Everyone is concerned about macroeconomics lately. Why? Because the state of the macroeconomy...
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Everyone is concerned about macroeconomics lately. Why? Because the state of the macroeconomy affects everyone in many ways. Recently, there is much discussion of recessions-- periods in which real GDP falls mildly-- and depressions, when GDP falls more severely. Macroeconomists are also concerned with issues such as inflation, unemployment, monetary and Welcome to Macroeconomics! Welcome to Macroeconomics!
Everyone is concerned about macroeconomics lately. Why? Because the state of the macroeconomy affects everyone in many ways. Recently, there is much discussion
Everyone is concerned about macroeconomics lately. Why? Because
the state of the macroeconomy affects everyone in many ways.
Recently, there is much discussion of recessions-- periods in which
real GDP falls mildly-- and depressions, when GDP falls more
severely. Macroeconomists are also concerned with issues such as
inflation, unemployment, monetary and fiscal policy. Welcome to
Macroeconomics!
Slide 2
What should we know? The Data for Macroeconomic Income and
expense The Real Economy in the Long Run Growth, saving and
investment, financial system and unemployment Money and Prices in
the Long Run Monetary system Macroeconomics of Open Economies
Short-run economics Fluctuations
Slide 3
Part I. Data for Macroeconomics Income & Expense (Chapter
23 & 24) There are 2 ways of viewing GDP Total income of
everyone in the economy Total expenditure on the economys output of
goods and services Income, Expenditure And the Circular Flow
Slide 4
Data for Macroeconomics For an economy as a whole, income must
equal expenditure because: Every transaction has a buyer and a
seller. Every dollar of spending by some buyer is a dollar of
income for some seller. Spending Goods and services bought Revenue
Goods and services sold Labor, land, and capital Income = Flow of
inputs and outputs = Flow of dollars Factors of production Wages,
rent, and profit FIRMS Produce and sell goods and services Hire and
use factors of production Buy and consume goods and services Own
and sell factors of production HOUSEHOLDS Households sell Firms buy
MARKETS FOR FACTORS OF PRODUCTION Firms sell Households buy MARKETS
FOR GOODS AND SERVICES
Slide 5
GDP Gross domestic product (GDP) is a measure of the income and
expenditures of an economy. It is the total market value of all
final goods and services produced within a country in a given
period of time. GDP is the most widely reported measure of a
nations economic performance
Slide 6
Government purchases of goods and services Government purchases
of goods and services Y = C + I + G + NX Total demand for domestic
output (GDP) Total demand for domestic output (GDP) is composed of
is composed of Consumption spending by households Consumption
spending by households Investment spending by businesses and
households Investment spending by businesses and households Net
exports or net foreign demand Net exports or net foreign demand
This is the called the national income accounts identity.
Slide 7
To compute the total value of different goods and services, the
national income accounts use market prices. Thus, if $0.50 $1.00
GDP = (Price of apples Quantity of apples) + (Price of oranges
Quantity of oranges) = ($0.50 4) + ($1.00 3) GDP = $5.00 $0.50
$1.00
Slide 8
The value of final goods and services measured at current
prices is called nominal GDP. It can change over time either
because there is a change in the quantity of goods and services or
a change in the prices of those goods and services. Hence, nominal
GDP Y = P Q, where P is the price level and Q is real output Real
GDP is the value of goods and services measured using a constant
set of prices.
Slide 9
Lets see how real GDP is computed in our apple and orange
economy. For example, if we wanted to compare output in 2002 and
output in 2003, we would obtain base-year prices, such as 2002
prices. Real GDP in 2002 would be: (2002 Price of Apples 2002
Quantity of Apples) + (2002 Price of Oranges 2002 Quantity of
Oranges). Real GDP in 2003 would be: (2002 Price of Apples 2003
Quantity of Apples) + (2002 Price of Oranges 2003 Quantity of
Oranges). Real GDP in 2004 would be: (2002 Price of Apples 2004
Quantity of Apples) + (2002 Price of Oranges 2004 Quantity of
Oranges).
