1. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 0 Macroeconomics: The Bird’s-Eye View

2. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 1 Macroeconomics  Macroeconomics  The study of the performance of national economies  The policies governments use to try and improve that performance  Macroeconomic policies  Government actions designed to affect the performance of the economy as a whole

3. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 2 Living Standards  Standard of living: The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable  In wealthy industrialized nations the standard of living is better than at any previous time or place in history

4. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 3 Economic Growth  Economic growth  A process of steady increase in the quantity and quality of goods and services the economy can produce  A process that says the more we produce the more we can consume  A process that brings improvement in the average person’s standard of living

5. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 4 Fig. 5.1 Output of the U.S. Economy, 1900-1999

6. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 5 Output Per Person  One reason for the increased growth is the rapid growth of U.S. population  More workers available to make more output. But, more people are sharing those goods and services  Hence, output per person is a better indicator of the average living standard over time

7. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 6 Fig. 5.2 Output per Person and per Worker in the U.S. Economy, 1900-1999

8. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 7 Productivity  Average labor productivity  Output per employed worker  Slowing productivity growth leads to less rapid improvements in living standards  Rate of improvement has slowed since the 1970s  1950-1973: 2.1%  1973-1999: <1%  1999-2000 it has picked up again

9. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 8 Recessions and Expansions  Growth is not always steady  Recessions: Slowdowns in economic growth  Depressions: Severe recessions  Expansions: Periods of rapid economic growth

10. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 9 Unemployment  Unemployment rate  The fraction of people who would like to be employed but can’t find work  Key indicator of the state of the labor market

11. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 10 Fig. 5.3 The U.S. Unemployment Rate, 1900-1999

12. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 11 Inflation  Inflation  The rate at which prices in general are increasing over time  Imposes a variety of costs on the economy  In recent years it has been relatively low

13. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 12 Fig. 5.4 The U.S. Inflation Rate, 1900- 1999

14. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 13 Interdependence among Nations  National economies are increasingly interdependent  Trade imbalances  Exist when the quantity of goods and services that a country sells abroad (exports) differs significantly form the quantity of goods and services its citizens buy from abroad (imports)  Trade deficits  Exist when imports are larger than exports

15. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 14 Fig. 5.5 Exports and Imports as a Share of U.S. Output, 1900-1999

16. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 15 Macroeconomic Monetary Policy  Monetary policy  Determination of the nation’s money supply  Changes in the money supply affect  National output  Employment  Interest rates  Inflation  Stock prices  International value of the dollar  Controlled by a central bank: The Federal Reserve System in the U.S.

17. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 16 Macroeconomic Fiscal Policy  Fiscal policy  Decisions that determine the government’s budget: expenditures and revenues of the governments  A Deficit  Government spends more than what is collected  A Surplus  Government spends less than what is collected

18. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 17 Structural Policy  Structural policy  A government policy aimed at changing the underlying structure, or institutions, of the nation’s economy  There are many forms of government policies; there is a move away from government control to a market-oriented approach in Eastern Europe

19. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 18 Positive v. Normative Analysis  Positive analysis  Addresses the economic consequences of a particular event or policy  Doesn’t judge whether those consequences are desirable  Normative analysis  Addresses the question of whether a policy should be used  Does involve the values of the person doing the analysis

20. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 19 Micro and Macro  Microeconomists  “Ground level”  Macroeconomists  “Bird’s-eye view”  Both use the basic principles of economics  Behavior of households individually  Behavior of households aggregated

21. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 20 Aggregation  Aggregation  The adding up of individual economic variables to obtain economy-wide totals

22. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 5 - 21 Plan of Attack  Part II-Introduction and Measurement  Part III-Long run  Provides important background for understanding short-term fluctuations  Part IV-Short-term fluctuations  Learn what happens during recessions and expansions  Learn how government policy changes economic performance  Part V-International trade