Macroeconomics: the big picture

Lesson MACRECONOMICS: The big picture Chapter 14 In this chapter we will learn: • ➤ An overview of macroeconomics, the study of the economy as a whole, and how it differs from microeconomics • ➤ The importance of the business cycle and why policy makers seek to diminish the severity of business cycles • ➤ The meaning of inflation and deflation and why price stability is preferred 14 Chapter Macroeconomics Difference between Macroeconomics and Microeconomics: • Microeconomics focuses on how decisions are taken by individuals and firms, and the consequences of their decisions • Macreconomics studies the aggregate behavior of the economy How the actions of individuals and firms interact to produce a particular economy wide level of economic performance 14 Chapter Macroeconomics 14 Chapter Macroeconomics • Attention: you don’t apply the supply and demand analisys to every good and then sum the results! The behavior of the macroeconomy is, indeed, greater than the sum of individual actions and market outcomes • The “Paradox of Thrift”: …a seemingly virtuous behavior like increase saving in case of expected hard times may end up hurting everybody, people will end up worse off than if they don’t act so responsibly… 14 Chapter Macroeconomics • A key insight into macroeconomics is that in the short run—a time period consisting of several years but typically less than a decade—the combined effect of individual decisions can have effects that are very different from what any one individual intended, effects that are sometimes perverse 14 Chapter Macroeconomics Macroeconomic Policy • The area of microeconomics, in general, suggests a limited role for government intervention We studied some cases of intervention that leave the economy worse off • Economists generally believe there is a much wider role for government to play in macroeconomics—most importantly, to manage short-term fluctuations and negative events in the economy 14 Chapter Macroeconomics 3.Economic Aggregates • Economic aggregates are economic measures that summarize data across different markets for goods, services, workers, and assets a) Aggregate Output: the total output ( or production) of the economy over a given time period 14 Chapter Macroeconomics b) Aggregate Price Level: a measure of the overall level of prices in the economy c) Investment spending: increase in the economy’s supply of productive physical capital Like machines and buildings 14 Chapter Macroeconomics Birth of modern macroeconomics • The Great Depression 10 14 Chapter 10 Macroeconomics • Has the Business Cycle Been Tamed? 23 14 Chapter 23 Macroeconomics • In macroeconomics we talk about the overall (general) price level of all the final goods and services in the economy • The aggregate price level (APL) is the overall price level for final goods and services in the economy • A rising aggregate price level is inflation • A falling aggregate price level is deflation 24 14 Chapter 24 Macroeconomics • Inflation = a sustained rise in the general level of prices • Deflation = a sustained decline in the general level of prices (negative inflation rate) • The inflation rate is the annual percent change in the aggregate price level • The measures of the aggregate price level: The Consumer Price Index (CPI) GDP Deflator 25 14 Chapter 25 Macroeconomics USA: 26 14 Chapter 26 Macroeconomics Japan: 27 14 Chapter Year Inflation rate % 1990 2.4 1991 3.0 1992 1.7 1993 0.6 1994 0.1 1995 -0.4 1996 -0.8 1997 0.4 1998 -0.1 1999 -1.4 2000 -1.6 2001 -1.6 27 Macroeconomics High levels of inflation: One interesting recent case is Zimbabwe’s hyperinflation: 6.5 × 10E108% (Forbes Asia, 22 Dec 08) 28 14 Chapter 28 Macroeconomics • Other extreme cases: Country Beginning End Average monthly inflation % Austria Oct 1921 Aug 1922 47 Germany Aug 1922 Nov 1923 1x10E10 Greece Nov 1943 Nov 1944 4.7x10E6 Hungary Mar 1923 Feb 1924 44 Hungary Aug 1945 Jul 1946 3.8x10E27 Poland Jan 1923 Jan 1924 699 Russia Dec 1921 Jan 1924 1.2x10E5 29 14 Chapter 29 Macroeconomics Problems with inflation and deflation: Inflation: • It will discourage people from holding cash, because cash loses value over time if the APL is increasing • In extreme cases ( Eg Hyperinflation ) people may prefere to return to barter or use foreign currencies instead of the national currency 30 14 Chapter 30 Macroeconomics Deflation: • If the APL decreases, holding cash that gains value over time becomes more interesting than investing in new factories and other productive assets This can make a recession worse • The economy has price stability when the aggregate price level is changing only slowly 31 14 Chapter 31 Macroeconomics • A nominal measure is a measure that has not been adjusted for changes in prices over time • A real measure is a measure that has been adjusted for changes in prices over time Example: Nominal Wage and Real Wage 32 14 Chapter 32 Macroeconomics • The real wage is a better indicator of the actual change in the workers’ purchasing power over time We can see how the wealth condition of the workers has changed over time • Example: Year 1: w=100,000 Y Year 2: w=110,000 Y Year 3: w=121,000 Y 