Slide 10
Nominal GDP measures the current dollar value of the output of
the economy. Real GDP measures output valued at constant prices.
measures the price of output relative to its price in the base year
The GDP deflator measures the price of output relative to its price
in the base year. It reflects whats happening to the overall level
of prices in the economy. GDP Deflator = Nominal GDP Real GDP
Slide 11
Summary of GDP GDP is a good measure of economic well- being
because people prefer higher to lower incomes. It is not a perfect
measure of well-being because some things, such as leisure time and
a clean environment, arent measured by GDP.
Slide 12
Measuring cost of living Turning dollar figures into meaningful
measures of purchasing power Consumer Price Index (CPI) can be used
CPI is used to monitor changes in the cost of living over time CPI
rises typical family has to spend more money to maintain same
standard of living CPI has strong relationship with inflation
Slide 13
The Consumer Price Index (CPI) turns the prices of many goods
and services into a single index measuring the overall level of
prices.
Slide 14
Lets see how the CPI would be computed in our apple and orange
economy. typical consumer For example, suppose that the typical
consumer buys 5 apples and 2 oranges every month. Then the basket
of goods consists of 5 apples and 2 oranges, and the CPI is: CPI= (
5 Current Price of Apples) + (2 Current Price of Oranges) ( 5 2002
Price of Apples) + (2 2002 Price of Oranges) In this CPI
calculation, 2002 is the base year. The index tells how much it
costs to buy 5 apples and 2 oranges in the current year relative to
how much it cost to buy the same basket of fruit in 2002.
Slide 15
The Inflation Rate The inflation rate is calculated as
follows:
Slide 16
GDP Deflator VS Consumer Price Index produced domestically The
GDP deflator reflects the prices of all goods and services produced
domestically, whereas... bought by consumers the consumer price
index reflects the prices of all goods and services bought by
consumers.
Slide 17
The consumer price index compares the price of a fixed basket
of goods and services to the price of the basket in the base year
(only occasionally does the BLS change the basket)... whereas the
GDP deflator compares the price of currently produced goods and
services to the price of the same goods and services in the base
year. GDP Deflator VS Consumer Price Index
Slide 18
CPI The consumer price index is imperfect: substitution bias
the introduction of new goods unmeasured changes in quality.
Because of measurement problems, the CPI overstates annual
inflation by about 1 percentage point.
Slide 19
Correcting Economic Variables for the Effects of Inflation
Price indexes are used to correct for the effects of inflation when
comparing dollar figures from different times. Carabao Made in
Thailand sold about 1.5 million cassettes in 1985. How much did the
band earn if we convert into 2003? : Suppose each cassette the band
received 20 baht, thus, 1.5 times 20 = 30 million baht. This can
convert to value in 2003 by = 30,000,000 * (Price level 2003/Price
level 1985) = 30,000,000 * (106.1/54.1) = 58,835,489 baht
Slide 20
Correcting Economic Variables for the Effects of Inflation
Indexation When some dollar amount is automatically corrected for
inflation by law or contract, the amount is said to be indexed for
inflation. Interest rate The nominal interest rate is the interest
rate usually reported and not corrected for inflation. It is the
interest rate that a bank pays. The real interest rate is the
nominal interest rate that is corrected for the effects of
inflation.
Slide 21
Part II. Real Economy in the Long Run Production and Growth
Saving, Investment, and Financial System Unemployment and its
Natural Rate
Slide 22
Production and Growth Economic growth is determined by
productivity Productivity refers to the amount of goods and
services that a worker can produce from each hour of work. The
inputs used to produce goods and services are called the factors of
production. The factors of production directly determine
productivity.
Slide 23
How Productivity Is Determined Physical Capital Human Capital
Natural Resource Technological Knowledge
Slide 24
ECONOMIC GROWTH AND PUBLIC POLICY Government Policies That
Raise Productivity and Living Standards Encourage saving and
investment. Encourage investment from abroad Encourage education
and training. Establish secure property rights and maintain
political stability. Promote free trade. Promote research and
development.
Slide 25
The Importance of Saving and Investment One way to raise future
productivity is to invest more current resources in the production
of capital.
