1. Chapter 4 – Goals of the Macroeconomy
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
&
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.

2. Goals & Problems of the Macroeconomy
Contents
Macroeconomy Overview
Unemployment & Full Employment
Employment & Unemployment Stats.
Inflation & Stable Prices
Deflation & Disinflation
Production Overview
Possible Policy Problem

3. Goals & Problems of the Macroeconomy
Chapter Objectives
To introduce the three fundamental areas on which macroeconomics focuses: employment, prices, and production.
To define unemployment, explain its consequences, and identify different types of unemployment.
To introduce common measures and statistics on employment and unemployment and discuss the interpretation of these data.
To discuss full employment.
To define inflation, explain its consequences, and identify its causes.
To introduce measures and statistics on inflation.
To distinguish between deflation and disinflation.
To define full production and economic growth.
To identify factors contributing to economic growth and to introduce some costs associated with growth.
To introduce GDP, the primary measure or production.
To define productivity and discuss changes in U.S. productivity over the years.

4. Macroeconomy Overview
4-1
Macroeconomy
Study of the operation of the economy as a whole.
Focuses on:
The roles of household, business, and government sectors.
Includes:
Aggregate employment & production
Unemployment
Inflation
Economic growth
Money
Government stabilization policies

5. Unemployment & Full Employment
4-2a
Employment Act of 1946
Legislation giving the federal government the right and responsibility to provide an environment for the achievement of full employment, full production, and stable prices.
Unemployment
Resources available for production are not being used.
Consequences of Unemployment
Economic loss for society
Unemployment intensifies the scarcity problem, and the loss to society is the goods and services that might have been enjoyed.
Individual hardships
Unemployment intensifies an individual’s struggle with scarcity because spending habits and lifestyles are altered due to the lack of employment.

6. Unemployment & Full Employment
4-2b
Types of Unemployment
Frictional Unemployment
Occurs when people are voluntarily out of work for a short period of time while searching for a job.
Cyclical Unemployment
Involuntary unemployment that results from a downswing in a business cycle, or recession.
Continues until the economy breaks out of the recession.
Structural Unemployment
Involuntary unemployment that results when a worker’s job is no longer part of the production structure of the economy.
Continues indefinitely; no prospect for rehire.
Full Employment
Occurs when only those voluntarily out of work are unemployed, or the unemployment rate includes only frictional unemployment.

7. Employment & Unemployment Statistics
Measures & Statistics Overview
Labor Force
All persons 16 years of age and older who are working or actively seeking work.
Participation Rate
Percentage of some specified group that is in the labor force.
Unemployment Rate
Percentage of the labor force that is unemployed and actively seeking work.

8. Employment & Unemployment Statistics
4-3b
Measures & Statistics Overview (cont.)

9. Employment & Unemployment Statistics
Measures & Statistics Overview (cont.)

10. Employment & Unemployment Statistics
4-3d
Measures & Statistics Overview (cont.)

11. Employment & Unemployment Statistics
Calculating Unemployment Statistics
Calculated:
By the U.S. Department of Labor, Bureau of Labor Statistics (BLS).
Monthly and annually.
Using results from the Current Population Survey.
Survey issued to a scientifically developed sample of households across the U.S. each month.
Considered employed if:
Did any work during the survey week as a paid employee.
Includes self-employed individuals.
Worked without pay for 15 or more hours in a family-operated business.
Was temporarily away from a job or business due to illness, weather, vacation, labor-management disputes, or personal reasons.

12. Employment & Unemployment Statistics
4-3f
Interpreting Unemployment Statistics
Factors to consider:
Discouraged Workers
Persons who drop out of the labor force because they have been unsuccessful for a long period of time in finding a job.
Regional differences in unemployment
Types of jobs held by the unemployed
Underemployment
Resources are not used to their fullest productive capability.

13. Employment & Unemployment Statistics
4-3g
Goal of Full Employment
Does not mean 100% of the labor force is working.
Rate associated with full employment has changed over the years due to factors such as:
Changes in the composition of the work force
Women used to have higher unemployment rates than men, but those rates are not comparable to male workers.
Duration and quantity of government assistance programs
May influence people’s decisions to remain out of work.
Growth in temporary and part-time work
Jobs are plentiful and people are counted as employed.
Natural Rate of Unemployment
Unemployment rate that includes the frictionally and structurally unemployed.

14. Inflation & Stable Prices
An increase in the general level of prices.
Hyperinflation
Extremely rapid increases in the general level of prices.
Consequences of Inflation
Intensifies scarcity when income does not rise as quickly as prices.
Penalizes some groups, such as savers receiving low interest rates.
Changes the value of assets.
Politically and socially destabilizing.

