Introduction to Macroeconomics Chapter 23

Performance and Policy There are many pieces of data an economist can look at to measure the economy We will look at three major components: Real GDP (Gross Domestic Product) Unemployment Inflation

Performance and Policy Real means that they have adjusted the numbers for inflation Nominal means that they are just using the raw numbers Why is it more useful to use real instead of nominal? Read example p 473 Policymakers care about GDP because more output means more consumption ability

Performance and Policy GDP measures the FINAL goods and services produced within the borders of a country during a specific year We compare ourselves to other countries and use this data to see if we grew from one year to the next Does it make sense to assume the US grows in GDP from one year to the next? Do all nations grow in GDP annually?

2016 Data GDP by Country 1 - USA $18.57 Trillion 2 – China $11.39 T 3 – Japan $4.73 T 4 – Germany $3.5 T 5 – United Kingdom $2.65 T 6 – France $2.49 T 7 – India $2.25 T 8 – Italy $1.85 T 9 – Brazil $1.77 T 10 – Canada $1.53 T

Performance and Policy Unemployment When a person is willing and seeking work but unable to find a job Nations do not like this because it is wasting their resources (labor) It also prevents production of goods which prevents consumption One of the biggest issues is the high crime, political unrest, and poverty Magic number for US is 4%

Performance and Policy Inflation is an increase in overall prices Inflation causes a person to have to spend more money to buy the same products they bought last year It will cause people to have to make choices and sacrifices which means they will buy less Their savings accounts will be worth less than they expected ($1M dollars will not be enough to retire on these days)

Performance and Policy Macroeconomics seeks to clarify government power: Can governments promote long-run economic growth? Can they reduce the severity of recessions by smoothing out short-run fluctuations? Are fiscal or monetary policies more efficient? Is there a trade-off between lower rates of unemployment and higher rates of inflation? These questions are at the heart of Macroeconomics They help us understand the large differences between nations in growth, unemployment, and inflation

The Miracle of Modern Economic Growth The concept of economic growth is fairly new There was no real economic difference between Rome in AD 500 and 1500 The standard of living for Chinese peasants was the same in AD 100 as it was in 1800 While these civilizations experienced economic expansion, they also had proportional population expansion The Industrial Revolution ushered in the phenomenon of economic growth outpacing population growth

The Miracle of Modern Economic Growth In industrialized nations… If GDP grows consistently at 2%/year, then wealth will double every 35 years An income of $10,000 will become $20,000 over the course of 35 years After another 35 years, it will be at $40,000 Prior to the Industrial Revolution, the wealthiest nations were only 2-3x richer than the poorest nations Today, the wealthiest nations are, on average, more than 50x richer than the poorest

The Miracle of Modern Economic Growth Per capita GDP (PPP) Nation 2016 Per Capita GDP Qatar Macao, SAR Luxembourg Singapore Brunei $124,927 $114,430 $109,192 $90, 531 $76,743 Iceland $72,632 Norway Kuwait $70,590 $69,669 United Arab Emirates $68,245 Switzerland USA (13th) $61,360 $59,495 Burundi $551 Dem Rep of Congo $415

The Miracle of Modern Economic Growth Saving vs. Investing Saving occurs when spending is less than income Economic investment is when we create or expand a business through spending on capital goods There are opportunity costs/tradeoffs If we want economic investment in the future, we have to limit consumption in the present Households are the principle source of savings Businesses are the principle source of investment

The Miracle of Modern Economic Growth Household savings contribute to business investment You put your money in a savings account at Citi Corp Boeing wants to invest in a new production line; they need to borrow the cash in order to do so Citi Corp uses your savings (combined with other customers’ savings) to lend Boeing the money Boeing pays the loan back with interest Citi Corp pays interest into your savings account

The Miracle of Modern Economic Growth Investing can be tricky Expectations don’t always pan out Companies can experience shocks Unexpected changes in demand Unexpected changes in supply Stocks and Mutual Funds can be very profitable, can also destroy parts or all of investments

The Miracle of Modern Economic Growth Microsoft invested tons of money in developing the Zune MP3 player with video capability Released soon after the iPod; hoped to cash in on the popularity of portable digital music A demand shock occurred…nobody wanted the thing The iPod had already cornered the market Microsoft lost millions in the investment

The Miracle of Modern Economic Growth In the 1970s, OPEC decided to drastically cut oil production, and set an oil embargo against the United States This created a supply shock There was much less gasoline available in the US Created shortages and long gas lines

The Miracle of Modern Economic Growth Most economists believe that short-run fluctuations in GDP are caused by demand shocks Demand shocks create problems for companies because of “sticky prices” It takes time to enact price changes in response to changes in demand Plus, people would get annoyed if the price of Coca-Cola changed every other day Why doesn’t price of gasoline follow this precept? Inventory control and production are based on previous trends, but are ultimately a “best guess” Maintaining an inventory helps smooth out the rough spots

The Miracle of Modern Economic Growth Some products change prices more than others Raw materials more flexible vs. consumer goods and services Oil prices can change daily Gas prices change, on average, about every 2-3 weeks Coin-operated laundries change ever 4 years Particularly sticky goods can cause major economic problems They don’t fluctuate with the market

The Business Cycle