Unit 4

The Big PictureAnd

Tracking the Macroeconomy

Macroeconomics, Paul Krugman and Robin Wells.

Tonight, we will learn about:-Differences between Microeconomics and

Macroeconomics-Business Cycle-Long-run growth in the economy-inflation, deflation and price stability-Open economy vs. closed economy-GDP, Gross Domestic Product-Unemployment-Price Indexes used to calculate Inflation

Macroeconomics vs. Microeconomics

Microeconomics focuses on how decisions are made by individuals and firms and the consequences of those decisions

Example: How much would it cost to add a new course?

Macroeconomics examines the aggregate behavior of the economy ─ how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole.

Paradox of Thrift

The Great Depression precipitated a thorough rethinking of macroeconomics, which gave rise to modern macroeconomics.

The Business CycleWhat happens during a business cycle? And

what can be done about it?

-effects of recessions, and expansions on unemployment-the effects of aggregate output-the possible role of government policy

Employment and Unemployment

Employment is the number of people working in the economy.

Unemployment is the number of people who are actively looking for work but aren’t currently employed.

The labor force is equal to the sum of employment and unemployment.

Employment/Unemployment-Discouraged workers are non-working people who are capable of working but are not actively looking for a job.

-Underemployment is the number of people who work during a recession but receive lower wages than they would during an expansion due to smaller number of hours worked, lower-paying jobs, or both.

-The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force, either currently working or looking for jobs.

Taming the Business Cycle Policy efforts undertaken to reduce the severity of recessions are called stabilization policy.

One type of stabilization policy is monetary policy, changes in the quantity of money or the interest rate.

The second type of stabilization policy is fiscal policy, changes in tax policy or government spending, or both.

Long-Run Economic GrowthSecular long-run growth, or long-run growth, is the sustained upward trend in aggregate output per person over several decades.

A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth. So a central concern of macroeconomics is what determines long-run growth

Aggregate Price LevelA nominal measure is a measure that has not been adjusted for changes in prices over time.

A real measure is a measure that has been adjusted for changes in prices over time.

The change in real wages is a better measure of changes in workers’ purchasing power than the change in nominal wages.

The aggregate price level is the overall level of prices in the economy.

Real vs. Nominal GDP

Inflation and DeflationA rising aggregate price level is inflation.

A falling aggregate price level is deflation.

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

The economy has price stability when the aggregate price level is changing only slowly.

Price Indexes and the Aggregate Price Level

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A price index is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100.

IndexesCPI: Consumer Price Index

Bureau of Labor Statistic consumer basket

PPI: Producer Price Index(producer basket)

GNP Deflater (ratio of nominal to real GDP)

The CPI, the PPI, and the GDP Deflator

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The Open EconomyA closed economy is an economy that does not trade goods, services, and assets. The United States has become increasingly open, so that open-economy macroeconomics has become increasingly important.

Open-economy macroeconomics is the study of those aspects of macroeconomics that are affected by movements of goods, services, and assets across national boundaries.

The Open EconomyOne of the main concerns introduced by open-economy macroeconomics is the exchange rate, the price of one currency in terms of another.

Exchange rates can affect the aggregate price level. They can also affect aggregate output through their

effect on the trade balance, the difference between the value of the goods and services a country sells to other countries and the value of the goods and services it buys in return.

Economists are also concerned about capital flows, movements of financial assets across borders.

Figure 7.1 An Expanded Circular-Flow Diagram: The Flows of Money Through the EconomyKrugman and Wells: Macroeconomics, First EditionCopyright © 2006 by Worth Publishers

Gross domestic product , or GDP, measures the value of all final goods

and services produced in the economy. It does not include the value of

intermediate goods.

Gross Domestic Product

Calculations for an EconomyGDP

Consumer Spending + Investment Spending + Government Spending + exports – imports = GDP

Net Exports Exports – Imports = net Exports

Disposable Income:Total wages + Government transfers – taxes

= DI

Homework 7-2

Real vs. Nominal GDPReal GDP: the value of the final goods and services produced calculated using the prices of some base year.

Nominal GDP: output valued at current prices.

Real GDP per capita is a measure of average output per person, but is not by itself an appropriate policy goal.

Review: Which is correct?1. Microeconomics/Macroeconomics focuses on

economy as a whole.2. Inflation is one of the topics studied in

Macroeconomics/Microeconomics.3. The unemployment rate is the % of the labor

force that is unemployed/employed.4. Expansion/Recession is when output it

increasing and unemployment is decreasing.5. A business cycle is a short-term/long-term

fluctuation between upturns & downturns.6. Nominal GDP is adjusted/not adjusted for

changes over time.

Homework/Next WeekChapter 6: The Big Picture: 2 & 4

Chapter 7: Tracking the Macroeconomy: 2 & 4

Next Week:Chapter 8: Long Run Growth

Chapter 9: Saving, Investing, Spending and the Financial System

Problem #111. Calculate market basket for books in each

year.Cost of TB 2002 =Cost of TB 2003 =Cost of TB 2004 =2. Establish a base year of 20023. Apply each year to formula:

Cost of TB 2002/ base year x 100 = ???TB=