measure of output.

• The central focus of our study is the level and growth of GDP and GDP per capita.

Other barometers of performance

• Employment and unemployment

• The price level

• The interest rate

• The exchange rate

• The trade balance and the balance of payments

• Note that income (revenue) and expenditure (output) are two sides of the same ledger

Recent U.S. Performance

1929 2006 Growthrate

GDP 865.0 11,319 3.40

Population (mil.) 122 300 1.18

GDP per capita ($000s) 7.1 37.8 2.19

Compare growth rates

1929 1973 2006

Gross domestic product 865.2 4,342 11,319

Population (000s) 122 212 300

GDP per capita ($000s) 7.1 20.5 37.8

U.S. GDP per Capita, 1929-73 & 73-06

Trends: 2.19% and 1.87%

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Y2

k$

(0

00

s)

GDP Trend

0

10,000

20,000

30,000

40,000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

U.S. Real GDP per capita (2000 dollars)

Great Depression

World War II

First oil price shock

Second oil price shock

long-run upward trend…

9/11/2001

Employment to Population RatioPersons aged 16 and older

50

52

54

56

58

60

62

64

66

1940 1950 1960 1970 1980 1990 2000 2010

Pe

rce

nt

U.S. unemployment rate(% of labor force)

0

5

10

15

20

25

30

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Unemployment Rate1947-2006

2

3

4

5

6

7

8

9

10

1940 1950 1960 1970 1980 1990 2000 2010

Pe

rce

nt

U.S. Inflation Rate based on CPI

-15

-10

-5

0

5

10

15

20

25

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Pe

rce

nt

Annual

Alternative Measures of U.S. InflationPCE Deflator vs. CPI

(15.00)

(10.00)

(5.00)

0.00

5.00

10.00

15.00

1930 1940 1950 1960 1970 1980 1990 2000

Pe

ce

nt

PCE Deflator CPI

Fig. 1.6

Fig. 1.7

Fig. 1.9

Stylized facts about recent history

• GDP grew a 3.73% per annum in 1929-73 and at 2.95% in 1973-2006.

• GDP per capita grew 2.44% in 1929–73 and at 1.87% in 1973-2006.

• Output and employment moved together; employment percentage seems to be a leading indicator.

• Unemployment peaks at the end of a recession.

• Inflation seems to increase before a recession hits.

• Nominal and real interest rates also increases before the recession occurs.

Three models

• Long-run growth

• Fluctuations

• Macroeconomic policy

Core of practical macro economics

• the long-run growth rate

• Inflation and unemployment in the long run

• Inflation and unemployment in the short run

• Rational expectations

• Monetary policy rules