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Introduction to Macroeconomics
Intermediate Macroeconomic Theory
Macroeconomic Analysis
University of North Texas
ECON 3560 / 5040 Introduction to Macroeconomics
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Outline
1 What Macroeconomists Study
2 The Data of Macroeconomics
Measuring the Value of Aggregate Economic ActivityMeasuring the Cost of Living
Measuring Joblessness
3 How Economists Think
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Outline
1 What Macroeconomists Study
2 The Data of Macroeconomics
Measuring the Value of Aggregate Economic ActivityMeasuring the Cost of Living
Measuring Joblessness
3 How Economists Think
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What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small
(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Wh M i S d
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What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small
(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Wh t M i t St d
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What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small
(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Wh t M i t St d
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What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small
(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Wh t M i t St d
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What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small
(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
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Outline
1 What Macroeconomists Study
2 The Data of Macroeconomics
Measuring the Value of Aggregate Economic ActivityMeasuring the Cost of Living
Measuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
The Data of Macroeconomics
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The Data of Macroeconomics
1 Economic growth rate: g = % value of aggregate economic
activity (Y)
2 Inflation rate: = % cost of living (P)
3 Unemployment rate: u = # of unemployedlabor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
The Data of Macroeconomics
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The Data of Macroeconomics
1 Economic growth rate: g = % value of aggregate economic
activity (Y)
2 Inflation rate: = % cost of living (P)
3 Unemployment rate: u = # of unemployedlabor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
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Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum ofmoney (market)values of
2 allfinalgoods and services
3 producedwithina country
4 in a given period of time(usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
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Measuring the Value of Aggregate Economic Activity
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Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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g gg g yNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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g gg g yNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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g gg g yNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
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g gg g yNominal GDP versus Real GDP
Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured at
constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityN i l GDP R l GDP
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g gg g yNominal GDP versus Real GDP
The Bureau of Economic Analysis (http://www.bea.doc.gov)
U.S. Real & Nominal GDP, 1967-2001
0
1,0002,000
3,000
4,000
5,000
6,000
7,0008,000
9,000
10,000
11,000
1965 1970 1975 1980 1985 1990 1995 2000
(billionso
fU
.S
.dollars)
NGDP (billions of $) RGDP (billions of 1996 $)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP
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g gg g yRGDP per person
Real GDP per person (y = YN
): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
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RGDP per person
Real GDP per person (y = YN
): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
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RGDP per person
Real GDP per person (y = YN
): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
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RGDP per person
Real GDP per person (y = YN
): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
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1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
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1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
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1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
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1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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C
CPI is measured by pricing the items on a list representative of
a typicalurbanhousehold budget
CPI is calculated and announced each month by the Bureau of
Labor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing a
standard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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CPI is measured by pricing the items on a list representative of
a typicalurbanhousehold budget
CPI is calculated and announced each month by the Bureau of
Labor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing a
standard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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CPI is measured by pricing the items on a list representative of
a typicalurbanhousehold budget
CPI is calculated and announced each month by the Bureau of
Labor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing a
standard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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CPI is measured by pricing the items on a list representative of
a typicalurbanhousehold budgetCPI is calculated and announced each month by the Bureau of
Labor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
1
Survey consumers to determine composition of the typicalconsumers basket of goods
2 Every month, collect data on prices of all items in the basket;compute cost of basket
3 CPI in any month equals
cost of basket in that month
cost of basket in base period 100
most price indexes, like CPI, are computed by pricing a
standard market basket of goods in subsequentperiods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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CPI is measured by pricing the items on a list representative of
a typicalurbanhousehold budget
CPI is calculated and announced each month by the Bureau of
Labor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing a
standard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
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The composition of the U.S. CPIs basket
16.2%
40.0%
4.5%
17.6%5.8% 5.9%
2.8%
2.5%
4.8%
Food and bev.
Housing
Apparel
Transportation
Medical care
Recreation
Education
Communication
Other goods andservices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI Inflation
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Inflation rate ( = %P): the percentage change in the average
level of prices from the year before
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some
monetary magnitude by dividing by some appropriate price
index
A price index (P) can be used to1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =
money wage in 2000
CPI of 2000
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some
monetary magnitude by dividing by some appropriate price
index
A price index (P) can be used to1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =
money wage in 2000
CPI of 2000
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some
monetary magnitude by dividing by some appropriate price
index
A price index (P) can be used to1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =
money wage in 2000
CPI of 2000
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some
monetary magnitude by dividing by some appropriate price
index
A price index (P) can be used to1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =
money wage in 2000
CPI of 2000
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some
monetary magnitude by dividing by some appropriate price
index
A price index (P) can be used to1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =
money wage in 2000
CPI of 2000
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP
real GDP = nominal GDP
GDP deflator 100
The GDP deflator includes the price of airplanes, government
service, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,
will show different measures of inflation because they use
different market basket
However, the discrepancy is usually minor
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Measuring JoblessnessUnemployment Rate
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Unemployment: the macroeconomic problem that affects
people most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each month
by the BLS (http://www.bls.gov)
u =# of unemployed
labor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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Unemployment: the macroeconomic problem that affects
people most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each month
by the BLS (http://www.bls.gov)
u =# of unemployed
labor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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Unemployment: the macroeconomic problem that affects
people most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each month
by the BLS (http://www.bls.gov)
u =# of unemployed
labor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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Unemployment: the macroeconomic problem that affects
people most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each month
by the BLS (http://www.bls.gov)
u =# of unemployed
labor force
100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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U.S. unemployment rate
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Measuring JoblessnessUnemployment Rate
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U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
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U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Okuns Law
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Employed workers help produce GDP, while unemployed
workers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
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Okuns Law
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Employed workers help produce GDP, while unemployed
workers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okuns Law
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Employed workers help produce GDP, while unemployed
workers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okuns Law
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Employed workers help produce GDP, while unemployed
workers do not
So one would expect a negative relationship between
unemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okuns Law
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1951
1984
1999
2000
1993
1982
1975
Change in
unemployment rate
10
-3 -2 -1 0 1 2 43
8
6
4
2
0
-2
Percentage change
in real GDP
Okuns Law states
that a one-percent
decrease in
unemployment is
associated with two
percentage points
of additional growth
in real GDP
Okuns Law states
that a one-percent
decrease inunemployment is
associated with two
percentage points
of additional growth
in real GDP
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
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1 What Macroeconomists Study
2 The Data of Macroeconomics
Measuring the Value of Aggregate Economic Activity
Measuring the Cost of LivingMeasuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
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Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
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Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
http://find/8/12/2019 01 Intro Macro
71/75
Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
http://find/8/12/2019 01 Intro Macro
72/75
Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
http://find/8/12/2019 01 Intro Macro
73/75
Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
http://find/8/12/2019 01 Intro Macro
74/75
Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
http://find/8/12/2019 01 Intro Macro
75/75
Economists use model to illustrates the essence of the real
economy and to help explaineconomic variables
Economic variables
1 Endogenousvariables: those that the model explains
2 Exogenousvariables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
http://find/