Lecture 9: focusing on Macro Issues

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Lecture 9 focusing on Macro Issues

• Macro Questions
• What are the facts
• What is Real GDP?
• Policy issues
• Role of Government
• Practice with EIA to illustrate
• What will the exam cover?????

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Overheating?

• Production expanded quickly in the United States
  during 1994/95/96.
• This rapid growth caused fear that the economy
  was overheating.
• An overheated economy is prone to increasing
  inflation and a balance of payments deficit.
• What, if anything, can be done?

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Origins and Issues of Macroeconomics

• Modern macroeconomics emerged during the Great
  Depression.
• People began to doubt the free market economy.
• John Maynard Keynes, in 1936, published The
  General Theory of Employment, Interest, and Money.

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Origins and Issues of Macroeconomics

• Macroeconomic Problems
• 1) Economic Growth
• 2) Unemployment
• 3) Inflation
• 4) Deficits

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Origins and Issues of Macroeconomics

• Short-Term Versus Long-Term Goals
• Keynes focused on the short-term primarily
• He felt the depression was caused by insufficient
  private spending
• Government should increase its spending

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Origins and Issues of Macroeconomics

• Short-Term Versus Long-Term Goals
• Long-term consequences were virtually disregarded
• In the long run, were all dead

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Origins and Issues of Macroeconomics

• Short-Term Versus Long-Term Goals
• Today, macroeconomics is concerned with
• Long-term economic growth and inflation
• Short-term business fluctuations and unemployment

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Origins and Issues of Macroeconomics

• The Road Ahead
• The focus of macroeconomics has shifted
• Depression
• Inflation of the 1970s
• International economics of today

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Economic Growth

• Economic growth is the expansion of the economys
  production possibilities.
• Measured by real gross domestic product (Real
  GDP)
• The value of the total production of all the
  nations farms, factories, shops, and offices
  linked back to the prices of a single year (1992)

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Economic Growth in theUnited States

• The Growth of Potential GDP
• When an economys labor, capital, land, and
  entrepreneurial ability are fully employed
• Real GDP fluctuates around potential GDP
• Growth slowed during the 1970s
• Productivity growth slowdown

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Economic Growth in theUnited States
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Economic Growth in theUnited States

• Fluctuations Around Potential GDP
• The business cycle is the periodic but irregular
  up-and-down movement in production.

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Economic Growth in theUnited States

• Phases of the Business Cycle
• Recession
• Period during which real GDP decreases for two
  successive quarters
• Expansion
• Period during which real GDP increases

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Economic Growth in theUnited States

• Turning Points
• Peak
• Expansion ends, recession begins
• Trough
• Recession ends, expansion begins

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The Most Recent U.S. Business Cycle
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Long-Term Economic Growthin the United States
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Economic Growth Aroundthe World

• Real GDP per person
• The growth rate of real GDP divided by the
  population is used to compare growth rates over
  time and across countries.

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Economic Growth Aroundthe World

• Growth rates in the U.S., Germany, and Japan have
  features that are distinct
• Similar productivity growth slowdowns
• Similar business cycles
• Different long-term trends in potential GDP

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Economic Growth inThree Large Economies
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Growth Rates Around the World
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Benefits and Costs ofEconomic Growth

• Benefits
• Expanded production possibilities
• health care
• medical research
• space exploration
• roads
• environmental improvements (if resources are
  devoted to solving environmental problems)

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Benefits and Costs ofEconomic Growth

• Costs
• 1) Foregone consumption
• 2) Depletion of natural resources
• 3) Increased pollution
• 4) More frequent job and location changes