Chapter 17 Macroeconomics: The Big Picture

1
Chapter 17Macroeconomics The Big Picture

• Real GDP
• Unemployment, Inflation, and Interest Rates
• Macroeconomic Theory and Policy

2
Macroeconomics

• Macroeconomics examines the workings and problems
  of the economy as a whole.
• Microeconomics deals with individual
  decision-making at firms and households
  interacting an individual market.
• Macroeconomics deals with an overall economic
  condition of an economy such as
• Output
• Unemployment
• Inflation

3
Real GDP

• Gross domestic product (GDP) measures the value
  of all the goods and services newly produced in
  an economy during a specified period of time
  (page 22).
• Real gross domestic product is adjusted for an
  inflation (the general increase in prices over
  time).

• Ex. Total amount of goods and services produced
  do not change from 2000 to 2001, but prices of
  all goods and services doubled.
• Real GDP remains the same.
• (Nominal) GDP is double in dollar term.

4
Figure 17.1Economic Growth and Fluctuations

5
Real GDP over Time

• Economic growth an upward trend in real GDP,
  reflecting expansion in the economy over time.
• Economic fluctuations swings in real GDP that
  lead to deviations of the economy from its
  long-term growth trend.
• Business cycles

6
Economic Growth

• The annual growth rate (percentage increase) of
  real GDP over last 30 years is 3 on average.
• Real GDP per capita real GDP/population.
• If real GDP grows faster than population growth,
  then real GDP per capital increases over time.
• ??Each individual in the economy can consume more
  goods and services.
• The annual growth rate of real GDP per capita
  over last 30 years is 1.7 on average.

7
Economic Fluctuations
8
Phases of Business Cycles

• Peak the highest point in real GDP.
• Trough the lowest point in real GDP.
• Recession a decline in real GDP that lasts for
  at least six months.
• Depression a huge recession.
• Great Depression in 1929-1933.
• Expansion an increase in real GDP.
• Recovery the early part of an expansion,
  immediately after the tough.

9
Figure 17.4Growth and Fluctuations Throughout
the Twentieth Century
10
Business Cycles in the U.S.

• Business cycles are not regularly occurring ups
  and downs.
• It depth and length vary.
• The average length of business cycle from peak to
  peak is 5 years.
• It varies from 1 year (1980-1981) to 11 years
  (1990-2001?).
• A recession lasts from 6 months (1980) to 43
  months (1929-1933).
• A decline in real GDP during recessions varies
  from 1.0 (1969-1970) to 32.6 (1929-1933).

11
Unemployment, Inflation, and Interest Rates

• Along business cycles (fluctuations in real GDP)
  the economic conditions change.
• Unemployment rate the number of unemployed
  people as a percentage of labor force (sum of
  unemployed and employed workers).
• Inflation rate the percentage increase in the
  average price of all goods and services.
• Interest rate the interest as a percentage of
  the amount loaned.

12
Figure 17.5The Unemployment Rate
13
Unemployment along Business Cycles

• Unemployment rate increases during recessions and
  decreases during expansions.
• Unemployment rate varies from 2 (1943) to 25
  (1933).
• A pattern of fluctuations of unemployment rate
  differs from one business cycle to another.
• Fluctuations of unemployment rate were much
  larger before 1950s.
• Unemployment rate had a general tendency to
  increase from late-1960s to mid-1980s, but to
  decrease from mid-1980s to 2000 along business
  cycles.

14
Figure 17.7The Ups and Downs in Inflation
15
Inflation along Business Cycles

• Inflation increases before each recession and
  then declines during each recession.
• Except for 1974-1975 recession
• Inflation had a general tendency to increase from
  mid-1960s to 1980, but to decrease in 1980s
  (disinflation).
• Deflation the general decrease in prices.
• Inflation rate may not be zero on average.

16
Figure 17.8The Ups and Downs in Interest Rates
17
Interest Rate along Business Cycles

• Interest rates rise before each recession and
  then decline during and after each recession.
• Similar pattern to inflation rate
• Interest rates had a general tendency to increase
  from mid-1980s to 1980s, but to decrease from
  1980s to early 1990s.

18
Real Interest Rate

• Real interest rate the (nominal) interest rate
  minus the expected inflation rate.
• Ex. The (nominal) interest rate is 5 and the
  expected inflation rate is 3.
• ? Real interest rate is 2 ( 5 - 3).

• Inflation makes money returned in future worth
  less.
• Lenders require a higher (nominal) interest rate
  to compensate for the decline in the value of
  funds.

19
Macroeconomic Policy

• Two goals of macroeconomic policy
• Raise long-term growth
• Reduce the size of short-term fluctuations
• Two types of macroeconomic policy
• Supply side policies concern with production of
  goods and services.
• Demand side policies concern with consumption of
  goods and services.

20
Fiscal and Monetary Policies

• Fiscal policy (conducted by the federal
  government) concerns with governments tax and
  spending.
• Monetary policy (conducted by the Federal Reserve
  System) concerns with the amount of money in
  economy and interest rate.