PRINCIPLES OF ECONOMICS Chapter 19 The Macroeconomic Perspective PowerPoint Image Slideshow

THE GREAT DEPRESSION, At times, such as when many people are in need of government assistance, it is easy to tell how the economy is doing. This photograph shows people lined up during the Great Depression, waiting for relief checks. At other times, when some are doing well and others are not, it is more difficult to ascertain how the economy of a country is doing.

3 of 24 John Maynard Keynes Much of the framework of modern macroeconomics comes from the works of John Maynard Keynes, whose The General Theory of Employment, Interest and Money was published in 1936, which emphasized short-term stability. “In the long-run, we are all dead.”

4 of 24 MACROECONOMIC GOALS Three of the major goals of macroeconomics are Sustained Economic Growth (about 3% per year) Low Unemployment (4-5% annually) Low Inflation (0-3% annually)

5 of 24 MACROECONOMIC POLICIES Fiscal Policy: Government policies of changing income taxes and public spending. Monetary Policy: The tools used by the Federal Reserve System to control the quantity of money, which in turn, affects interest rates.

MACROECONOMIC FRAMEWORK This chart shows what macroeconomics is about. The box on the left indicates macroeconomic goals. The middle box lists the framework economists use to analyze macroeconomic changes. The box on the right indicates the two tools the federal government uses to influence the macro economy.

7 of 24 MACROECONOMIC ACTIVITY The Circular Flow Diagram: A diagram showing the income received and payments made by each sector of the economy.

GROSS DOMESTIC PRODUCT GDP measures the market value of final goods and services produced within national boundaries, regardless who produced them. GDP = C + I + G + (EX – IM)

COMPONENTS OF GDP

10 of 35 GROSS DOMESTIC PRODUCT (GDP) Goods & Services Excluded from GDP Calculation Used goods: already included when produced Intermediate goods: already counted in final sale; avoid double-counting of same items Barter transactions: have no market value Do-it-yourself activities: hard to compute Paper transactions: do not add to production Illegal goods and services: are not supposed to be produced

11 of 35 NOMINAL VS. REAL GDP Nominal GDP: GDP measured at existing (current-year) prices Real GDP: GDP measured at constant (base-year) prices GDP Deflator: A measure of the general price level = (Nominal GDP / Real GDP) * 100 Economic Growth Rate = Percentage change of Real GDP Inflation Rate = Percentage change of Implicit GDP Deflator Per Capita GDP = Real GDP / Population

NOMINAL GDP Nominal GDP values have risen exponentially from 1960 through 2010.

GDP DEFLATOR Much like nominal GDP, the GDP deflator has risen exponentially from 1960 through 2010.

NOMINAL GDP VS. REAL GDP

REAL GDP U.S. Real GDP in 2012 was about $13 trillion. After adjusting to remove the effects of inflation, this represents a roughly 20-fold increase in the economy’s production of goods and services since the start of the twentieth century.

16 of 35 LIMITATION OF GDP GDP is not a Measure of Social Welfare Society is better off when crime decreases; however, a decrease in crime is not reflected in GDP. But, money spend on crime reduction is included in GDP. - Violent crimes falling 10% this year - Five extra police officers are hired at $80,000 each per year An increase in leisure time is an improvement in social welfare; but it is not reflected in GDP. Money spent on having more leisure is included in GDP. - Working three days a week - Club membership and expenses to playing golf two days a week

17 of 35 LIMITATION OF GDP Non-market transactions and do-it-yourself activities are not counted in GDP even though they amount to real production. - Stay home moms to raise children - Enrolling children at private day-care centers Externalities of production and consumption are not included in GDP. - Air pollution, water contamination - Paying for smog checks GDP is not a Measure of Social Welfare