MACROECONOMICS English

Macroeconomic Concerns Output Growth Unemployment Inflation and Deflation The Components of the Macroeconomy The Circular Flow Diagram The Three Market Arenas The Role of the Governmen

Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICS

T E N T H E D I T I O N

Macroeconomic Concerns

Output Growth Unemployment Inflation and Deflation

The Components of the Macroeconomy

The Circular Flow Diagram The Three Market Arenas The Role of the Government in the Macroeconomy

A Brief History of Macroeconomics The U.S Economy Since 1970

PART I CONCEPTS AND PROBLEMS

IN MACROECONOMICS

microeconomics Examines the functioning of individual industries and

the behavior of individual decision-making units—firms and households

macroeconomics Deals with the economy as a whole

Macroeconomics focuses on the determinants of total national income,

deals with aggregates such as aggregate consumption and investment,

and looks at the overall level of prices instead of individual prices

aggregate behavior The behavior of all households and firms together

sticky prices Prices that do not always adjust rapidly to maintain

equality between quantity supplied and quantity demanded

Macroeconomic Concerns

aggregate output The total quantity of goods and services produced

in an economy in a given period

recession A period during which aggregate output declines

Conventionally, a period in which aggregate output declines for two consecutive quarters

depression A prolonged and deep recession

Output Growth

expansion or boom The period in the business cycle from a trough up

to a peak during which output and employment grow

contraction, recession, or slump The period in the business cycle from a peak down to a trough during which output and employment fall

Macroeconomic Concerns

Output Growth

moves through point A from

the trough to the peak

When the economy moves

from a peak down to a trough,

through point B, the economy

is in recession

Macroeconomic Concerns

Output Growth

 FIGURE 2 U.S Aggregate Output (Real GDP), 1900–2009

The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output

Macroeconomic Concerns

Output Growth

Inflation and Deflation

inflation An increase in the overall price level

hyperinflation A period of very rapid increases in the overall price level

deflation A decrease in the overall price level

Understanding how the macroeconomy works can be challenging because a

great deal is going on at one time Everything seems to affect everything else

To see the big picture, it is helpful to divide the participants in the economy into

four broad groups:

(1) Households

(2) Firms

(3) The government

(4) The rest of the world

The Components of the Macroeconomy

The Components of the Macroeconomy

The Circular Flow Diagram

circular flow A diagram showing the income received and payments made by each sector of the economy

transfer payments Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments They include Social Security benefits, veterans’

benefits, and welfare payments

 FIGURE 3 The Circular Flow of Payments

Households receive income from firms and

the government, purchase goods and

services from firms, and pay taxes to the

government

They also purchase foreign-made goods

and services (imports)

Firms receive payments from households

and the government for goods and services;

they pay wages, dividends, interest, and

rents to households and taxes to the

government

The government receives taxes from firms

and households, pays firms and households

for goods and services—including wages to

government workers—and pays interest

and transfers to households

Finally, people in other countries purchase

The Components of the Macroeconomy

The Circular Flow Diagram

We divide the markets into three broad arenas:

(1) The goods-and-services market

(2) The labor market

(3) The money (financial) market

The Components of the Macroeconomy

The Three Market Arenas

The Components of the Macroeconomy

The Three Market Arenas

Goods-and-Services Market

Labor Market

Households supply funds to this market in the expectation of

earning income in the form of dividends on stocks and interest on bonds

Much of the borrowing and lending of households, firms, the government, and the rest of the world are coordinated by financial institutions

The Components of the Macroeconomy

The Three Market Arenas

Money Market

The Components of the Macroeconomy

The Three Market Arenas

Money Market

Treasury bonds, notes, and bills Promissory notes issued

by the federal government when it borrows money

corporate bonds Promissory notes issued by firms when they borrow money

shares of stock Financial instruments that give to the holder a share in the firm’s ownership and therefore the right

to share in the firm’s profits

dividends The portion of a firm’s profits that the firm pays

fiscal policy Government policies concerning taxes and spending

monetary policy The tools used by the Federal Reserve to control the quantity of money, which in turn affects interest rates

