Macroeconomics: the big picture

3.Economic Aggregates •Economic aggregates are economic measures that summarize data across different markets for goods, services, workers, and assets.. a Aggregate Output: the total ou

Lesson 1

MACRECONOMICS: The big picture

Chapter 14

In this chapter we will learn:

the economy as a whole, and how it differs from

microeconomics

why policy makers seek to diminish the severity

of business cycles

why price stability is preferred

Difference between Macroeconomics and

Microeconomics:

taken by individuals and firms, and the

consequences of their decisions

the economy How the actions of individuals and

firms interact to produce a particular economy

wide level of economic performance

Macroeconomics

demand analisys to every good and then sum the results!

1 The behavior of the macroeconomy is, indeed,

greater than the sum of individual actions and market outcomes

behavior like increase saving in case of expected hard times may end up hurting everybody, people will end up worse off than if they don’t act so responsibly…

short run—a time period consisting of several

years but typically less than a decade—the

combined effect of individual decisions can have

effects that are very different from what any one

individual intended, effects that are sometimes

perverse

2 Macroeconomic Policy

suggests a limited role for government intervention We studied some cases of intervention that leave the economy worse off

wider role for government to play in macroeconomics—most importantly, to manage short-term fluctuations and negative events in the economy

3.Economic Aggregates

•Economic aggregates are economic measures

that summarize data across different markets for

goods, services, workers, and assets

a) Aggregate Output: the total output ( or

production) of the economy over a given time

period

Birth of modern macroeconomics

•The Great Depression

The Business Cycle ( or economic cycle):

between recessions, and expansions

•Recessions are periods of economic downturns

when output and employment are falling It is a

period of negative GDP growth Usually refers to

a period of at least 2 consecutive quarters of

negative GDP growth

•Expansions, or recoveries, are periods of

economic upturns when output and employment

are rising It is aperiod of positive GDP growth

recession

average lasting time of the recessions is 10

months, and the average lasting time of the

expansions is 57 months

What happens during a business cycle?

income and output level decrease and as a

consequence the living standard will be lower

• Employment is the number of people currently employed

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.

• Discouraged workers are nonworking people who are

capable of working but have given up 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 fewer number of hours worked, lower-paying jobs, or both.

• The unemployment rate is the percentage of the total

number of people in the labor force who are unemployed

It is equal to:

100

x workers employed

of Number workers

unemployed of

Number

workers unemployed

of Number

+

conditions in the job market

increases

decreases

Aggregate Output

•Aggregate output is the economy’s total

production of final goods and services for a given time period Or more simply it is the total amount

of output produced in the economy

•Final goods only, this means that the goods and

services produced as inputs for the production of other goods (intermediate goods) are not

included

usually calculate Real Gross Domestic Product

( Real GDP)

• Final goods:

Are the goods purchased by

their ultimate users.

Controlling the business cycle:

recessions an inflation

recessions and to rein in excessively strong

•Monetary policy is a type of stabilization policy

that involves changes in the quantity of money in circulation or in interest rates, or both

•Fiscal policy is a type of stabilization policy that

involves changes in taxation or in government

spending, or both

•Has the Business Cycle Been Tamed?

(general) price level of all the final goods and

services in the economy

price level for final goods and services in the

economy

• Inflation = a sustained rise in the general level of

prices.

• Deflation = a sustained decline in the general level of

prices (negative inflation rate)

• The inflation rate is the annual percent change in the

aggregate price level.

• The measures of the aggregate price level:

1 The Consumer Price Index (CPI)

2 GDP Deflator

USA:

4 High levels of inflation:

One interesting recent case is Zimbabwe’s

hyperinflation: 6.5 × 10E108% (Forbes Asia, 22

Dec 08)

Country Beginning End Average monthly

inflation % Austria Oct 1921 Aug 1922 47

Germany Aug 1922 Nov 1923 1x10E10 Greece Nov 1943 Nov 1944 4.7x10E6 Hungary 1 Mar 1923 Feb 1924 44

Hungary 2 Aug 1945 Jul 1946 3.8x10E27 Poland Jan 1923 Jan 1924 699

Russia Dec 1921 Jan 1924 1.2x10E5

Problems with inflation and deflation:

1 Inflation:

because cash loses value over time if the APL

is increasing

may prefere to return to barter or use foreign currencies instead of the national currency

2 Deflation:

value over time becomes more interesting than

investing in new factories and other productive

assets This can make a recession worse

aggregate price level is changing only slowly

been adjusted for changes in prices over time

adjusted for changes in prices over time

Example: Nominal Wage and Real Wage

change in the workers’ purchasing power over

time We can see how the wealth condition of the workers has changed over time

• Example:

Year 1: w=100,000 Y

Year 2: w=110,000 Y

Year 3: w=121,000 Y

money than the previous year If for example

inflation is 10% every year, and this is the

nominal wage, there is no change in wealth for

the worker

wage increased 20 times, but the real wage

increased 3 times