33 14 Chapter 33 Macroeconomics • If it is the real wage the worker has really more money than the previous year If for example inflation is 10% every year, and this is the nominal wage, there is no change in wealth for the worker • In the USA between 1948 and 2002 the nominal wage increased 20 times, but the real wage increased times 34 14 Chapter 34 Macroeconomics Some Examples • Japan: 35 14 Chapter Year Inflation rate Output growth % rate % Unemploymen t rate % 1990 2.4 5.3 2.1 1991 3.0 3.1 2.1 1992 1.7 0.9 2.2 1993 0.6 0.4 2.5 1994 0.1 1.0 2.9 1995 -0.4 1.6 3.1 1996 -0.8 3.5 3.4 1997 0.4 1.8 3.4 1998 -0.1 -1.1 3.4 1999 -1.4 0.8 4.1 2000 -1.6 1.5 4.7 2001 -1.6 -0.7 5.0 35 Macroeconomics More about the “Great Depression”: USA: 36 14 Chapter Year Unemployment rate % Output growth rate% Price level 1929 3.2 -9.8 100 1930 8.7 -7.6 97.4 1931 15.9 -14.7 88.8 1932 23.6 -1.8 79.7 1933 24.9 9.1 75.6 1934 24.7 9.9 78.1 1935 20.1 13.9 80.1 1936 16.9 5.3 80.9 1937 14.3 -5.0 83.8 1938 19.0 8.6 82.2 1939 17.2 8.5 81.0 1940 14.6 16.1 81.8 1941 9.9 12.9 85.9 1942 4.7 13.2 95.1 36 37 14 Chapter 37 [...]... how the wealth condition of the workers has changed over time • Example: Year 1: w=100,000 Y Year 2: w=110,000 Y Year 3: w=121,000 Y 33 14 Chapter 33 Macroeconomics • If it is the real wage the worker has really more money than the previous year If for example inflation is 10% every year, and this is the nominal wage, there is no change in wealth for the worker • In the USA between 1948 and 2002 the. .. 16 Macroeconomics • The unemployment rate is a good indicator of the conditions in the job market • In case of recession the unemployment rate increases • In case of expansion the unemployment rate decreases 17 14 Chapter 17 Macroeconomics Aggregate Output • Aggregate output is the economy’s total production of final goods and services for a given time period Or more simply it is the total amount of... Chapter 19 Macroeconomics • Final goods: Are the goods purchased by their ultimate users 20 14 Chapter 20 Macroeconomics Controlling the business cycle: • There are two main concerns for economists, recessions an inflation • Policy efforts undertaken to reduce the severity of recessions and to rein in excessively strong expansions are called stabilization policy • There are 2 kinds of stabilization policies... economy • The aggregate price level (APL) is the overall price level for final goods and services in the economy • A rising aggregate price level is inflation • A falling aggregate price level is deflation 24 14 Chapter 24 Macroeconomics • Inflation = a sustained rise in the general level of prices • Deflation = a sustained decline in the general level of prices (negative inflation rate) • The inflation... 10 recessions The average lasting time of the recessions is 10 months, and the average lasting time of the expansions is 57 months 12 14 Chapter 12 Macroeconomics What happens during a business cycle? • During a recession unemployment will increase, income and output level decrease and as a consequence the living standard will be lower 13 14 Chapter 13 Macroeconomics • Employment is the number of people... in the quantity of money in circulation or in interest rates, or both • Fiscal policy is a type of stabilization policy that involves changes in taxation or in government spending, or both 22 14 Chapter 22 Macroeconomics • Has the Business Cycle Been Tamed? 23 14 Chapter 23 Macroeconomics • In macroeconomics we talk about the overall (general) price level of all the final goods and services in the. .. people currently employed in the economy • Unemployment is the number of people who are actively looking for work but aren’t currently employed • The labor force is equal to the sum of employment and unemployment • Discouraged workers are nonworking people who are capable of working but have given up looking for a job 14 14 Chapter 14 Macroeconomics • Underemployment is the number of people who work... rise in the general level of prices • Deflation = a sustained decline in the general level of prices (negative inflation rate) • The inflation rate is the annual percent change in the aggregate price level • The measures of the aggregate price level: 1 The Consumer Price Index (CPI) 2 GDP Deflator 25 14 Chapter 25 Macroeconomics USA: 26 14 Chapter 26 Macroeconomics 2 Japan: 27 14 Chapter Year Inflation... time if the APL is increasing • In extreme cases ( Eg Hyperinflation ) people may prefere to return to barter or use foreign currencies instead of the national currency 30 14 Chapter 30 Macroeconomics 2 Deflation: • If the APL decreases, holding cash that gains value over time becomes more interesting than investing in new factories and other productive assets This can make a recession worse • The economy... 14 Macroeconomics • Underemployment is the number of people who work during a recession but receive lower wages than they would during an expansion due to fewer number of hours worked, lower-paying jobs, or both • The unemployment rate is the percentage of the total number of people in the labor force who are unemployed It is equal to: Number of unemployed workers x 100 Number of unemployed workers +