Copyright © 2006 Pearson Education Canada A First Look at Macroeconomics PART 7Macroeconomic Overview 19 CHAPTER

Copyright © 2006 Pearson Education Canada

A First Look at Macroeconomics

PART 7 Macroeconomic Overview

19CHAPTER


Objectives (slide #1)

After studying this chapter, you will able to Understand the origins and issues of macroeconomics

Trends and fluctuations:

(1) in economic growth

(2) in jobs and unemployment

(3) in inflation

(4) in government and international deficits

(5) underline the macroeconomic policy challenges and the tools used to rectify these challenges.


PROJECT THE FUTURE ECONOMIC STATE (Will Your World Be Like)?(#2)

(1) Increase in prosperity?

(2) Increase in # of jobs?

(3) Stability in the cost of living?

(4) Government surplus or deficit?


Origins and Issues of Macroeconomics (3)

The study of economic growth, inflation, and international payments during the 1750s.

Modern macroeconomics began around the Great Depression (1929-1939)which was characterized with high unemployment and international stagnation of production.

At the forefront of this development was John Maynard Keynes. His book, The General Theory of Employment, Interest, and Money, started the ball rolling.


Origins and Issues of Macroeconomics (4)

Short-Term Versus Long-Term Goals

Keynes focused on the short-term—i.e. unemployment and lost of production.

The reason:

“In the long run,” said Keynes, “we’re all dead.”

The 1970s and 1980s, started a growing concern with long-term economic problems — inflation and economic growth.


Growth and Fluctuations (5)

One fundamental topic is Economic growth (EC). EC is the expansion of the economy’s production possibilities— i.e. an outward shifting of the Production Possibility Frontier ( PPF.

Economic growth is measured by the increase in reareal gross domestic

product (GDP).

Real GDP— is the total value of the total production of all the nation’s farms, factories, shops, and offices. It is measured in the prices of a single year.


Growth and Fluctuations (#6)

Economic Growth in Canada

Figure 19.1 shows real GDP in Canada from 1961 to 2005.

Notice the:

Growth of potential GDP

The movement of real GDP around potential GDP



Growth of Potential GDP

Potential GDP is the value of real GDP when all the country’s (resources) labour, capital, land, and entrepreneurial ability are fully employed.

During the 1970s and early 1980s, the growth of real GDP per person (per capita GDP) slowed down — i.e. a productivity growth slowdown.


Growth and Fluctuations (8)

Movement of Real GDP Around Potential GDP (Trend)

Real GDP fluctuates around potential GDP in a business cycle—which is a periodic and irregular up-and-down movement in a country’s output – over several years.


Growth and Fluctuations (#9) – pg. 448

Every business cycle has two phases and two turning points:

Phase: (a) a recession; (b) an expansion

Turning points: (a) a peak; (b) a trough

Figure 19.2 (on page 448) identifies these features of the business cycle.


Growth and Fluctuations (#10) – pg. 448

Canada’s most recent business cycle.



A recession is defined as a period where real GDP declines for at least two successive quarters.

An expansion is identified with a a period during where real GDP increases.

A growth recession is identified with a positive real GDP growth rate but also slows down so real GDP falls below potential GDP.


Growth and Fluctuations (#12) – pg.

And the most recent recession is identified below…


Growth and Fluctuations (#13) – pg 448

and the three growth recessions in the Canadian economy.


Growth and Fluctuations (#14) – pg. 449.

Figure 19.3 shows the long-term growth trend and business cycles.


Growth and Fluctuations – Around the World (15) – pg. 450.

Economic Growth Around the World

Figure 19.4(a) compares the growth rate of real per capita GDP in Canada with those of the world’s three largest economies.


Growth and Fluctuations (15b)

In the 1960s, Japan’s growth rate was much faster than the others.

After the 1970s, all four growth rates were similar.

Canada’s growth rate has fallen behind the U.S. growth rate.


Growth and Fluctuations (# 16) –pg. 450.

Figure 19.4(b) compares Canada’s economic growth with several countries and regions for the period 1980 to 2004.

Asia was the fastest growing region in the world economy.


The Lucas Wedge and the Okun Gap

Productivity slowdowns in a business cycle create the lost of output as real GDP fluctuates around potential GDP in a business cycle. To measures these losses we can use the following methods:

(1) the Lucas wedge and

(2) the Okun gap.

Growth and Fluctuations (#17) pg. 451


The Lucas Wedge

The Lucas wedge is the accumulated loss of output from a slowdown in the growth rate of real per capita GDP.

Figure 19.5(a) shows that the Lucas wedge, from the productivity slowdown in Canada during the 1970s, was estimated as $11.5 trillion or 10 times the GDP at the 2005 level. (Blk Lne).

Growth and Fluctuations (#18) (fig. 19-5)- pg. 451.


The Okun Gap

The Okun gap is the gap between the potential GDP and actual real GDP. Another name for the Okun Gap is the output gap.

Figure 19.5(b) shows that the Okun gap, from the recessions since 1974, is estimated at $173 billion or about 2 months of 2005 real GDP.

Growth and Fluctuations (fig 19) (#20)pg. 451


Benefits and Costs of Economic Growth

The Lucas wedge is a measure of the dollar value of lost real GDP if the growth rate slows. This cost is identified with the decline or loss of real goods and services.

It translates into an inferior Canadian health-care system, fewer child-care services, worsen roads and less improvements in environment control activites.

But fast growth is also costly. Its main costs is forgone current consumption. To sustain growth, resources must be allocated to advancing technology and accumulating capital rather than to current consumption.

