Macroeconomics Broad Social Goals - PowerPoint Presentation

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Macroeconomics

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Broad Social Goals

Economic Freedom-

Freedom IndexEconomic Growth-GDPEconomic Stability-CPIEconomic Equity- Gini IndexEconomic Efficiency - Hard to measure MSB=MSC

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Macroeconomic Goals

Full Employment

Price Stability

Economic Growth

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Phases of the Business Cycle

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What causes fluctuations in output?

Irregular

innovation that sparks investment i.e. microchip, internet & railroad

Productivity changes-result in unexpected changes in resource availability.Monetary factors – too much money and to too little Political events- 9/11, war, peaceFinancial Instability- financial bubbles and bursts  Short run stickiness in prices prevent the economy from adjusting rapidly to shocks. Most effected by business cycles: consumer durable goods and capital goods. Nondurable consumers

goods

are somewhat insulated from the cycles.

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Economic Indicators

Leading Indicators

Avg

wkly hrs, manufacturing Avg wkly initial claims for unemployment Building permitsStock prices, S& P 500Money Supply, MM2Interest rate spread, 10-yr Treasury bonds less federal funds

Index of consumer expectation

Lagging Indicators

Avg duration of unemploymentManufacturing and trade inventoriesCommercial loans

Ratio of consumer debt to personal income

Change in labor cost per unit of output, manufacturing

Short term Interest rates

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The Circular Flow of Resources,

Goods, Services and Money Payments

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Circular Flow with Government

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GDP

Gross Domestic Product

,

is the market value of all final goods and services produced in a country in a given time period

GDP=

C+I+G+Nx

30% Goods

70% Services

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Consumer Spending (C)

Spending by households on goods and services such as food, rent, medical expenses and so on but does not include new housing. 2/3 of GDP

10% durable goods

30% nondurable goods

60% services

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Gross Investment (I)

Spending by business on machinery, factories, equipment, tools.

All construction-includes residential construction b/c they earn income if they are rented.

Changes in inventory

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Gross Investment

Gross Investment – (all investment-even replacement of broken equipment) Net investment plus depreciation

Net investment is the added capital

If gross is less than depreciation net investment is negative ex. Great Depression.Depreciation- capital used up in a year

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Gross Investment

Changes in inventory- count all goods that were produced even though it might not have been sold.

Inventories can increase, or decrease

increase in inventory producing more than it sold but counted.“draw down inventories” means sold more output than it produced (sold stuff from last year already counted)

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Net Exports (Nx or X-M)

Spending by people abroad on US goods and services (exports) minus spending by people in the US on foreign goods and services (imports)

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Government Spending (G)

Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways.

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Not included in GDP

Secondhand Sales

Illegal activities

Transfer payment Financial transactionsIntermediate Goods

Intermediate good: meat, bun, lettuce, tomato

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0 5 10 15 20 25 30

Greece

Italy

Spain

Portugal

Belgium

Sweden

Germany

France

Holland

United Kingdom

Japan

United States

Switzerland

GLOBAL PERSPECTIVE

The Underground Economy as a Percent of GDP

Source: The Journal of Economic Literature, 2000

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Two ways of computing GDP

Aggregate expenditures approach

AE=GDP=C+I+G+(X-M)

Factor income approachGDP=Y=wages +interest +rent + profitsY=C+S+TProduct Market

Resources Market

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Why do we have inflation, and why is inflation a problem?

Increase in the average price level over time.

Mostly a monetary problem but other reasons exist.

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Price Stability

Inflation

A rise in the general level of prices (1970s)

Deflation A decline in the general level of prices (Great Depression)

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Worst Inflation on Record

Germany Aug. 1922-Nov. 1923

Inflation Rate 1,020,000,000,000%

Before 1920, one mark would buy a full meal for 2By Nov. 1923, a foot high stack of 50M mark notes to feed one couple.German prices rose at the rate of 41 percent per dayHungary Aug. 1945- 1946

381,000,000,000,000,000,000,000,000,000

%

Octillions

x-mas price index

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Measurements of inflation

Two ways to estimate prices

Directly by constructing price indexes

Consumer Price Index (CPI)Producer Price Index (PPI)Indirectly by computing the implicit price deflator (the most inclusive index).GDP Price Deflator

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Price index for groceries

Market basket (in base year of 1960)

1 dozen eggs

2 chickens3 pounds hamburger Other things a typical family might buyPrice of basket =$100 in 1960Price of basket = $200 in 1970

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Calculations of Price changes

CPI=

cost of market basket

current-year cost of same market basket in base-year Price Change = Change in CPI Beginning CPI

X 100

X 100

CPI overstates or understates real GDP?

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Price index

The market basket does not change so any difference must be due to prices.

Price indexes however miss

Substitution effectNew goodsQuality changesDiscount storesChanges in products over time

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Measuring Short-Run Economic Growth

is to measure fluctuation in output

We measure increases in the quantity of goods and services produced in the economy.

