1 Introduction to Macroeconomics Chapter 20 © 2006 Thomson/South-Western.
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Transcript of 1 Introduction to Macroeconomics Chapter 20 © 2006 Thomson/South-Western.
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Introduction to Introduction to MacroeconomicsMacroeconomics
Chapter 20Chapter 20
© 2006 Thomson/South-Western
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The National EconomyThe National Economy
Macroeconomics concerns the overall Macroeconomics concerns the overall performance of the economyperformance of the economy
The term The term economy economy describes the describes the structure of economic activity in a structure of economic activity in a community, a region, a country, a group community, a region, a country, a group of countries, or the worldof countries, or the world
Gross domestic product: the market Gross domestic product: the market value of final goods and services value of final goods and services produced in the United States during a produced in the United States during a given period, typically a yeargiven period, typically a year
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Flow and Stock VariablesFlow and Stock Variables
Flow VariableFlow VariableAn amount per period of timeAn amount per period of timeAverage spending per week, hours worked per Average spending per week, hours worked per
month, etc.month, etc.
Stock VariableStock VariableAn amount measured at a particular point in timeAn amount measured at a particular point in timeAmount of cash on hand you have nowAmount of cash on hand you have nowNumber of housing units in existence todayNumber of housing units in existence today
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Economic FluctuationsEconomic Fluctuations
Economic fluctuations Economic fluctuations The rise and fall of economic activity The rise and fall of economic activity
relative to the long-term growth trend of the relative to the long-term growth trend of the economyeconomy
Business cyclesBusiness cyclesVary in length and intensity but have some Vary in length and intensity but have some
features in commonfeatures in common
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Components of Business CyclesComponents of Business Cycles
Two phasesTwo phasesPeriods of expansionPeriods of expansionPeriods of contractionPeriods of contraction
DepressionDepressionSevere contractionSevere contractionLasting longer than one year and accompanied by Lasting longer than one year and accompanied by
high unemploymenthigh unemployment RecessionRecession
Milder contractionMilder contractionDecline in total output lasting at least two Decline in total output lasting at least two
consecutive quartersconsecutive quarters
66
Exhibit 1: Hypothetical Business FluctuationsExhibit 1: Hypothetical Business FluctuationsContraction begins after a previous expansion has reached its peak and continues until the economy reaches a troughLong-term growth trend is shown by upward sloping straight line. Period between a peak and a trough is a contraction Period between a trough and subsequent peak is an expansion
77
Exhibit 2: Annual Percentage Change Exhibit 2: Annual Percentage Change in U.S. Real GDP from 1929 to 2003in U.S. Real GDP from 1929 to 2003
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Exhibit 3: U.S. – U.K. Annual Growth Exhibit 3: U.S. – U.K. Annual Growth Rates in OutputRates in Output
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Economic IndicatorsEconomic Indicators
Leading economic indicatorsLeading economic indicatorsVariables that predict, or Variables that predict, or lead to, lead to, a recession or a recession or
recovery; foreshadow a turning point in economic recovery; foreshadow a turning point in economic activity and predict, or lead to, upturns and downturnsactivity and predict, or lead to, upturns and downturns
Coincident economic indicatorsCoincident economic indicatorsThose measures that reflect peaks and troughs as they Those measures that reflect peaks and troughs as they
occuroccur Lagging economic indicatorsLagging economic indicators
Follow or trail changes in overall economic activityFollow or trail changes in overall economic activity
1010
Aggregate OutputAggregate Output
Aggregate outputAggregate outputTotal amount of goods and services Total amount of goods and services
produced in the economy during a given produced in the economy during a given periodperiod
Best measure is real gross domestic product, Best measure is real gross domestic product, or real GDPor real GDP
Aggregate demandAggregate demandThe relationship between the economy’s The relationship between the economy’s
price level and the quantity of aggregate price level and the quantity of aggregate output demandedoutput demanded
1111
Price LevelPrice Level
Average price of aggregate output is called the price level
A composite measure reflecting the prices of all goods and services in the economy relative to prices in a base year
The price level in the base year has a benchmark value of 100
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Price LevelPrice Level
