Introduction to Macroeconomics Chapter 11.0 Syracuse Economics

Microeconomics: the study of the individual interdependent markets that make up an economy Macroeconomics: the study of the overall economy as a whole

Basic Macro questions Why doesn’t the economy always produce up to its full capacity? Ex. Great Depression Why are resources (like people) unemployed? What causes this to persist? Can high unemployment happen again?

Intervention and non-Intervention Most economists lie on a continuum between intervention and non- intervention Therefore, there are differing opinions as to what are appropriate policies for macro problems

Gross Domestic Product (GDP)GDP value of all new production in the nation in the year Full, sustainable capacity GDP – greatest level of production the economy can sustain over at he long haul We’ll call this full GDP

Recession 2 quarters (6 months) of falling actual GDP Depression Prolonged period of declining GDP If Real GDP declines for 8 quarters = Depression GDP not adjusted for inflationGDP

The Macroeconomic Variables Gross Domestic Product (GDP) –Real/Actual GDP (Y): the value of final goods/services produced in a year, adjusted for inflationReal/Actual GDP (Y): –Nominal GDP (Unadjusted GDP): total production at current prices –Full Sustainable Level of Real GDP (Y F ): the maximum level of real GDP the economy can sustain

Gross Domestic Product (GDP) What do the following say about the economy? –Y < Y F –Y = Y F –Y > Y F

Unemployment Rate Unemployment Rate (U) the percentage of the labor force that is unemployed –Labor Force: all people 16+ who are participating in or looking for work –The labor force consists of two groups: A. Employed B. Unemployed –Voluntarily Unemployed: all those people who are not working and do not want a job

Percentage of the labor force that is unemployed Great Depression- 25% WWII – 1% Currently- 9.7% There are different reasons why people are unemployed

Job search process

Different Types of Unemployment Frictional Unemployment: when people are looking for jobs and there are jobs out there, but the people haven’t found the jobs yet (job search) Structural Unemployment: a time when people are looking for jobs but there is a mismatch between the person seeking the job and the job itself Demand-Deficient (Cyclical) Unemployment: a lack of jobs for all those who want one Natural Rate of Unemployment (UN): the sum of the frictional & structural unemployment rates

Economists expect to find both frictional and structural unemployment These two together are called the natural rate of unemployment Full employment means at the natural rate Full employment does NOT mean zero percent unemployment Natural rate is generally believed to be between 4 and 7%

Demand-Deficient unemployment Not enough jobs for those who want one Loss of productive capacity, plus many other social costs 1929 – 3.2% 1933 – 25% Great Depression

Inflation A rise in the overall level of prices, or a fall in the purchasing power of money Costs of Inflation Efficiency Costs Equity Costs Calculated by using the Consumer Price Index or GDP Deflator

Inflation – rise in the overall level of prices, or a fall in the purchasing power of money Deflation – fall in the overall level of prices, or a rise in the purchasing power of money

Inflation imposes costs on an economy Efficiency cost - money loses some of the useful roles it usually plays Hyperinflation – unbelievably high inflation – Germany after WWI Money ceases to become a store of value, a medium of exchange, or a unit of account

Another cost of inflation Equity cost- when inflation causes a redistribution of wealth People with a fixed wage lose value because money is worth less and less Those who can’t take steps to account for inflation fall further and further behind

Indexing – automatically adjusting payments for wages/loans to account for inflation Ex. If Inflation goes up 10%, your paycheck goes up 10% COLA – cost of living adjustment Social Security is indexed

Nominal value- the actual number, the face value Real value- the underlying true value Ex. Earning $10,000 a year in 1963 vs. Earning $10,000 a year in 2003 Nominally, they are the same In real terms, 1963 was worth much more because of inflation

CPI CPI – Consumer Price Index Government selects a “market basket” of goods that a typical household consumes Food, clothes, housing, transportation, etc. As an orientation point, the government chooses a base yearEverything gets measured against the base year

Pmb in target year / Pmb in base year X 100 Base year will always have a value of 100 If 5095/4450 X 100 = 114 Then 114 is the price index for that target year It takes 114 cents to buy what used to cost 100 cents in the base year

One can use these measures to calculate the inflation rate CPItarget /CPIbase year X 100% 114/100 X 100% = 14% This tool allows use to transform nominal values into real values

Nominal value = (Real value) X (Price level) Or (Nominal value) / (Price level) = Real value When comparing over time, Keep it real