Introduction to macroeconomics Lecture 1

Macroeconomic performance Key indicators: - the inflation rate: the percentage rate of increase of the general price level - the unemployment rate: the percentage of the labor force out of job and looking for work: - the growth rate: the percentage rate of increase of real GNP

Inflation The general price level is often going up The rate of inflation is often rising as well What does it mean? Money is loosing its value, public loses confidence in economic stability – threat of their economic security Macroeconomics explains: causes of inflation, its costs and possible methods to make the rate of inflation smaller

Unemployment Unemployment a major political issue People dislike unemployment A high unemployment means wasting scarce resources on a large scale Macroeconomics explains why the economy suffers from high unemployment and what can be done about it

Growth Economy is growing when its total production of goods and services is going up A growing economy each year means more jobs and a higher standard of living The growth rate is changing in a short run Business cycle: the movements of the economy through sequences of recessions and recoveries More or less regular pattern of expansion and contraction o ion real output around economy’s average or trend Actual and potential output ( full-employment level) Macroeconomics studies the causes of growth in the short run and the long run

Other macroeconomic issues Interest rates- the cost of borrowing money and the return to lending money; affects the decisions about future, about saving and investment Budget deficit- the difference between government spending and receipts Trade deficit – the excess of imports over exports

The circular flow of income and spending Interactions between firms and households in the economy as whole Flow of services of factors of production from households to firms Matched by income paid by firms to households Matched in the opposite direction is a flow of goods and services from firms to households Paid for by households’ spending from their incomes

More details on unemployment Unemployment and the production possibility frontier shows a combination of output at which economy is fully employing labor Macroeconomics explains why the unemployed are not put quickly back to work How does the economy avoid a continuing fall in production and employment

More details on inflation Two cases of inflation: 1) the economy producing on the production possibility frontier and demand for goods goes up. Firms rise prices 2) inflation may take place even though the economy is not at full employment Macroeconomics explains why the situation (2) is possible

How to calculate rate of inflation? The rate of inflation: the growth of prices in a certain period of time Inflation rate 2010-2011: Inflation in 2011 = (CPI 2011 – CPI 2010/CPI 2010 x 100% Negative inflation or deflation- falling prices

More details on growth Growth: shift of the production possibility frontier - unemployed resources put back to work - the quantity of factors of production may increase or existing factors of production are more productive Macroeconomics should answer how to promote the growth

Growth rates Real growth rate 2011 = real GNP 2011 – real GNP 2010/real GNP 2010 x 100% It is positive most years but there are several years when output declines, the rate is negative Actual output ≠ potential output Per capita output as a measure of average standard of living

Inflation, unemployment and the rate of growth years UK US West Germany Japan Inflation 1960-73 5.1 3.2 3.3 6.1 1973-81 15.4 9.4 4.9 9.0 1981-85 6.9 5.5 3.1 1.3 Unemployment 2.9 5.0 0.8 6.3 1.2 11.0 8.5 7.0 2.5 Real rate of growth 4.2 4.8 10.5 0.5 2.4 2.0 4.0 1.8 2.6 1.1 4.3

Growth of world output 2005-2013 2005-2008 2009 2010 2011 2012 2013 World 3.3 -2.4 4.0 2.8 2.6 3.2 US 1.8 -3.5 3.0 1.7 1.5 2.0 Japan 1.3 -6.3 -0.5 EU 2.2 -4.3 1.6 0.7 New EU members 5.4 -3.7 2.3 2.9 3.1 Euro area 1.9 0.4 Economies in transition 7.1 -6.6 4.1 3.9 Developing economies 6.9 2.4 7.5 6.0 5.6 5.9

Real GDP (percentage changes) Average 1992-02 2015 2016 2017 2018 China 9,8 6.9 6,7 6,6 6,4 Germany 1,5 1,8 2,0 France 2,2 1,2 1,1 1,3 1,6 Greece … -0,3 -o.1 2,5 Japan 1,0 1,4 Poland 4,6 3,8 2,7 3,6 3,1 US 3,4 2,6 2,1 2,4 Euro area 1.5 1,7 Total OECD 2,8