Price levels in other years are expressed Price levels in other years are expressed relative to the base-year price levelrelative to the base-year price level
Price level or price index used to makePrice level or price index used to makeComparisons in prices across timeComparisons in prices across timeAccurate comparisons of real aggregate Accurate comparisons of real aggregate
output over timeoutput over time
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GDP Price IndexGDP Price Index
Real GDP: Gross domestic product after Real GDP: Gross domestic product after adjusting GDP for price changesadjusting GDP for price changes
The GDP price indexThe GDP price indexShows how the economy’s general price level Shows how the economy’s general price level
changes over timechanges over timeCan be used to convert production in different Can be used to convert production in different
years into dollars of constant purchasing poweryears into dollars of constant purchasing power
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Aggregate Demand CurveAggregate Demand CurveAggregate demand curve:Aggregate demand curve: shows the shows the
relationship between the price level in the relationship between the price level in the economy and the real GDP demanded, other economy and the real GDP demanded, other things constantthings constant
Sums demands of the four economic Sums demands of the four economic decision makers: households, firms, decision makers: households, firms, governments, and the rest of the worldgovernments, and the rest of the world
Among the factors held constant along a Among the factors held constant along a given aggregate demand curve aregiven aggregate demand curve areThe price levels in other countriesThe price levels in other countriesThe exchange rates between the U.S. dollar The exchange rates between the U.S. dollar
and foreign currenciesand foreign currencies
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Exhibit 4: Aggregate Demand CurveExhibit 4: Aggregate Demand Curve
Sums the demands of four economic decision makers: households, firms, governments, and the rest of the worldThe inverse relationship reflects the fact that as the price level increases, other things constant, purchases by the four major decision makers decline
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Aggregate Supply CurveAggregate Supply Curve
Shows how much output U.S. producers Shows how much output U.S. producers are willing and able to supply at each are willing and able to supply at each price level, other things constantprice level, other things constant
Assumed constant along an aggregate Assumed constant along an aggregate supply curve aresupply curve areResource prices, including wage ratesResource prices, including wage ratesThe state of technologyThe state of technologyThe rules of the game that provide The rules of the game that provide
production incentivesproduction incentives
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Exhibit 5:Aggregate Demand & SupplyExhibit 5:Aggregate Demand & Supply
Wage rates assumed constant along the AS curve; firms find a higher price level more profitable, so they increase real GDP suppliedEquilibrium occurs where the AD and AS curves intersectAlthough employment is not measured directly, firms must usually hire more workers to produce more output
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Exhibit 6: Decrease in Aggregate Exhibit 6: Decrease in Aggregate Demand from 1929 to 1933Demand from 1929 to 1933
AS
AD1929
11.9
865 Real GDP(billions of 2000 dollars)
AD1933
8.9
6360
The Great Depression can be viewed as a shift to the left of the AD curveThis resulted in a drop of both the price level and real GDP
Pri
ce le
vel (
2000
= 1
00)
1919
Short History of U.S. EconomyShort History of U.S. Economy
Age of Keynes: After the Great Age of Keynes: After the Great Depression to the Early 1970sDepression to the Early 1970sFederal budget deficit: amount by which Federal budget deficit: amount by which
federal outlays exceed federal revenuesfederal outlays exceed federal revenuesDemand-side economics: focus was on how Demand-side economics: focus was on how
changes in aggregate demand could promote changes in aggregate demand could promote full employmentfull employment
2020
Exhibit 7: Stagflation Between 1973-1975Exhibit 7: Stagflation Between 1973-1975
AD
AS1973
31.9
4.34
0
AS1975
38.0
4.31
The stagflation of the mid-1970s can be represented as a reduction in aggregate supply
Real GDP(trillions of 2000 dollars)
Pri
ce le
vel (
2000
= 1
00)
2121
Short History of U.S. EconomyShort History of U.S. Economy
Experience since 1980Experience since 1980Supply Side economics: federal government Supply Side economics: federal government
would provide incentives to increase the would provide incentives to increase the supply of labor and other resources by supply of labor and other resources by lowering tax rateslowering tax rates
Government debt: net accumulation of prior Government debt: net accumulation of prior deficitsdeficits
2222
Exhibit 8: Tracking U.S. Real GDP and Exhibit 8: Tracking U.S. Real GDP and Price Level Since 1929Price Level Since 1929