The Components of the Macroeconomy

The Role of the Government in the Macroeconomy

Great Depression The period of severe economic contraction and high

unemployment that began in 1929 and continued throughout the 1930s

fine-tuning The phrase used by Walter Heller to refer to the government’s role

in regulating inflation and unemployment

stagflation A situation of both high inflation and high unemployment

A Brief History of Macroeconomics

The Grapes of Wrath,

set in the early 1930s

E C O N O M I C S I N P R A C T I C E

Macroeconomics in Literature

The underlying

phenomena that

economists study are

the stuff of novels as

well as graphs and

equations

If you look at Figure 5.2

for these two periods,

you will see the

translation of Fitzgerald

and Steinbeck into

macroeconomics

The U.S Economy Since 1970

 FIGURE 4 Aggregate Output (Real GDP), 1970 I–2010 I

 FIGURE 5 Unemployment Rate, 1970 I–2010 I

The U.S unemployment rate since 1970 shows wide variations

The five recessionary reference periods show increases in the unemployment rate

The U.S Economy Since 1970

 FIGURE 6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average), 1970 I–2010 I

The U.S Economy Since 1970

Much of the framework of modern

macroeconomics comes from the

works of John Maynard Keynes,

whose General Theory of

Employment, Interest and Money was

published in 1936.

E C O N O M I C S I N P R A C T I C E

John Maynard Keynes

macroeconomics microeconomics monetary policy recession

shares of stock stagflation

sticky prices transfer payments

Treasury bonds, notes, and bills

R E V I E W T E R M S A N D C O N C E P T S

Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICS

T E N T H E D I T I O N

Unemployment

Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment

unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks

Unemployment

Measuring Unemployment

labor force = employed + unemployed

population = labor force + not in labor force

Unemployment

Measuring Unemployment

employed + unemployed

labor force labor force participation rate =

population

Labor Force (Millions)

Employed (Millions)

Unemployed (Millions)

Labor Force Participation Rate (Percentage Points)

Unemployment

Rate (Percentage Points)

TABLE 2 Unemployment Rates by Demographic Group, 1982 and 2010

Years November 1982 June 2010

20+

20+

19.3 16.5

17.4 11.8

Unemployment

Components of the Unemployment Rate

Unemployment Rates for Different Demographic Groups

Components of the Unemployment Rate

Unemployment Rates in States and Regions

Unemployment

Components of the Unemployment Rate

Discouraged-Worker Effects

As women began joining the

labor force in greater numbers

in the 1970s and 1980s, their

wages relative to men’s wages

actually fell

Most economists attribute this

decline to the fact that less

experienced women were

entering the labor force,

pointing out the importance of

correcting for factors such as

experience and education when we analyze labor markets

If you are interested in learning more about the economic history of American

women, read the book Understanding the Gender Gap: An Economic History

of American Women by Harvard University economist Claudia Goldin

E C O N O M I C S I N P R A C T I C E

A Quiet Revolution: Women Join the Labor Force

TABLE 4 Average Duration of Unemployment, 1970–2009

Components of the Unemployment Rate

The Duration of Unemployment

Unemployment

The Costs of Unemployment

Some Unemployment Is Inevitable

frictional unemployment The portion of unemployment that

is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems

structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries

Unemployment

The Costs of Unemployment

Frictional, Structural, and Cyclical Unemployment

natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy

Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate

At the bottom were the poor and the fully unemployed, about

25 percent of the labor force Even those who kept their jobs found themselves working part-time

Many people lost all or part of their savings as the stock market crashed and thousands of banks failed

Unemployment

The Costs of Unemployment

Social Consequences

is meant to represent the ―market basket‖ purchased monthly

by the typical urban consumer

Inflation

The Consumer Price Index

Most of a consumer’s money goes toward housing, transportation, and food and beverages

