Chapter 23 An Introduction to Macroeconomics McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Macroeconomics is the study of the large economy as a whole. It is the study of the big picture. Instead of analyzing one consumer, we analyze everyone. Instead of one business we study all businesses. What is Macroeconomics? Why study the whole economy? The field of macroeconomics was born during the Great Depression. Government didn’t understand how to fix a depressed economy with 25% unemployment. Macro was created to: 1.Measure the health of the whole economy. 2.Guide government policies to fix problems. 2 Copyright ACDC Leadership 2015

23-3 Performance and Policy Real GDP –Corrects for price changes Nominal GDP –Uses current prices Unemployment –Actively seeking employment Inflation –Increase in overall level of prices

1.Promote Economic Growth 2.Limit Unemployment 3.Keep Prices Stable (Limit Inflation) In this unit we will analyze how each of these are measured. For all countries there are three major economic goals: 4 Copyright ACDC Leadership 2015

Goal #1 Promote Economic Growth How does a country measure economic growth? 5 Copyright ACDC Leadership 2015

23-6 Performance and Policy Can governments: –Promote economic growth? –Reduce severity of recession? Is monetary or fiscal policy more effective at mitigating recession? Is there a tradeoff between inflation and unemployment?

23-7 Economic Performance Output growth – Guess the percent! –3.1% per year , less robust recently Unemployment rate – Guess the percent! Target? –3-4% has historically been good, currently 5.5% Inflation rate – Guess the percent! Target? –Target – around 2%, recently it’s been lower –Why are we missing our targets in these categories recently?

U.S. GDP Growth 23-8

China GDP Growth 23-9

China vs. U.S

U.S. Unemployment Rate 23-11

U.S. Inflation Rate 23-12

23-13 Economic Growth Standard of living measured by output per person No considerable growth in living standards prior to Industrial Revolution Modern economic growth –Output per person rises –Not experienced by all countries

23-14 GDP Per Capita 2011

GDP Per Capita 15 Copyright ACDC Leadership 2015

World GDP Distribution 16 Copyright ACDC Leadership 2015

17 Copyright ACDC Leadership 2015

23-18 Savings and Investment Saving –Tradeoff current for future consumption Investment –Financial investment prospecting –Economic investment Newly created capital goods Banks and financial institutions

23-19 Expectations The future is uncertain Expectations affect investment Shocks –What happens is not what you expected – good or bad Demand shocks –Ex: exchange rates, credit crunch Supply shocks –Ex: drought (crops), war (oil)

23-20 Shocks Optimal Output = min ATC Demand shocks and flexible prices –Price falls if demand low –Sales unchanged Demand shocks and sticky prices –Maintain inventory –Sales change –Business cycles - growth and recession

23-21 Demand Shocks Cars per week Price DMDM DLDL DHDH 900 $40,000 $37,000 $35,000 Flexible Prices

23-22 Demand Shocks Cars per week DMDM DLDL DHDH $37,000 Sticky Prices Price

23-23 Sticky Prices Can help explain fluctuations is GDP Average months between price changes Which goods are more inelastic? Coin-operated Beer4.3 Laundry Machine46.4 Microwave Ovens3.0 Newspaper29.9 Milk2.4 Haircut25.5 Electricity1.8 Taxi fare19.7 Airline ticket1.0 Veterinary service14.9 Gasoline0.6 Magazine11.2 Computer software 5.5

23-24 Sticky Prices Many prices sticky in short run –Consumers prefer stable prices –Firms want to avoid price wars –Menu costs –Elasticity All prices flexible in long run –Firms adjust to unexpected, but permanent changes in demand –“sticky,” not “stuck”