Growth and Fluctuations (#21) – pg 452.


Jobs and Unemployment (#22) – pg. 452.

Jobs

The Canadian economy creates, on average about 220,000 additional jobs a year.

This number fluctuates. For example, since 2000, the economy has created about 1.6 additional jobs, but during the 1991 recession, 260,000 jobs disappeared.


Jobs and Unemployment (# 23) pg. 452.

Unemployment

Unemployment, in Canada, is defined as a state in which a person does not have a job but is available for work, is willing to work, and has made some effort to find work within the previous four weeks.

The labour force is the total number of people who are employed and unemployed.

The unemployment rate is the percentage of the people in the labour force who are unemployed.

A discouraged worker is a person who is available for work, willing to work, but who has given looking for a job.


Jobs and Unemployment (#24) Fig.19.6(a) – pg. 453

Unemployment in CanadaFigure 19.6 shows the unemployment rate in Canada from 1926 to 2005.

During the 1930s, the unemployment rate hit 20 percent.

The lowest rate occurred during World War II at 1.2 percent.


Jobs and Unemployment Fig (#25) 19.6b – pg. 453.

During recent recessions, the unemployment rate increased but not as high as in the Great Depression.

The unemployment rate is never zero. Since World War II, it has averaged 6.7 percent.


Jobs and Unemployment (#26) Fig 19.7 pg. 454.

Unemployment Around the WorldFigure 19.7 compares the unemployment rate in Canada with those in Japan, Western Europe, and the United States.

Compared to the other countries, on the average, unemployment is highest in Canada.


Jobs and Unemployment (# 27) pg. 454.

Why Unemployment Is a Problem

Unemployment has a serious economic, social, and personal problems for two main reasons:

(a) lost production and incomes; and

(b) lost human capital

The loss of a job brings an immediate loss of income and production. This can be a temporary problem.

A prolonged spell of unemployment can bring permanent damage through the loss of human capital.


Inflation (#28) – pg. 455.

Inflation is a process of rising prices or an increase in the price level.

We measure the inflation rate as the percentage change in the average level of prices or the price level.

The Consumer Price Index -the CPI -is a common measurement of the price level.


Inflation (#29a) pg. 455

Inflation in Canada Was low in the first half of the 1960s.

Increased in the 1970s and early 1980s.

Was lowered in the 1980s and 1990s.

Since 1990s, it has kept inside the target band.


Inflation (#29b)

The inflation rate fluctuates, but it is always positive. the price level has not fallen below zero for the years shown in the figure.

A falling price level—a negative inflation rate—is called deflation.


Inflation (#30) pg. 456

Inflation Around the WorldFigure 19.9(a) compares the inflation rate of Canada compared with other countries.

Canadian inflation rate has been similar to those in other industrial countries.


Inflation (#31) pg. 456

Figure 19.9(b) shows that the inflation rates in industrial countries has been much lower than those in developing countries.


Inflation (#32) –pg. 456

Is Inflation a Problem?

Unpredictable changes in the inflation rate are a problem because they redistribute income in arbitrary ways between employers and workers and between borrowers and lenders.

A high inflation rate is a problem because it diverts resources from productive activities to the forecasting of inflation and speculation activities.

Reducing/ removing inflation has its costs because it brings a period of greater than average unemployment.


Surpluses and Deficits (# 33) – pg 457.

Government Budget Surplus and Deficit

If a government collects more in taxes than it spends, it has a government budget surplus.

If a government spends more than it collects in taxes, it has a government budget deficit.


Surpluses and Deficits (#34 a) –pg. 458

Figure 19.10(a) shows the changing surplus and deficit of the federal and provincial governments in Canada since 1960.

Persistent federal deficits during the 1970s through the 1990s and

Federal surpluses since 1998.


Surpluses and Deficits (#34b) –pg 458

Provincial governments had

Surpluses during the 1960s and 1970s and

Large deficits in the early 1990s.


Surpluses and Deficits (#35a) –pg 458

International Surplus and Deficit

If a nation imports more than it exports, it has an international deficit.

If a nation exports more than it imports, it has an international surplus.

The balance on the current account is the balance of exports minus imports, plus net interest paid to and received from the rest of the world.


Surpluses and Deficits (#35b) –pg. 458

Figure 19.10(b) shows Canada’s current account balance from 1960 to 2005.

Persistent current account deficit most of the time

Surpluses during the past five years


Macroeconomic Policy Challengesand Tools (#36a) – pg. 459.

Five widely agreed policy challenges for macroeconomics are to:

1. Reduce unemployment

2. Boost economic growth

3. Stabilize the business cycle

4. Keep inflation low

5. Reduce government and international deficits


Macroeconomic Policy Challengesand Tools (#36b) – pg. 459.

Two broad groups of macroeconomic policy tools are

Fiscal policy—making changes in tax rates and government spending

Monetary policy—changing interest rates and changing the amount of money in the economy

The government conducts fiscal policy.

The Bank of Canada conducts monetary policy.


Implications from Reading Between The Lines (# 37) – pgs. 460- 461. (Application)

(1) What did the paper clipping forecast in each sector of the economy?

(2) What official sources did the clipping used?

(3) How did the authors evaluate these forecasts?

(4) What methodologies were employed to analyze the correctness of the analysis?

(5) What are your conclusions on this exercise?

(6) What tools, lessons and information have you learnt from this exercise? From this chapter ?

L. Paul (Jan 07)


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Copyright © 2006 Pearson Education Canada A First Look at Macroeconomics PART 7Macroeconomic Overview 19 CHAPTER