Chapter 20A

A First Look at Macroeconomics

Chapter 20

Economists began to study economic growth,
inflation, and international payments during the
1750s

Modern macroeconomics dates from the Great
Depression, a decade (1929-1939) of high
unemployment and stagnant production throughout
the world economy.

John Maynard Keynes book, The General Theory
of Employment, Interest, and Money, began the
subject.

Origins and Issues of
Macroeconomics

Short-Term Versus Long-Term Goals

Keynes focused on the short-term issues of
unemployment and lost production.

“In the long run,” said Keynes, “we’re all dead.”

During the 1970s and 1980s, macroeconomists
became increasingly concerned with the long-
term issues of inflation and economic growth.

Origins and Issues of
Macroeconomics

Economic growth

is the expansion of the economy’s

production possibilities - an outward shifting PPF.

We measure economic growth by the increase in real
GDP.

Real GDP - real gross domestic product - is the value of
the total production of all the nation’s farms, factories,
shops, and offices, measured in the prices of a single
year.

Potential GDP is the value of real GDP when all the
economy’s labour, capital, land, and entrepreneurial ability
are fully employed.

Economic Growth

Real GDP fluctuates around potential GDP in a business
cycle - a periodic but irregular up-and-down movement in
production.

Every business cycle has two phases:

1. A recession

2. An expansion

and two turning points:

1. A peak

2. A trough

The Business Cycle

Lev

real

Time

Peak

Trough

LO1

9-6

Potential
GDP

Benefits and Costs of Economic Growth

The main benefit of long-term economic growth is
expanded consumption possibilities, including more health
care for the poor and elderly, more research on cancer
and AIDS, better roads, more and better housing and a
cleaner environment.

The costs of economic growth are forgone consumption in
the present, more rapid depletion of non-renewable
natural resources, and more frequent job changes.

Economic Growth

Jobs

Between 1979 and 2008

The EU economy created 10.4 million jobs

The UK economy created 2.5 million jobs

The US economy created 42.3 million jobs

The record of job creation in the EU and UK could
be better!

Jobs and Unemployment

Unemployment

Unemployment is a state in which a person does not
have a job but is available for work, willing to work, and
has made some effort to find work within the previous four
weeks.

The workforce is the total number of people who are
employed and unemployed.

The unemployment rate is the percentage of the people
in the workforce who are unemployed.

A discouraged worker is a person who available for
work, willing to work, but who has given up the effort to
find work.

Jobs and Unemployment

Why Unemployment Is a Problem

Unemployment is a serious economic, social, and
personal problem for two main reasons:

• Lost production and incomes
• Lost human capital

Lost production and income is serious but
temporary.

Lost human capital is devastating and permanent.

Inflation

Inflation is a process of rising prices.

We measure the inflation rate as the percentage
change in the average level of prices or price
level.

The Consumer Price Index - the CPI - is a
common measure of the price level.

A falling price level - a negative inflation rate - is
called deflation.

Is Inflation a Problem?

Unpredictable changes in the inflation rate are a problem
because they redistribute income in arbitrary ways
between employers and workers and between borrowers
and lenders.

A high inflation rate is a problem because it diverts
resources from productive activities to inflation forecasting.

Eradicating inflation is costly because it brings a period of
greater than average unemployment.

Inflation

Government Budget Surplus and Deficit

If a government collects more in taxes than it
spends, it has a government budget surplus.

If a government spends more than it collects in
taxes, it has a government budget deficit.

Surpluses and Deficits

International Surplus and Deficit

If a nation imports more than it exports, it has an
international deficit.

If a nation exports more than it imports, it has an
international surplus.

The current account deficit or surplus is the
balance of exports minus imports plus net interest
paid to and received from the rest of the world.

Surpluses and Deficits

Five widely agreed policy challenges for
macroeconomics are to:

1. Boost economic growth

2. Stabilize the business cycle

3. Lower unemployment

4. Keep inflation low

5. Reduce government and international deficits

Macroeconomic Policy
Challenges and Tools

Two broad groups of macroeconomic policy
tools are :

•

Fiscal policy

—making changes in tax rates and

government spending

•

Monetary policy

—changing interest rates and

changing the amount of money in the economy

Review Quiz

Real GDP equals potential GDP when

____________.

a. economic growth is stronger than usual

b. labour, capital, land, and entrepreneurial

ability are fully employed

c. the business cycle is at a peak

d. economic growth is at its average rate

Review Quiz

Real GDP equals potential GDP when

____________.

a. economic growth is stronger than usual

b. labour, capital, land, and entrepreneurial

ability are fully employed

c. the business cycle is at a peak

d. economic growth is at its average rate

Review Quiz

In a business cycle, a peak is followed by a

recession, a trough, and then ____________.

a. a period of inflation

b. a peak

c. a period of increasing inflation and falling

unemployment

d. an expansion

Review Quiz

In a business cycle, a peak is followed by a

recession, a trough, and then ____________.

a. a period of inflation

b. a peak

c. a period of increasing inflation and falling

unemployment

d. an expansion

Review Quiz

John graduates from university and can’t find a job in
his field, so he takes a job driving a taxi 3 days a
week. John is discouraged because he cannot find a
job that uses his university degree. John is counted as
____________.

a. employed

b. unemployed because he has only a seasonal job

c. unemployed because he is a part-time worker

d. unemployed because he is discouraged

Review Quiz

a. employed

b. unemployed because he has only a seasonal job

c. unemployed because he is a part-time worker

d. unemployed because he is discouraged

Review Quiz

When an inflation occurs ____________.

a. all prices are rising

b. oil prices are rising

c. all families are spending more money on food

d. prices on the average are rising

Review Quiz

When an inflation occurs ____________.

a. all prices are rising

b. oil prices are rising

c. all families are spending more money on food

d. prices on the average are rising

Review Quiz

One measure of the price level is ____________.

a. the average level of oil prices

b. the Consumer Price Index

c. real GDP

d. the average level of food prices

Review Quiz

One measure of the price level is ____________.

a. the average level of oil prices

b. the Consumer Price Index

c. real GDP

d. the average level of food prices

Review Quiz

John borrows $5,000 from Helen, and he promises
to repay the money in one year. During the year,
inflation unexpectedly increases. The unpredicted
inflation creates an unexpected ____________.

a. gain for John and an unexpected loss for Helen

b. loss for John and an unexpected gain for Helen

c. loss for both John and Helen

d. gain for both John and Helen

Review Quiz

Sam borrows $5,000 from Sue, and he promises to
repay the money in one year. During the year,
inflation unexpectedly increases. The unpredicted
inflation creates an unexpected ____________.

a. gain for Sam and an unexpected loss for Sue

b. loss for Sam and an unexpected gain for Sue

c. loss for both Sue and Sam

d. gain for both Sam and Sue