The Realm of Macroeconomics Where the telescope ends, the microscope begins. Which of the two has the grander view? VICTOR HUGO

Drawing a Line Between Macro and Microeconomics The Foundations of Aggregation – During economic fluctuations, markets tend to move up or down together.

Drawing a Line Between Macro and Microeconomics Macroeconomics focuses on economic aggregates Three major economic aggregates Output / GDP General price level / Inflation Employment / Unemployment

Objectives Output --- Growth General price level --- price stability, low inflation rate Employment --- full employment, low unemployment rate

Two evils: Recession and inflation  Recession –High unemployment –Stagnate economic growth  Inflation –Rapid increase in the price level

Recession versus expansion  Recession –Slow/negative growth –High unemployment rate  expansion –Raid growth –Low unemployment rate

Major economic events  The Great Depression,  The New Economics and growth in the mid-60s  The Stagflation,  Reaganomics,  Clintonomics, 1993 – 2000  Deficit surge and financial crisis under the Bush’s term, 2001 – 2008  Obama’s term: slow economic recovery

The growth rate of U.S. real GDP since 1870 Figure 5 8

The inflation rate in the United States since 1870 Figure 6 9

Growth and Inflation  Directly or inversely related?  Directly related prior to 1970s  In the great depression: GDP down and Price down  In 1960s GDP up rapidly as well as inflation

Growth and Inflation  Directly or inversely related?  In 1970s, the two evils come out together  GDP down but inflation accelerates  Stagflation

Supply and Demand in Macroeconomics  Aggregate supply (AS)  Aggregate demand (AD)

Demand side shifts  Demand-pull inflation GDP (y)  and P  Example: 1960s  Insufficient Demand caused Recession GDP (y)  and P  Example: Great depression

Insufficient Demand caused Recession Copyright © 2003 South-Western/Thomson Learning. All rights reserved. D 2 B Price Level S D0D0 D0D0 S E Domestic Product D2D2

Demand-pull inflation Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Q 0 Price P 0 D 1 A S D D S E Quantity (a) Price P 0 S D D S E Quantity (a) D 1

Supply-side shifts  Cost-push inflation GDP (y)  and P  Example: In the 1970s, stagflation  Productivity-induced growth GDP (y)  and P  Example: In the 1990s during the Clinton’s period. Rapid growth and low inflation rate.

Cost-push inflation and Stagnation Copyright © 2003 South-Western/Thomson Learning. All rights reserved. S 1 S 1 D D S 0 S 0 Price Level Real GDP A E

Economic Aggregates National Output  GDP (Gross Domestic Product) The sum of the money values of all final goods and services produced in the country during a year - Final goods: purchased by their ultimate users. - Intermediate goods: purchased as the inputs or for resale.  GNP (Gross National Product)... produced by the citizens of the country during a year.

Economic Aggregates National Output  Nominal GDP calculated at current prices  Real GDP calculated at constant prices

Calculating Nominal GDP Data from a model economy: Price ($)Quantity (b) PriceQuantity (b) Hamburger CDs T-Shirts

Calculating Nominal GDP  Nominal GDP in 1990 = 0.50 X X X 2 = = 13 (billion)  Nominal GDP in 2000 = 1.00 X X X 3 = = 39 (billion)

GDP Growth Rate The growth rate of GDP

Nominal GDP Growth Rate The nominal growth rate of GDP between 1990 – 2000 is:

Real Growth Rate  Nominal Growth is misleading because it has NOT corrected for inflation  To correct for inflation, we rely on the concept of real growth.

Real GDP  Real GDP is calculated at common price (base-year price, constant price).  Real GDP can be derived by 1. Adding up at common prices 2. Deflating the Nominal GDP by the inflation rate

Calculating Real Growth  Use the 1990 price as the common prices  Real GDP in 1990 (at 1990 price) = 0.50 X X X 2 = = 13 (billion)  Real GDP in 2000 (at 1990 price) = 0.50 X X X 3 = = 16.4 (billion)  The real growth rate of GDP is ( ) / 13 X 100% = 26.1% Only 26.1%.

Nominal versus Real Term  Learn how to read the table for macroeconomic data  Data (in billions of dollars) means using the current price or in nominal term  Data (in billions of 2000 dollars) means using the constant price in the year of 2000 or in real term

Nominal versus Real Growth in the recessions  Nominal growth data is misleading in economic recession

Nominal versus Real Growth  Nominal growth data is misleading in economic recession YearNominal Real (at 2000 price)

Nominal GDP, Real GDP, and Real GDP per Capita Copyright © 2003 South-Western/Thomson Learning. All rights reserved Year Nominal GDP (right scale) Billions of Dollars per Year $10,000 $9,000 7,000 5,000 3,000 8,000 6,000 4,000 1,000 2,000 0 Per-capita real GDP (left scale) Dollars per Year $35,000 25,000 15,000 Real GDP (right scale) 30,000 20,000 5,000 10,000 0

Limitations of GDP  Only market activity is included in GDP (underground, housekeeping work by housewives, etc).  Other welfare factors are overlooked, such as leisure, security, education, health, etc.  International comparison can be misleading. (undervalued currencies in developing countries)