Post on 01-Apr-2015
transcript
Slides by John F. Hall
Animations by Anthony ZambelliINTRODUCTION TO ECONOMICS 2e / LIEBERMAN & HALLCHAPTER 11 / INTRODUCTION TO MACROECONOMICS©2005, South-Western/Thomson Learning
Chapter 11
Introduction To Macroeconomics
Lieberman & Hall; Introduction to Economics, 2005 2
What Macroeconomics Tries to Explain
Microeconomic deals with behavior of individual decision makers and individual markets
Macroeconomic deals with broad outlines of the economy
Which view is better? Depends on what we’re trying to do
Lieberman & Hall; Introduction to Economics, 2005 3
Macroeconomic Goals
Economists—and society at large—agree on three important macroeconomic goals Economic growth Full employment Stable prices
Why is there such universal agreement on these three goals? Because achieving them gives us opportunity to make all
of our citizens better off
Lieberman & Hall; Introduction to Economics, 2005 4
Economic Growth Economists monitor economic growth
By keeping track of real gross domestic product (real GDP)• Total quantity of goods and services produced in a country over a year
Real GDP has actually increased faster than the population During this period (1929 to 2002), while U.S. population did not quite triple
• Quantity of goods and services produced each year has increased more than tenfold
Although output has grown, rate of growth has varied over the decades Over long periods of time small differences in growth rates can cause
huge differences in living standards Economists and government officials are very concerned when
economic growth slows down Macroeconomics helps us understand a number of issues surrounding
economic growth
Lieberman & Hall; Introduction to Economics, 2005 5
Figure 1: U.S. Real Gross Domestic Product, 1929-2002
Real GDP(Billions of 1998 dollars)
1000
2000
3000
4000
5000
6000
7000
8000
9000
1950
1960
1940
1930
1970
1990
2000
2002
Lieberman & Hall; Introduction to Economics, 2005 6
High Employment (or Low Unemployment)
Unemployment affects distribution of economic well being among our citizens People who cannot find jobs suffer a loss of
income Joblessness affects all of us—even those
who have jobs A high unemployment rate means economy is
not achieving its full economic potential
Lieberman & Hall; Introduction to Economics, 2005 7
High Employment (or Low Unemployment)
Unemployment rate Percentage of the workforce that would like to work, but cannot find jobs Used to keep track of employment
The nation’s commitment to high employment has twice been written into law With memory of Great Depression still fresh, Congress passed Employment
Act of 1946• Required federal government to “promote maximum employment, production, and
purchasing power” A numerical target was added in 1978, when Congress passed Full
Employment and Balanced Growth Act Called for an unemployment rate of 4%
In the 1990s, we came closer and closer and finally—in December 1999—we reached the target again for the first time since the 1960s In 2001 unemployment rate began to creep up again, and continued rising
through the first half of 2003, when it averaged 6%
Lieberman & Hall; Introduction to Economics, 2005 8
Figure 2: U.S. Unemployment Rate, 1920-2003
UnemploymentRate
(Percent)
25
1950
1960
1940
1930
1970
1980
1990
2000
20
15
10
5
200 3
0
1920
Lieberman & Hall; Introduction to Economics, 2005 9
Employment and the Business Cycle
When firms produce more output, they hire more workers—when they produce less output, they tend to lay off workers We would thus expect real GDP and employment to be
closely related, and indeed they are Business cycles
Fluctuations in real GDP around its long-term growth trend
Expansion A period of increasing real GDP
Contraction A period of declining real GDP
Lieberman & Hall; Introduction to Economics, 2005 10
Employment and the Business Cycle
Recession A contraction of significant depth and duration
Depression An unusually severe recession
In the twentieth century, United States experienced one decline in output serious enough to be considered a depression—the worldwide Great Depression of the 1930s From 1929 to 1933, the first four years of Great
Depression, U.S. output dropped by more than 25%
Lieberman & Hall; Introduction to Economics, 2005 11
Figure 3: The Business Cycle
Time
RealGDP
Expansion Recession Expansion
Long-run upward trend of real GDP
The business cycle fluctuation of actual output around its long-run trend.
Lieberman & Hall; Introduction to Economics, 2005 12
Stable Prices With very few exceptions, inflation rate has been positive During 1990s, inflation rate averaged less than 3% per year Other countries have not been so lucky
An extreme case was the new nation of Serbia—prices rose by 1,880% in August 1993
Why are stable prices—a low inflation rate—an important macroeconomic goal? Because inflation is costly to society With annual inflation rates in the thousands of percent, the costs are easy to see
• Purchasing power of currency declines so rapidly that people are no longer willing to hold it
Economists regard some inflation as good Price stabilization requires not only preventing inflation rate from rising too high
But also preventing it from falling too low, where it would be dangerously close to turning negative
Lieberman & Hall; Introduction to Economics, 2005 13
Figure 4: U.S. Annual Inflation Rate, 1922-2003
Infl
atio
n R
ate
(Per
cen
t)
0
-5
-10
5
15
2000
1940
1950
1960
1970
1980
1990
10
1930
2003
Lieberman & Hall; Introduction to Economics, 2005 14
The Macroeconomic Approach
In macroeconomics, we want to understand how the entire economy behaves Thus, we apply the steps to all markets
simultaneously How can we possibly hope to deal with all
these markets at the same time? The answer is aggregation—process of
combining different things into a single category and treating them as a whole
Lieberman & Hall; Introduction to Economics, 2005 15
Aggregation in Macroeconomics
Aggregation plays a key role in both micro- and macro-economics
In macroeconomics, we take aggregation to the extreme Because we want to consider the entire economy at
once, and yet keep our model as simple as possible• Must aggregate all markets into broadest possible categories
By aggregating in this way, can create workable and reasonably accurate models that teach us a great deal about how overall economy operates
Lieberman & Hall; Introduction to Economics, 2005 16
Macroeconomic Controversies Macroeconomics is full of disputes and
disagreements Modern macroeconomics began with publication of The
General Theory of Employment, Interest, and Money by British economist John Maynard Keynes in 1936
Keynes was taking on conventional wisdom of his time Which held that the macroeconomy worked very well on
its own• Best policy for the government to follow was laissez faire
This new school of thought held that the economy does not do well on its own and needed guidance
Lieberman & Hall; Introduction to Economics, 2005 17
Macroeconomic Controversies While some of the early disagreements have been
resolved, others have arisen to take their place For example—the controversy over the Bush
administration’s $330-billion ten-year tax cut Because of such political battles, people who follow
the news often think that there is little agreement among economists about how the macroeconomy works In fact, the profession has come to a consensus on many
basic principles, and we will stress these as we go