Slide 26
Diminishing Returns and the Catch-Up Effect As the stock of
capital rises, the extra output produced from an additional unit of
capital falls; this property is called diminishing returns. Because
of diminishing returns, an increase in the saving rate leads to
higher growth only for a while.
Slide 27
Diminishing Returns and the Catch-Up Effect The catch-up effect
refers to the property whereby countries that start off poor tend
to grow more rapidly than countries that start off rich.
Slide 28
ECONOMIC GROWTH AND PUBLIC POLICY Government Policies That
Raise Productivity and Living Standards Encourage saving and
investment. Encourage investment from abroad Encourage education
and training. Establish secure property rights and maintain
political stability. Promote free trade. Promote research and
development.
Slide 29
Saving and investment are key ingredients to long-run economic
growth Save large portion of GDP more resources are available for
investment in capital higher capital raises a countrys productivity
and living standard
Slide 30
The Financial System financial system The financial system
consists of the group of institutions in the economy that help to
match one persons saving with another persons investment.
Slide 31
FINANCIAL INSTITUTIONS The financial system is made up of
financial institutions that coordinate the actions of savers and
borrowers. Financial markets are the institutions through which
savers can directly provide funds to borrowers. Financial
intermediaries are financial institutions through which savers can
indirectly provide funds to borrowers.
Financial Markets The Bond Market A bond is a certificate of
indebtedness that specifies obligations of the borrower to the
holder of the bond. Characteristics of a Bond Term: The length of
time until the bond matures. Credit Risk: The probability that the
borrower will fail to pay some of the interest or principal. Tax
Treatment: The way in which the tax laws treat the interest on the
bond. Municipal bonds are federal tax exempted. IOU
Slide 34
Financial Markets The Stock Market Stock represents a claim to
partial ownership in a firm and is therefore, a claim to the
profits that the firm makes.
Slide 35
Bond & Stock Bond Bond holder is a creditor of the
corporation Bondholders get only the interest on their bonds. Stock
Owner of share = part owner If company is very profitable
stockholders enjoy benefits of these profits Compared to bonds,
stocks offer both higher risk and potentially higher returns.
Slide 36
Financial Intermediaries Banks take deposits from people who
want to save and use the deposits to make loans to people who want
to borrow. pay depositors interest on their deposits and charge
borrowers slightly higher interest on their loans.
Slide 37
Financial Intermediaries Mutual Funds A mutual fund is an
institution that sells shares to the public and uses the proceeds
to buy a portfolio, of various types of stocks, bonds, or both.
They allow people with small amounts of money to easily
diversify.
Slide 38
SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS Recall
that GDP is both total income in an economy and total expenditure
on the economys output of goods and services: Y = C + I + G +
NX
Slide 39
Some Important Identities closed economy Assume a closed
economy one that does not engage in international trade: Y = C + I
+ G + NX Y = C + I + G GDP is the sum of consumption, investment,
and government purchases
Slide 40
Some Important Identities To find out national saving, subtract
C and G from both sides of the equation: Y- C - G = C + I + G C G Y
C G =I The left side of the equation is the total income in the
economy after paying for consumption and government purchases and
is called national saving, or just saving (S).
Slide 41
Some Important Identities Substituting S for Y - C - G, the
equation can be written as: S = I
Slide 42
Some Important Identities National saving, or saving, is equal
to: S = I S = Y C G T denote the amount of taxes minus the amount
it pays back to households in form of Social security or welfare S
= (Y T C) + (T G)
Slide 43
Some Important Identities S = (Y T C) + (T G) The two Ts in
this equation cancel each other National saving are separated into
two parts Private saving is the amount of income that households
have left after paying their taxes and paying for their
consumption. Private saving = (Y T C) Public saving is the amount
of tax revenue that the government has left after paying for its
spending. Public saving = (T G)
Slide 44
The Meaning of Saving and Investment Surplus and Deficit If T
> G, the government runs a budget surplus The surplus of T - G
represents public saving. If G > T, the government runs a budget
deficit
Slide 45
THE MARKET FOR LOANABLE FUNDS Loanable funds Loanable funds
refers to all income that people have chosen to save and lend out,
rather than use for their own consumption. The market for loanable
funds is the market in which those who want to save supply funds
and those who want to borrow to invest demand funds.
