Econ 102 Introduction Instructor for Econ 102 Dr (Mrs) Nkechi S. Owoo nowoo@ug.edu.gh OH- Fridays: 12- 1pm Format of Course Instruction for this semester Other lecturer Dr William Bekoe Course Outline Econ 102 Course Outline 2014_2015.doc Class email account

Econ 102- Lecture 1 General Expectatations Class Representative Attend all class sessions Class disruptions PARTICIPATE in class Class sample problems ‘Take-home’ questions Class Representative Class Email account?

An Introduction to Macroeconomics Lecture 1 An Introduction to Macroeconomics

Macroeconomic Goals Photographs of earth taken from satellites What does earth look like? Seas? Mountains? Customary view of earth surface Cars, trees, buildings… Different ways of viewing the economy Macroeconomic view Microeconomic view

Macroeconomic Goals Which view is better? Depends on aim But.. Why are computers getting better and cheaper every year? Why are earnings of skilled workers rising every year while earning of unskilled workers fall? But.. Overall level of economic activity in economy What percentage of the workforce is unemployed

Macroeconomic Goals Microeconomics Macroeconomics Behavior of individual decision makers and individual markets Who? Macroeconomics Broad outlines of the economy Although disagreement about how to make macroeconomy perform well; Economic growth Full employment Stable prices Why?

The History of Macroeconomics The Great Depression was a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s. Causes Stock bubbles Unregulated markets Contractionary monetary policy Consequences Decline in economic activity Rapid deflation Production – declined 30% Unemployment rate Increased from 3% to 25%

The History of Macroeconomics The Great Depression, 1929-1933 Revolution in economic thought Before: economy corrects itself After: decrease in aggregate demand cannot recover by themselves (J. M. Keynes) Monetary & fiscal policy needed Development of macroeconomics Keynes believed governments could intervene in the economy and affect the level of output and employment. During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession. In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money

Macroeconomic Concerns Three of the major concerns of macroeconomics are: Economic growth Unemployment Inflation

Economic Growth Typical Ghanaian living at beginning of the 20th century… Work a full week, and yearly salary of Ghc500 would buy a bit less than Ghc20,000 would buy today Expect to die at age of about 40 If fell seriously ill, doctor couldn’t help much- no X-ray machines, blood tests, etc Today, typical Ghanaian much better off…. Greater variety of goods and services. Can expect to live much longer than 40 years Better diagnostic medical instruments to cure diseases Machines to make life easier- laundry, dishes, cars, etc

Economic Growth What is responsible for dramatic changes? Increase in production of goods and services Real GDP Total quantity of goods and services produced in a country over a year Increasing faster than the population in some countries When real GDP rises faster than population growth, output per person and average standard of living rises Average person today consumes much more than in the year 1990

Economic Growth Figure 1 U.S. Real Gross Domestic Product, 1929–2006

Ghana GDP trend, 2005- 2013

Economic Growth What do you notice about the two graphs wrt to: GDP over time Rate of growth over time

Economic Growth Growth increases size of economic pie Everyone gets a larger slice... In principle Does growth really benefit everyone in practice?

Economic Growth Going forward: What makes real GDP grow in the first place? Why does it grow faster in some periods than in others? Why do some countries experience very rapid growth (e.g. US) while other countries hardly grow at all? Can government policy do anything to alter the rate of growth? Are there any downsides to such policies?

High Employment/Low Unemployment Economic growth not only important goal in macroeconomics Suppose real GDP growing at 4% but about 10% of workforce was unable to find work… Would the economy be performing well? Why/ why not?

High Employment/Low Unemployment Unemployment affects distribution of economic well-being among unemployed citizens People who cannot find jobs suffer loss of income and lower living standards Unemployment also affects those who have jobs Many people who could be working to increase the amount of goods and services in economy are not doing so Lower average standard of living

High Employment/Low Unemployment Unemployment rate Percentage of the workforce that is searching for a job but hasn’t found one High unemployment rate implies economy is not achieving its full economic potential

U.S. Unemployment Rate, 1920–2006 Figure 2 U.S. Unemployment Rate, 1920–2006

Ghana Unemployment Rate, 1992- 2010

Employment and the Business Cycle Real GDP and employment are closely related How?

Employment and the Business Cycle Real GDP and employment are closely related How? Firms produce more Hire more workers Firms produce less Lay off workers Business cycles Fluctuations in real GDP around its long-term growth trend

The Business Cycle Figure 3 The Business Cycle Time Real GDP Long-run upward trend of real GDP The business cycle fluctuation of actual output around its long-run trend. Expansion Recession Expansion

Employment and the Business Cycle Expansion A period of increasing real GDP Increasing employment Contraction A period of declining real GDP Decreasing employment Recession A contraction of significant depth and duration Depression An unusually severe recession

Unemployment Going forward.... Why is unemployment often higher than the intended target? What causes average unemployment rate to fluctuate from year to year? Why are there business cycles? Is there anything we can do to prevent recessions from occurring, or at least make them milder and shorter?

Inflation and Deflation an increase in the overall price level. Hyperinflation a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation. Deflation a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.

Stable Prices- Inflation Percentage increase in the average level of prices Extreme case- Zimbabwe For a period, inflation had been above 100% since 2001 In Nov 2008, annual rate of inflation was 89,700,000,000,000,000,000,000 (89.7 sextillion) Prices were doubling every day If an item cost you a dollar at the beginning of the month, would cost $1bn at the end of the month

Stable Prices A low inflation rate - important macroeconomic goal Inflation is costly to society Why?

Stable Prices No-one willing to hold domestic currency, or accept it as payment Extreme case- people waste time and resources bartering with each other Little time left for producing goods and services Average standard of living falls

Stable Prices ...However, some level of inflation good Why? What is Ghana’s current inflation rate?

Stable Prices Going forward.... What causes inflation/deflation? How would a moderately high inflation rate of say 7 or 8% harm society? How does a recession bring down the inflation rate, and how does the government actually create a recession? Why might a period of decreasing prices be a threat to the economy?

Next Class The circular flow of income and expenditure National Income Accounting Definition (and measurement) of national income