Macro OverviewMacro Overview

Unit 4Unit 4

What it is?What it is?

►Remember: Macroeconomics is the part of Remember: Macroeconomics is the part of economics that looks at the behavior of the economics that looks at the behavior of the whole economy collectively, rather than at whole economy collectively, rather than at the individual economic behavior of people the individual economic behavior of people or businesses.or businesses.

►When we talk about “the economy,” what When we talk about “the economy,” what do we mean? What exactly are we referring do we mean? What exactly are we referring to?to? GDP, Unemployment, Inflation, the Business GDP, Unemployment, Inflation, the Business

CycleCycle

What’s up, GDP?What’s up, GDP?

►Gross Domestic Product (GDP) Gross Domestic Product (GDP) is what is what we use to measure a country’s we use to measure a country’s standard of living, or well-being (like standard of living, or well-being (like our nation’s “net worth”). our nation’s “net worth”).

►What does it measure? It’s the What does it measure? It’s the total total market value of goods & services market value of goods & services produced in a year.produced in a year.

““Real” versus “Nominal” GDPReal” versus “Nominal” GDP

►GDP doesn’t allow for changing price GDP doesn’t allow for changing price levels (inflation, etc. – more on that in a levels (inflation, etc. – more on that in a bit)bit)

►This is called This is called NOMINAL GDP NOMINAL GDP – it is NOT – it is NOT adjusted for price levelsadjusted for price levels

►So, we typically measure using So, we typically measure using REAL GDPREAL GDP►That is, we calculate the difference in the That is, we calculate the difference in the

value of the dollar (price level) and use it value of the dollar (price level) and use it in figuring GDPin figuring GDP

GDPGDP

►The “Expenditure Approach” calculates The “Expenditure Approach” calculates GDP like this:GDP like this:

GDP = Consumer spending (“C”)GDP = Consumer spending (“C”)

+ Business Investments (“I”)+ Business Investments (“I”)

+ Government Purchases (“G”)+ Government Purchases (“G”)

+ Net Exports: meaning exports + Net Exports: meaning exports minus imports (“X-M”)minus imports (“X-M”)

GDP = C + I + G + (X – M) or sometimesGDP = C + I + G + (X – M) or sometimes

GDP = C + I + G + F (for “Foreign sector”)GDP = C + I + G + F (for “Foreign sector”)

The Business CycleThe Business Cycle(G

DP

)

The Business CycleThe Business Cycle

►KNOW THE DIFFERENT PHASES OF THE KNOW THE DIFFERENT PHASES OF THE BUSINESS CYCLE!BUSINESS CYCLE!

(GD

P)

UnemploymentUnemployment

►UnemploymentUnemployment is defined as: is defined as: the the condition of those who are willing and condition of those who are willing and able to work and are actively seeking able to work and are actively seeking work but who do not currently workwork but who do not currently work

►The The Civilian Labor ForceCivilian Labor Force is defined as: is defined as: the total number of people in the the total number of people in the working age group (16+) who are working age group (16+) who are either employed or actively seeking either employed or actively seeking workwork

UnemploymentUnemployment

►The The Unemployment Rate Unemployment Rate is: is: the the percentage of the civilian labor force percentage of the civilian labor force that is considered unemployedthat is considered unemployed

► Is calculated by the following formula:Is calculated by the following formula:

Number UnemployedNumber Unemployed

# in Civ. Labor Force# in Civ. Labor Force

The Costs of UnemploymentThe Costs of Unemployment

►Unemployment hurts the economy, Unemployment hurts the economy, because it keeps us from producing to because it keeps us from producing to our fullest potential – it does not add our fullest potential – it does not add to our GDP, and personally, it hurts to our GDP, and personally, it hurts people and their families’people and their families’

►Leads to crime, higher rate of disease, Leads to crime, higher rate of disease, and other social problemsand other social problems

Types of UnemploymentTypes of Unemployment►CyclicalCyclical UnemploymentUnemployment: : results from a results from a

low level of aggregate demand, or an low level of aggregate demand, or an economic downturn – think due to economic downturn – think due to “business CYCLE”“business CYCLE”

►FrictionalFrictional UnemploymentUnemployment: : unemployment of people who are unemployment of people who are temporarily between jobs, or recent grads temporarily between jobs, or recent grads interviewing for careerinterviewing for career

►StructuralStructural UnemploymentUnemployment: : results from results from skills that do not match what employers skills that do not match what employers require or from being geographically require or from being geographically separated from job opportunitiesseparated from job opportunities

Types of Unemployment Types of Unemployment (cont.)(cont.)