Slide 46
Supply and Demand for Loanable Funds The supply of loanable
funds comes from people who have extra income they want to save and
lend out. The demand for loanable funds comes from households and
firms that wish to borrow to make investments.
Slide 47
Supply and Demand for Loanable Funds The interest rate is the
price of the loan. It represents the amount that borrowers pay for
loans and the amount that lenders receive on their saving. The
interest rate in the market for loanable funds is the real interest
rate.
Slide 48
Supply and Demand for Loanable Funds Financial markets work
much like other markets in the economy. The equilibrium of the
supply and demand for loanable funds determines the real interest
rate.
Slide 49
Figure 1 The Market for Loanable Funds Loanable Funds (in
billions of dollars) 0 Interest Rate Supply Demand 5% $1,200
Copyright2004 South-Western
Slide 50
Supply and Demand for Loanable Funds Government Policies That
Affect Saving and Investment Taxes and saving Taxes and investment
Government budget deficits
Slide 51
Policy 1: Saving Incentives Taxes on interest income
substantially reduce the future payoff from current saving and, as
a result, reduce the incentive to save.
Slide 52
Policy 1: Saving Incentives A tax decrease increases the
incentive for households to save at any given interest rate. The
supply of loanable funds curve shifts to the right. The equilibrium
interest rate decreases. The quantity demanded for loanable funds
increases.
Slide 53
Figure 2 An Increase in the Supply of Loanable Funds Loanable
Funds (in billions of dollars) 0 Interest Rate Supply,S1S1 S2S2
2.... which reduces the equilibrium interest rate... 3.... and
raises the equilibrium quantity of loanable funds. Demand 1. Tax
incentives for saving increase the supply of loanable funds... 5%
$1,200 4% $1,600 Copyright2004 South-Western
Slide 54
Policy 1: Saving Incentives If a change in tax law encourages
greater saving, the result will be lower interest rates and greater
investment.
Slide 55
Policy 2: Investment Incentives An investment tax credit
increases the incentive to borrow. Increases the demand for
loanable funds. Shifts the demand curve to the right. Results in a
higher interest rate and a greater quantity saved.
Slide 56
Policy 2: Investment Incentives If a change in tax laws
encourages greater investment, the result will be higher interest
rates and greater saving.
Slide 57
Figure 3 An Increase in the Demand for Loanable Funds Loanable
Funds (in billions of dollars) 0 Interest Rate 1. An investment tax
credit increases the demand for loanable funds... 2.... which
raises the equilibrium interest rate... 3.... and raises the
equilibrium quantity of loanable funds. Supply Demand,D1D1 D2D2 5%
$1,200 6% $1,400 Copyright2004 South-Western
Slide 58
Policy 3: Government Budget Deficits and Surpluses When the
government spends more than it receives in tax revenues, the short
fall is called the budget deficit. The accumulation of past budget
deficits is called the government debt.
Slide 59
Policy 3: Government Budget Deficits and Surpluses Government
borrowing to finance its budget deficit reduces the supply of
loanable funds available to finance investment by households and
firms. This fall in investment is referred to as crowding out. The
deficit borrowing crowds out private borrowers who are trying to
finance investments.
Slide 60
Policy 3: Government Budget Deficits and Surpluses A budget
deficit decreases the supply of loanable funds. Shifts the supply
curve to the left. Increases the equilibrium interest rate. Reduces
the equilibrium quantity of loanable funds.
Slide 61
Figure 4: The Effect of a Government Budget Deficit Loanable
Funds (in billions of dollars) 0 Interest Rate 3.... and reduces
the equilibrium quantity of loanable funds. S2S2 2.... which raises
the equilibrium interest rate... Supply,S1S1 Demand $1,200 5% $800
6% 1. A budget deficit decreases the supply of loanable funds...
