Introduction
Micro and Macro Economics 8UGjECt4 Important terms in Macroeconomics?
Macroeconomics is the study of issues that affect the economy as a whole. Examples are the effects of inflation, and unemployment on economic growth and economic well-being. What is Macroeconomics?
Divisions of Macroeconomics The science of macroeconomics is positive economics: the study of economic facts and theories and how they work. Policy practice of macroeconomics is concerned with policies to achieve goals.
Normative Macroeconomic Goals High growth Avoiding large swings in economic output Low unemployment Low inflation Low income inequality No poverty
Why These Goals? High growth Avoiding large swings in economic output Low unemployment Low inflation Income distribution Poverty
Normative Economic Goals Economic policy is dependent on normative economic goals. Political processes determine which goals have the highest priority. Once priority has been established, macroeconomics deals with the ways to achieve those goals
Goals: Output U.S. Real Gross Domestic Product
U.S. Recession?
GDP
Genuine Progress Indicator It adds in the economic contributions of household and volunteer work, but subtracts factors such as crime, pollution, and family breakdown
The World Values Survey
Working Hours
Goals: Unemployment The unemployment rate is the percentage of the labor force looking for work, but unable to find it.
U.S. Unemployment Each one-point increase in the unemployment rate is associated with: 920 more suicides 650 more homicides 4000 more people admitted to state mental institutions 3300 more people sent to state prisons 37,000 more deaths Increases in domestic violence and homelessness
Goals: Inflation Inflation is the continual increase in the average price of goods and services. Inflation usually increases as actual output rises above potential output and usually decreases if output falls below potential output. Policymakers may face a trade-off between high inflation and low unemployment.
U.S. Inflation
Inflation – The Great Moderation (median for developing- and GDP weighted mean for high-income)
Inflation in Zimbabwe
Poverty?
U.S. Poverty
Wage Inequality?
Measuring Inequality I (ratio of 90th to 10th percentile)
Measuring Inequality II (Gini Coefficient)
30 of 32 U.S. Wage Inequality Since the early 1980s, the relative wages of workers with a low education level have fallen; the relative wages of workers with a high education level have risen.
The Budget Balance The budget balance is the difference between tax revenues collected by the government and expenditures made by the government. If taxes are greater than expenditures there is a budget surplus. If expenditures are greater than taxes, there is a budget deficit. The budget balance is affected by both changes in the economy and fiscal policy.
U.S. Government Budget What is the current U.S. government ’ s surplus/deficit?
U.S. Government Deficit
The U.S. Budget Deficit, Since 1945 (Ratio to Output, in percent).
U.S. Trade Balance
Policies Used to Achieve Goals Demand-side policies Supply-side policies
Demand-Side Policies Monetary Policy Changes in the money supply implemented by the Federal Reserve Fiscal Policy Changes in government spending and/or taxes implemented by Congress and the president
Supply-Side Policies Supply-Side Policies are designed to increase potential output by encouraging: Productivity and innovation by the labor force Investment in capital Advances in technology
Models in Economics Models are simplified representations of relationships within an economy. Models are used to predict economic outcomes in different situations. Models have three ingredients Assumptions Exogenous variables determined outside the model Endogenous variables determined inside the model
Models II
Using a Model to Predict OPEC decreases the supply of oil to the United States. What happens to the price of gasoline? Q2Q2 Q1Q1 Price of Gasoline Demand Supply P2P2 P1P1 Quantity of Gasoline A decrease in supply shifts the supply curve to the left and increases price and decreases quantity.