Fluctuations in output are caused by greater or lesser utilization of the existing capital stock. We are actually measuring changes in real output because of more or less labor applied to the existing level of technology and plant equipment.

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Price Index

Current year cost

Base year cost

Base year always indexed at 100CPI and GDP Price deflator are both examples of a price indexNominal – values that increase or decrease with price levelReal – adjust for price changes X 100=

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Implicit price deflator

Estimate real GDP by determining what people buy now using base year prices

Changes in consumption patterns or new goods are reflected in the deflator unlike the CPI.

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Implicit price deflator

X 100

GDP deflator =

Nominal GDP

Real GDP

Ratio of current year prices to some base year

P deflator of 200 means that a current year price is twice its base year.

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Converting nominal GDP to

real

GDP using a price index

X 100

(In year 1)

index

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Have cars gotten cheaper?

Real Output Growth

Real GDP growth =

(real GDP yr 2 - real GDP yr 1) real GDP yr 1

(Output)

Elwood Haynes in his first car in 1894- $2,000

REVAi/G-Wiz i

electric car -

£9,995

x100

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Real GDP per Capita

Real GDP per Capita =

year 1 real GDP

population in Yr 1

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GDP and economic welfare

GDP ignores:

changes in heath and life expectancy

leisure time (early retirement)environmental qualitypolitical freedom and social justice

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Why do we have unemployment, and why is unemployment a problem?

Many reason for unemployment

Unemployment means that society has fewer products because workers are not working.

Imposes social and psychological costs on society

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Types of Unemployment

Frictional Unemployment

Structural Unemployment

Cyclical

Unemployment

Seasonal Unemployment

Other Employment Concepts

Natural Rate of Unemployment

Full Employment

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Frictional Unemployment

Workers voluntarily changing jobs; and by temporary layoffs.

Example: quit your job to look for a better one because you hate your boss.

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Structural Unemployment

Workers whose skills are not in demand by employers.

Example: typists that lack computer skills

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Cyclical Unemployment

Unemployment caused by an insufficient aggregate demand; recession.

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Full Employment

When the economy experiences only

frictional

and structural unemployment.Or Full employment occurs only when there is no cyclical unemployment. Full employment is less than 100% . Unemployment Map

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Definitions of Employed, Unemployed

and Unemployment Rate

Employed = everyone currently working, including part-time workers

Unemployed = people looking for work or temporarily laid off from work

Unemployment Rate(UR) =

Labor force(LF) = employed + unemployed

Labor force participation rate (LFPR) =

# of unemployed

X 100

labor force

# in labor force

X 100 adult population

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Employed, Unemployed, Not in labor force

People who have stopped looking are not counted as unemployed.

People are not consider part of the labor force if under the age of 16, not looking for work (house wife or retired) or institutionalized.

Unemployed includes people who are actively looking for work.

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Problems with the measurement

Discouraged workers –persons who have given up looking are no longer counted as unemployed.

Underemployed workers- people who are working part time but would like full time or who holds a job that requires a lower skill level than they possess.

Different groups experience different levels of unemployment rates

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Programs to Reduce Unemployment

Frictional

Job information

Employment servicesStructural Educational subsidiesJob training/ RetrainingWage Subsidies/ Employment Tax CreditsPublic Services EmploymentCyclical Fiscal Policy Monetary PolicyPublic Service EmploymentWage Subsidies/ Employment Tax Credit

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What determines economic growth?

Growth depends on:

Number of workers

The education and training of workers The technological advances The amount of machinery &technology labor has to work withThe basic material resourcesTrade

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Long Run Economic Growth

refers to changes in the productive capabilities of the economy through changes in amount of plant and equipment and technology

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How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?

Decisions of the Federal Reserve Bank determine the amount of money in the economy.

The amount of money in the economy determines the level of economic activity.

Monetary policy

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Which government policy affects output, growth, unemployment and inflation?

Government policy decisions on taxes and spending affects the level of economic activity.

Fiscal policy

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Deficit/Surplus/Debt

Tax Revenue – Government Spending=

Deficit

– negative balance government must borrow.Or Surplus – positive balanceDebt- The total accumulation of the deficits the Federal government has incurred through time. Total amount owed. US securities: Treasury bills, Treasury Notes, Treasury Bonds and US Saving Bonds

2008

2012

$15,574,428,564,198.34

$10,852,628,401,130.22

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A Trillion Dollar

1 Million Dollars

$10,000

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100 Million Dollars

1 Billion Dollars

1 Trillion Dollars

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National debt

is the sum of all securities issued by the US Treasury

US Debt

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US Deficit / Surplus

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US Deficit / Surplus

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Medicare 17% Medicaid 9%

ACA Subsidies 1%

SS 24% Unemployment

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Special Interest

Pork Barrel Spending

the politicians win political favor with a small group of highly valued local constituents by spending on projects that cannot others wise be economically justified. Logrolling trading votes to secure favorable outcomes can either diminish or increase in economic efficiency.