►SeasonalSeasonal UnemploymentUnemployment: : unemployment of people who are out unemployment of people who are out of work because of factors that vary of work because of factors that vary with the time of yearwith the time of year

Reducing UnemploymentReducing Unemployment

►““Full” Employment: Full” Employment: employment of employment of about 95 percent of the labor forceabout 95 percent of the labor force This allows about 5 percent for frictional This allows about 5 percent for frictional

and seasonal unemploymentand seasonal unemployment

►Education and TrainingEducation and Training►Match Skill Requirements to JobMatch Skill Requirements to Job►Lower Minimum WageLower Minimum Wage► Increase Aggregate DemandIncrease Aggregate Demand

AggregatesAggregates

►Aggregate DemandAggregate Demand: : the total the total demand of all people for all goods demand of all people for all goods and services produced in an and services produced in an economyeconomy

►Aggregate SupplyAggregate Supply: : the total supply the total supply of all goods and services in an of all goods and services in an economyeconomy

Average

Price

Level

Total Output in Constant Dollars (Real GDP)

Aggregate

Supply

Aggregate

Demand

Macroeconomic EquilibriumEquilibrium Price Level

Equilibrium Level of Output

InflationInflation

► Inflation Inflation refers to an increase in the average refers to an increase in the average price of goods and services bought by the price of goods and services bought by the average consumer.average consumer.

►DeflationDeflation is a decrease in the average price is a decrease in the average price of goods and services.of goods and services.

►StagflationStagflation occurs when prices increase but occurs when prices increase but the economy isn’t growing (this is very bad!)the economy isn’t growing (this is very bad!)

►Our measure of inflation is the Our measure of inflation is the Consumer Consumer Price Index (CPI)Price Index (CPI)..

Price IndexPrice Index►What is a What is a price indexprice index? ? A number that A number that

compares prices in one year with some compares prices in one year with some earlier base yearearlier base year -- it’s how we -- it’s how we measure inflationmeasure inflation

►The main price index: The main price index: The Consumer The Consumer Price Index (CPI)Price Index (CPI) – – a number used to a number used to calculate changes in the average level calculate changes in the average level of prices for a number of items typically of prices for a number of items typically bought by urban families bought by urban families (gov’t(gov’t checks checks the prices of about 400 items)the prices of about 400 items)

CPICPI

►CPI = CPI = (Cost of basket today) (Cost of basket today) x100 x100

(cost of basket in base year)(cost of basket in base year)

Example: if market basket cost $960 in Example: if market basket cost $960 in base year 2006 and $1000 in year 2007, base year 2006 and $1000 in year 2007, we’d calculate it like this:we’d calculate it like this:

CPI = CPI = 10001000 x 100 = 1.04 x 100 = 104 x 100 = 1.04 x 100 = 104

960960

What does this mean? Prices rose by What does this mean? Prices rose by about 4%about 4%

InflationInflation

►Let’s check out these websites:Let’s check out these websites:

►Minneapolis Fed Inflation Calculator

►Morgan’s Inflation Page

Who Benefits from Inflation?Who Benefits from Inflation?

►Debtors benefit from inflationDebtors benefit from inflation, , because the money they pay back because the money they pay back later actually has a lower value than later actually has a lower value than the money they borrowed (because the money they borrowed (because the value of money has decreased, the value of money has decreased, right?! Yes!)right?! Yes!)

Who is Hurt by Inflation?Who is Hurt by Inflation?

►People who are on a fixed income People who are on a fixed income are hurt most by inflation.are hurt most by inflation. For For example, if your grandparents have a example, if your grandparents have a set retirement of $12,000 per year, and set retirement of $12,000 per year, and inflation occurs, that $12,000 will have inflation occurs, that $12,000 will have less and less value.less and less value.

►Creditors are also hurt by inflationCreditors are also hurt by inflation, , because if inflation is higher than the because if inflation is higher than the interest rate, they lose money.interest rate, they lose money.