Topic #12: Introduction to macroeconomics

Dr David Penn

Associate Professor of Economics and Director of the Business and Economic Research Center

Focus of macroeconomics Macroeconomics deals with economic

aggregates including: Employment and unemployment, Inflation and the level of prices, Output (the economy’s total production), and Trade balances and capital flows.

Beginnings of Macroeconomics: The Great Depression

Unemployment rate (percent of workforce) 1929: 3.2% (about three in a hundred) 1933: 24.9% (about one in four)

Output fell 27% from 1929 to 1933

Images from the Great Depression

Typical picture capturing the number of people who were unemployed and looking for a job. (Circa 1935)

Images from the Great Depression

Farm Security Administration: Destitute pea pickers in California. Mother of seven children. (Circa February 1936)

Images from the Great Depression

Dust Storm Near Beaver, Oklahoma. (July 14, 1935)

Images from the Great Depression

Farm Security Administration: farmers whose topsoil blew away joined the sod caravans of "Okies" on Route 66 to California. (Circa 1935)

Images from the Great Depression

Depression: "Runs on Banks": people milling about outside of bank. (Circa 1933)

Images from the Great DepressionDepression: Breadlines: long line of people waiting to be fed: New York City: in the absence of substantial government relief programs during 1932, free food was distributed with private funds in some urban centers to large numbers of the unemployed. (Circa February 1932)

Images from the Great Depression

The Unemployed Union: marchers south on Broadway: Camden New Jersey typical scene reflecting large population of unemployed in desperate need of work and looking for jobs. (Circa 1935)

Images from the Great Depression

Farm Security Administration: Migrant worker on California highway. (Circa 1935)

Output in the Great Depression

•Not until 1937 did output rise above its 1929 level.•By 1939, output was just 9% higher than in 1929.

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1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

Ten years later in 1939, the unemployment rate was still a very high 17%.

Unemployment

Still very high through 1940 ten years into the depression

Began to fall in 1941

Price level falls The general

level of prices fell greatly during the depression

Items that cost $10 in 1929 would cost $7.50 in 1933

Wage rates fell 17%

Great Depression

How did this happen? What can policymakers do to prevent future

depressions?

Great Depression

Up until the 1930s, economists believed the economy could be studied by summing up its parts. Manufacturing Agriculture Construction

In macroeconomics, the behavior of the whole economy is sometimes different than the sum of its parts

Great Depression

Up until the 1930s, economists believed the economy was largely self-regulating Unemployment would correct itself through

falling wage rates Interest rates would fall to encourage

investment Policy actions would make things worse

Stabilization Policy

•John Maynard Keynes – General Theory of Employment, Interest, and Money (1936)

Stabilization Policy

•Keynes’s theory: • the depression was caused by insufficient total demand;

• the depression will not end on its own; • the government needs to boost total demand with large increases in spending and borrowing.

Stabilization Policy

•Policy tools:• Fiscal policy:

• Government spending• Tax revenue

• Monetary policy:• Money supply• Interest rates

Topics for Macroeconomics Measuring aggregated economic activity Explaining long-term growth Explaining short-term fluctuations (business

cycle) Designing macroeconomic policy International issues (trade, currencies, capital

flows)

Questions for Next Class

How much did real GDP grow in the second quarter?

What major parts of GDP grew the most?