1. A FIRST LOOK AT MACROECONOMICS
Origins of macroeconomics and the problems it deals with
Macroeconomic issues.
Economic growth
Unemployment
Inflation
Government budget deficits or surpluses.
Trade deficits or surpluses
Macroeconomic policy challenges
Tools for meeting macroeconomic goals.
Think about using MyEconLab to supplement this chapter. The data graphing tool enables you to make a large number of time series and scatter diagrams using US and international data over a long time period. If your classroom is online, use it in class. You can generate a lot of interest in and discussion of the data with this tool.

2. Origins and Issues of Macroeconomics
Study of economic growth, inflation, and international payments began during the 1750s.
Modern macro dates to Great Depression ( )
John Maynard Keynes, The General Theory of Employment, Interest, and Money
focused on short run - unemployment and lost production.
“In the long run, we’re all dead.”
During the 1970s and 1980s, macroeconomists became more concerned about the long-term—inflation and economic growth.

3. Economic Growth and Fluctuations
An outward shift of the Production Possibilities Curve.
An increase in “potential GDP”
Sources of growth
technology
more resources
Land, labor, capital, human capital
Pro-growth policies

4. Economic Growth and Fluctuations
Real GDP
$ value of all goods & services produced in an economy during one year, measured with a fixed set of prices.
Potential GDP
$ value of real GDP when all the economy’s labor, capital, land, and entrepreneurial ability are fully employed.
Signs that Real GDP < Potential GDP?
Can policies be implemented to correct problem?

5. Economic Growth and Fluctuations
During the 1970s and 1980s, there was a “slowdown in economic growth”
What could have caused this?
Answers: slowdown in labor force growth, technological growth, oil.

6. Economic Growth and Fluctuations
Over time, real GDP fluctuates more than potential GDP because of the business cycle

7. Economic Growth and Fluctuations
Every business cycle has four stages:
Recession
period during which real GDP decreases for at least two successive quarters
Trough
turning point between recession and expansion
Expansion
period during which real GDP increases.
Peak

8. Economic Growth and Fluctuations
The most recent U.S. cycle.

11. Economic Growth and Fluctuations
Long-term growth trend and cycles.

12. Economic Growth and Fluctuations
Why do growth rates vary across countries?

13. Economic Growth and Fluctuations
The Lucas Wedge
accumulated loss of output from a slowdown in the growth rate of real GDP per person.
approximately $50 trillion, or five year’s GDP, since 1960

14. Economic Growth and Fluctuations
The Okun Gap
gap between potential GDP and actual real GDP
another name for the output gap.
totaled $2.7 trillion since 1973 or about 3 months real GDP.

15. Economic Growth and Fluctuations
Benefits and Costs of Economic Growth
Benefits:
expanded consumption possibilities.
Costs:
Forgone consumption in the present
More rapid depletion of nonrenewable natural resources & environmental effects
More frequent job changes.
Distributional consequences

16. Jobs and Unemployment Jobs
The U.S. economy created around 2 million jobs a year, on the average during the 1990s.
But the number fluctuates and since 2001 the pace of job creation has been slow.

17. Jobs and Unemployment Unemployment labor force unemployment rate
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.
labor force
total number of people who are employed and unemployed.
unemployment rate
% of the labor force who are unemployed.
discouraged worker
available for work, willing to work, but who has given up the effort to find work.

18. Jobs and Unemployment Unemployment rate
rises during recession, falls during expansion.
During the 1930s, the unemployment rate almost hit 25 percent
The lowest rate occurred during WWII at 1.2 percent

19. Unemployment Around the World
U.S. unemployment, on average, lies in the middle of the other countries shown.

20. Inflation Inflation is a process of rising prices.
We measure the inflation rate as the percentage change in the average level of prices or the price level.
The Consumer Price Index—the CPI—is a common measure of the price level.

21. Inflation The inflation rate fluctuates, but is usually positive.
A falling price level—a negative inflation rate—is called deflation.

23. Inflation Around the World
U.S. inflation has been similar to that in other industrial countries
U.S. inflation has been much lower than that in developing countries

24. Is Inflation a Problem?
Income redistribution between borrowers and lenders
Tax system.
Diverts resources from productive activities to inflation forecasting.
Eradicating can be costly in terms of unemployment.

25. Surpluses and Deficits
Government Budget Surplus and Deficit
If taxes > spending: surplus.
If spending > taxes: deficit
Deficits tend to be countercyclical.

27. Surpluses and Deficits
International Surplus and Deficit
If a nation imports more than it exports, it has a trade deficit (or “international deficit”).
If a nation exports more than it imports, it has a trade 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.

29. Macro Policy Challenges and Tools
Five widely agreed policy challenges for macroeconomics are to:
Boost economic growth
Keep inflation low
Stabilize the business cycle
Maintain low levels of unemployment
Reduce government and international deficits

30. Macro Policy Challenges and Tools
Macro policy tools
Monetary policy
Federal Reserve
Interest rates
Fiscal policy
Taxes
Government spending