▲ FIGURE 7.1 The CPI Market Basket

Inflation

The Consumer Price Index

in CPI CPI

Percentage Change

in CPI CPI

Percentage Change

During inflations, most prices—including input prices like wages—tend

to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land

So inflation by itself does not necessarily reduce ones purchasing power

Inflation

The Costs of Inflation

In the last few years many

state governments in the

United States have begun to

see the costs associated with

retiring state workers

escalate as the number of

retirees has grown

For many of these

public-sector retirees, pensions

have been tied to the cost of

living

E C O N O M I C S I N P R A C T I C E

The Politics of Cost-of-Living Adjustments

No Cost-of-Living Increase for State Retirees in July

The Baltimore Sun

real interest rate The difference between the interest rate

on a loan and the inflation rate

Inflation

The Costs of Inflation

Inflation May Change the Distribution of Income

Economists have debated the seriousness of the costs of inflation for decades

No matter what the real economic cost of inflation, people do not like it

Inflation

The Costs of Inflation

Administrative Costs and Inefficiencies

Public Enemy Number One?

output growth The growth rate of the output of the entire economy

per-capita output growth The growth rate of output per person in the economy

productivity growth The growth rate of output per worker

Long-Run Growth

Productivity grew much faster in the 1950s and 1960s than since

▲ FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2010 I

Long-Run Growth

Output and Productivity Growth

The first chapter of this part introduced the field; the second chapter discussed

the measurement of national product and national income; and this chapter

discussed unemployment, inflation, and long-run growth

We are now ready to begin the analysis of how the macroeconomy works

labor force participation rate

natural rate of unemployment

not in the labor force

output growth

per-capita output growth

producer price indexes (PPIs) productivity growth

real interest rate structural unemployment unemployed

unemployment rate

1 labor force = employed + unemployed

2 population = labor force + not in labor force

3

4

unemployed employed

unemployed rate

nt unemployme





population

forcelabor

rateion participatforce

R E V I E W T E R M S A N D C O N C E P T S

Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICS

T E N T H E D I T I O N

Income

Gross Domestic Product

Final Goods and Services Exclusion of Used Goods and Paper Transactions Exclusion of Output Produced Abroad by Domestically Owned Factors of Production

Limitations of the GDP Concept

GDP and Social Welfare The Underground Economy Gross National Income per Capita

Looking Ahead

gross domestic product (GDP) The total market value

of all final goods and services produced within a given period by factors of production located within a country

GDP is the total market value of a country’s output It is the market value of all final goods and services produced within a given period

of time by factors of production located within a country

Gross Domestic Product

Gross Domestic Product

Final Goods and Services

TABLE 1 Value Added in the Production of a Gallon of

Gasoline (Hypothetical Numbers)

Stage of Production Value of Sales Value Added

Gross Domestic Product

Final Goods and Services

GDP does not count transactions in which money or goods changes hands but in which no new goods and services are produced

Gross Domestic Product

Exclusion of Used Goods and Paper Transactions

GDP is the value of output produced by factors of

production located within a country

gross national product (GNP) The total market value

of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced

Gross Domestic Product

Exclusion of Output Produced Abroad by Domestically Owned Factors of

Production

income approach A method of computing GDP that measures the income—wages, rents,

interest, and profits—received by all factors of production in producing final goods and services

Calculating GDP

There are four main categories of expenditure:

Personal consumption expenditures (C): household

spending on consumer goods

Gross private domestic investment (I): spending by

firms and households on new capital, that is, plant, equipment, inventory, and new residential structures

Government consumption and gross investment (G)

Net exports (EX  IM): net spending by the rest of

the world, or exports (EX) minus imports (IM)

GDP = C + I + G + (EX  IM)

Calculating GDP

The Expenditure Approach

TABLE 2 Components of U.S GDP, 2009: The Expenditure Approach

Billions of Dollars Percentage of GDP Personal consumption expenditures (C) 10,089.1 70.8

Government consumption and gross

investment (G)

Net exports (EX – IM)  392.4  2.8

Calculating GDP

The Expenditure Approach