Lecture Economics (18th edition): Chapter 23 - McConnell, Brue, Flynn''s

Chapter 23 - An introduction to macroeconomics. In this chapter, students will be able to understand: Interpret how macroeconomics studies both long-run economic growth and short-run fluctuations in output and unemployment; explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy.

Chapter 23

An Introduction

to Macroeconomics

Chapter Objectives

• Long-run economic growth and

short-run fluctuations

• GDP, inflation, and

unemployment

• Sustained increase in living

standards

• Savings and investment

Performance and Policy

• Real GDP

–Corrects for price changes

• Nominal GDP

–Uses current prices

• Unemployment

• Inflation

–Increase in overall level of prices

Performance and Policy

• Can governments:

–Promote economic growth?

–Reduce severity of recession?

• Is monetary or fiscal policy more effective at mitigating recession?

• Is there a tradeoff between

Economic Performance

• Output growth

–3.1% per year 1995-2005

• Unemployment rate

–4.6% in 2007

• Inflation rate

–2.7% in 2007

Economic Growth

• Standard of living measured by

output per person

• No growth in living standards

prior to Industrial Revolution

• Modern economic growth

–Output per person rises

GDP Per Person 2007

United States $45,845

United Kingdom $35,134

South Korea $24,782

Saudi Arabia $23,243

Tanzania $1,256 North Korea $1,900

U.S dollars based on purchasing power parity

Savings and Investment

• Saving

–Tradeoff current for future

consumption

• Investment

–Financial investment

–Economic investment

• Banks and financial institutions

• Demand shocks and flexible

prices

–Price falls if demand low

–Sales unchanged

• Demand shocks and sticky prices

–Maintain inventory

–Sales change

–Business cycles

• The future is uncertain

• Expectations affect investment

• Shocks

–What happens is not what you

expected

• Demand shocks

Demand Shocks

D M

D L

D H

900

$40,000

$37,000

$35,000

Flexible Prices

Demand Shocks

D

D H

$37,000

Fixed Prices

Sticky Prices

• Explain fluctuations is GDP

• Average months between price changes

Coin-operated Beer 4.3 Laundry Machine 46.4 Microwave Ovens 3.0 Newspaper 29.9 Milk 2.4 Haircut 25.5 Electricity 1.8 Taxi fare 19.7 Airline ticket 1.0 Veterinary service 14.9 Gasoline 0.6 Magazine 11.2 Computer software 5.5

Sticky Prices

• Many prices sticky in short run

–Consumers prefer stable prices

–Firms want to avoid price wars

• All prices flexible in long run

–Firms adjust to unexpected, but

permanent changes in demand

Inventory Management

• Computerized inventory tracking

• Unexpected changes in demand

easier to observe

• Firms make better output and

employment decisions

• Less severe business cycles

• Only two mild recessions since

adoption

– Possible explanation

Key Terms

• business cycle

• recession

• real GDP

• nominal GDP

• unemployment

• inflation

• modern economic

growth

• financial investment

• economic investment

• expectations

• shocks

• demand shocks

• supply shocks

• inventory

• inflexible prices

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Measuring

Domestic Output

and National

Income