Copyright2004 South-Western
Slide 62
Policy 3: Government Budget Deficits and Surpluses When
government reduces national saving by running a deficit, the
interest rate rises and investment falls. A budget surplus
increases the supply of loanable funds, reduces the interest rate,
and stimulates investment.
Slide 63
IDENTIFYING UNEMPLOYMENT Categories of Unemployment The problem
of unemployment is usually divided into two categories. The
long-run problem and the short-run problem: The natural rate of
unemployment unemployment that does not go away on its own even in
the long run. It is the amount of unemployment that the economy
normally experiences. The cyclical rate of unemployment
year-to-year fluctuations in unemployment around its natural rate.
It is associated with short-term ups and downs of the business
cycle.
Slide 64
Figure 2 Unemployment Rate Since 1960 Copyright2003
Southwestern/Thomson Learning 10 8 6 4 2 0
19701975196019651980198519902005 Percent of Labor Force 19952000
Natural rate of unemployment Unemployment rate
Slide 65
IDENTIFYING UNEMPLOYMENT Describing Unemployment Three Basic
Questions: How does government measure the economys rate of
unemployment? What problems arise in interpreting the unemployment
data? How long are the unemployed typically without work?
Slide 66
How Is Unemployment Measured? Based on the answers to the
survey questions, the BLS places each adult into one of three
categories: Employed Unemployed Not in the labor force
Slide 67
How Is Unemployment Measured? Labor Force The labor force is
the total number of workers, including both the employed and the
unemployed.
Slide 68
Figure 1 The Breakdown of the Population in 2001 Copyright2003
Southwestern/Thomson Learning Adult Population (211.9 million)
Labor Force (141.8 million) Employed (135.1 million) Not in labor
force (70.1 million) Unemployed (6.7 million)
Slide 69
How Is Unemployment Measured? The unemployment rate is
calculated as the percentage of the labor force that is
unemployed.
Slide 70
The labor-force participation rate is the percentage of the
adult population that is in the labor force. How Is Unemployment
Measured?
Slide 71
Why Are There Always Some People Unemployed? In an ideal labor
market, wages would adjust to balance the supply and demand for
labor, ensuring that all workers would be fully employed. In
reality there are always some workers without jobs, even when the
whole economy is doing well. Why???
Slide 72
Why Are There Always Some People Unemployed? Frictional
unemployment unemployment that results from the time that it takes
to match workers with jobs. Job search Structural unemployment
unemployment that results because the number of jobs available in
some labor markets is insufficient to provide a job for everyone
who wants one. Minimum-Wage laws, Unions, Theory of efficiency
wages
Slide 73
1.) JOB SEARCH Job search the process by which workers find
appropriate jobs given their tastes and skills. results from the
fact that it takes time for qualified individuals to be matched
with appropriate jobs.
Slide 74
Public Policy and Job Search Government programs can affect the
time it takes unemployed workers to find new jobs. These programs
include the following: Government-run employment agencies Public
training programs Unemployment insurance
Slide 75
2.) MINIMUM-WAGE LAWS When the minimum wage is set above the
level that balances supply and demand, it creates
unemployment.
Slide 76
Figure 4 Unemployment from a Wage Above the Equilibrium Level
Copyright2003 Southwestern/Thomson Learning Quantity of Labor 0
Surplus of labor = Unemployment Labor supply Labor demand Wage
Minimum wage LDLD LSLS WEWE LELE
Slide 77
3. ) UNIONS AND COLLECTIVE BARGAINING A union is a worker
association that bargains with employers over wages and working
conditions. The process by which unions and firms agree on the
terms of employment is called collective bargaining.
Slide 78
4.) THE THEORY OF EFFICIENCY WAGES Efficiency wages are
above-equilibrium wages paid by firms in order to increase worker
productivity. The theory of efficiency wages states that firms
operate more efficiently if wages are above the equilibrium
level.
Slide 79
Wages above the equilibrium Minimum-wage laws and unions
Prevent firms from lowering wages in the presence of a surplus of
workers Efficiency-wage theory Firms prefer to keep wages above the
equilibrium level Unemployment is the result of wages above the
level that balances the quantity of labor supplied and the quantity
of labor demanded.