15. Inflation & Stable Prices
Nominal Income (Money)
Income measures in terms of current currencies.
Real Income
Income measured in terms of the goods and services that can be purchased with a particular amount of money income.
Cost of Living Adjustments (COLAs)
Arrangement whereby an individual’s wages automatically increase with inflation.

16. Inflation & Stable Prices
Cost of Living Adjustments (cont.)
FIGURE 4-1
The Purchasing Power of Income

17. Inflation & Stable Prices
4-4d
Inflation and the Interest Rate
Interest Rate
The price of money.
Determines the return to savers and lenders of money, and the cost to borrowers.
The Real Rate of Interest
Nominal, or stated, rate of interest minus the inflation rate.
Nominal interest rate adjusted for inflation.
Wealth and the Interest Rate
Wealth
Measure of the value of tangible assets.
Includes such items as real estate and corporate securities.

18. Inflation & Stable Prices
Social and Political Consequences of Inflation

19. Inflation & Stable Prices
Causes of Inflationary Pressure
Demand-Pull Inflation
Pressure on prices from the buyers’ side of the market.
Tends to occur when spending is greater than the productive capability of the economy, and when an economy is close to or at full employment.
Cost-Push Inflation
Pressure on prices from the sellers’ side of the market, particularly from increases in the costs of production.
Occurs due to increased costs of labor, raw materials, fuels, machinery, borrowing, and even attempts to increase profit.
Role of Expectations
Our expectations about inflation can cause inflation to occur.

20. Inflation & Stable Prices
4-4g
Measures of Inflation
Price Index
Measures changes in the price of an item or a group of items using a percentage scale.
Consumer price index
Producer price index
GDP price index
Constructing a Price Index
Base Year
Year against which prices in other years are compared in a price index.

21. Inflation & Stable Prices
4-4h
Constructing a Price Index (cont.)

22. Inflation & Stable Prices
Consumer Price Index
Measures changes in the prices of goods and services that consumers typically purchase.
FIGURE 4-6
Consumer Price Index: All Items and Various Categories
for Selected Years (1982–1984 = 100.0)

23. Inflation & Stable Prices
4-4j
Consumer Price Index (cont.)
FIGURE 4-2
Annual Percentage Changes in the Overall CPI

24. Inflation & Stable Prices
4-4k
Other Price Indexes
Producer Price Index (PPI)
Measures changes in the prices of goods that businesses buy, either for further processing or for sale to a consumer.
GDP Price Index
Price index used when calculating price changes for the entire economy.

25. Deflation & Disinflation
4-5
Deflation and Disinflation
Deflation
Sustained decrease in the general level of prices.
Disinflation
Slowing of the inflation rate.

26. Production Overview Full Production and Economic Growth (cont.) 4-6b
FIGURE 4-3
Economic Growth

27. U.S. Economic Growth: Real Output per Capita
Production Overview
4-6c
Achieving Economic Growth
Technology
Increase in knowledge about production and its processes.
Human Capital Investments
Investments, such as formal education, that increases the productivity of people.
FIGURE 4-4
U.S. Economic Growth: Real Output per Capita

28. Production Overview Costs of Economic Growth Measures of Production
Increased amounts of waste
Depletion of resources
Reasons to purchase new or better items
Dissatisfaction of possessions must be instilled in a person to encourage them to continually want replacement items.
Measures of Production
Gross Domestic Product (GDP)
Dollar figure that measures the value of all finished goods and services produced in an economy in one year.
Nominal GDP (Money GDP)
Measures the value of production in terms of prices at the time of production.
Real GDP (Constant GDP)
Money GDP adjusted to eliminate inflation.

29. Production Overview
4-6e
Measures of Production (cont.)

30. Money GDP, Real GDP, and the GDP Price Index for Selected Years
Production Overview
4-6f
Assessing U.S. Production
TABLE 4-8
Money GDP, Real GDP, and the GDP Price Index for Selected Years

31. Production Overview Underground Economy
Productive activities that are not reported for tax purposes and are not included in GDP.
Nonmarket productive activities
Volunteer work, maintaining your car, etc.
Unreported work
Mowing lawns, full-time housecleaning, tips, etc.
Swapped services
Dental work in exchange for legal advice.

32. Growth in Labor Productivity: Business Sector, 1970–2001
Production Overview
4-6g
Productivity
Concept of assessing the amount of output produced by an economy’s resources.
Often measures specifically by output per worker.
TABLE 4-9
Growth in Labor Productivity: Business Sector, 1970–2001

33. Possible Policy Problem
4-7
Dilemma Facing Policymakers
Full production and full employment with inflation, or
Stable prices and less than full production with unemployment?

34. Chapter 4 – Goals of the Macroeconomy
This is the end of Chapter 4.
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the expressed written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.