Macroeconomics The Great Depression was the springboard to modern macroeconomics. Macroeconomics is the study of aggregate economic behavior, of the economy as a whole. The Great Depression was the springboard to modern macroeconomics. Macroeconomics is the study of aggregate economic behavior, of the economy as a whole. Macroeconomics focuses on the big picture; microeconomics focuses on the small picture. LO-1

Assessing Macro Performance There are three basic measures of macro performance: Output (GDP) growth Unemployment Inflation There are three basic measures of macro performance: output (GDP) growth, unemployment, and inflation. These three things tell us how the economy is doing. LO-1

GDP Recall that GDP is the total value of output (goods and services) produced in an economy during a given period of time. It is measured by the Bureau of Economic Analysis (www.bea.gov), an agency within the Department of Commerce. GDP is the total output produced in an economy during a given period of time. LO-1

The Business Cycle The business cycle is the alternating periods of economic growth and contraction experienced by the economy. It shows the rise and fall of the economy over time. The business cycle is the alternating periods of economic growth and contraction experienced by the economy. It shows the rise and fall of the economy over time. LO-1

Figure 10.1

Real GDP Business cycles are measured by changes in real GDP: Real GDP is the inflation-adjusted value of GDP or the value of output measured in constant prices. Nominal GDP is measured in current prices. Business cycles are measured by changes in real. Real GDP is the inflation-adjusted value of GDP or the value of output measured in constant prices. Nominal GDP is measured in current prices. As stated earlier, real GDP is the better measure because it allow comparisons from one year to another. LO-1

The Great Depression This was the most prolonged departure from our long-term growth path. Real GDP fell by 30% between 1929-1933. The economy started to grow again in 1934. Total output declined once again in 1936-1937. The Great Depression was the most prolonged departure from our long-term growth path. It was the worst economic catastrophe in U.S. history. Real GDP fell by 30% between 1929 and 1933. The economy started to grow again in 1934, but total output declined once again in 1936 and 1937. LO-1

Recession A recession is a decline in total output (real GDP) for two or more consecutive quarters. It is a slump or downturn in the economy. We rely on the National Bureau of Economic Research (www.nber.org) as our official designator of recessions. A recession is a decline in total output (real GDP) for two or more consecutive quarters. It is a slump or downturn in the economy. LO-1

Table 10.1

Recent Recessions 1981-1982: Lasted 16 months, with an unemployment rate of 10.8%, the highest since the 1930s. 1990-1991:A very brief recession, lasting only 8 months. 2001: A brief and mild recession occurred from March to November 2008-09: A significant decline in output along with failures in financial and real estate markets. There have been three recessions in recent years. In 1981-1982, there was a recession that lasted 16 months. The unemployment rate reached 10.8%, the highest since the 1930s. In 1990-1991 there was a very brief recession, lasting only 8 months. In 2001 there was a brief and mild recession that occurred from March to November of that year. In 2008-09, a strong recession occurred along with failures in financial and real estate markets LO-1

Unemployment Unemployment is the inability of labor-force participants to find jobs. When output declines, jobs are eliminated. It is measured by the Bureau of Labor Statistics (www.bls.gov), an agency within the Department of Labor. Unemployment is the inability of labor-force participants to find jobs. When output declines, jobs are eliminated. Output and unemployment are inversely related. When output is down, unemployment is up. LO-2

The Labor Force The labor force consists of everyone over the age of 16 who is actually working, plus all those who are not working but are actively seeking employment. The labor force consists of everyone over the age of 16 who is actually working plus all those who are not working but are actively seeking employment. About half of the total population of the U.S. is in the labor force. Certain groups, such as retirees, stay-at-home moms, and students are not included. LO-2

Figure 10.3

The Unemployment Rate The unemployment rate is the proportion of the labor force that is unemployed: Unemployment rate= number of unemployed size of labor force The unemployment rate is the proportion of the labor force that is unemployed. The unemployment rate equals the number of unemployed people divided by the size of the labor force. The unemployment rate is calculated monthly by the Department of Labor. LO-2

Figure 10.4

Inflation The biggest fear as an economy reaches full employment is inflation. As an economy reaches its production possibilities, costs rise, pushing up prices. It is measured by the Bureau of Labor Statistics (www.bls.gov), an agency within the Department of Labor. The biggest fear as an economy reaches full employment is inflation. Inflation is a continual increase in overall prices. As an economy reaches its production possibilities, costs rise, pushing up prices. LO-3

Relative versus Average Prices Inflation is an increase in the average level of prices, not a change in any specific price. Deflation is a decrease in the average level of prices of goods and services. The relative price is the price of one good in comparison with the price of other goods. Inflation is an increase in the average of prices, not a change in any specific price. Inflation means that prices in general are rising, but not necessarily all prices. Deflation is a decrease in the average level of prices of goods and services. Deflation is the opposite of inflation. The relative price is the price of one good in comparison with the price of other goods. LO-3

The Price-Stability and Policy Goal Price stability is the absence of significant changes in the average price level. The Full Employment and Balanced Growth Act of 1978 establishes a goal for economic policy to hold the rate of inflation at under 3%. Price stability is the absence of significant changes in the average price level. The Full Employment and Balanced Growth Act of 1978 establishes a goal for economic policy to hold the rate of inflation at under 3%. Price stability means keeping the inflation rate low. LO-4