Post on 21-Dec-2015
Lecture 9: focusing on Macro Issues
Macro Questions What are the facts What is Real GDP? Policy issues Role of Government Practice with EIA to illustrate What will the exam cover?????
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Overheating?
Production expanded quickly in the United States during 1994/95/96.
This rapid growth caused fear that the economy was overheating.
An overheated economy is prone to increasing inflation and a balance of payments deficit.
What, if anything, can be done?
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Origins and Issues of Macroeconomics
Modern macroeconomics emerged during the Great Depression.
People began to doubt the free market economy.
John Maynard Keynes, in 1936, published The General Theory of Employment, Interest, and Money.
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Origins and Issues of Macroeconomics
Macroeconomic Problems
1) Economic Growth
2) Unemployment
3) Inflation
4) Deficits
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Origins and Issues of Macroeconomics
Short-Term Versus Long-Term Goals Keynes focused on the short-term
primarily• He felt the depression was caused by insufficient
private spending
• Government should increase its spending
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Origins and Issues of Macroeconomics
Short-Term Versus Long-Term Goals Long-term consequences were virtually
disregarded• “In the long run, we’re all dead”
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Origins and Issues of Macroeconomics
Short-Term Versus Long-Term Goals Today, macroeconomics is concerned
with:• Long-term economic growth and inflation
• Short-term business fluctuations and unemployment
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Origins and Issues of Macroeconomics
The Road Ahead The focus of macroeconomics has
shifted:• Depression
• Inflation of the 1970’s
• International economics of today
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Economic Growth
Economic growth is the expansion of the economy’s production possibilities.
Measured by real gross domestic product (Real GDP) The value of the total production of all the
nation’s farms, factories, shops, and offices linked back to the prices of a single year (1992)
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Economic Growth in theUnited States
The Growth of Potential GDP When an economy’s labor, capital, land, and
entrepreneurial ability are fully employed
Real GDP fluctuates around potential GDP
Growth slowed during the 1970s Productivity growth slowdown
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Economic Growth in theUnited States
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Economic Growth in theUnited States
Fluctuations Around Potential GDP The business cycle is the periodic but
irregular up-and-down movement in production.
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Economic Growth in theUnited States
Phases of the Business Cycle Recession
• Period during which real GDP decreases for two successive quarters
Expansion• Period during which real GDP increases
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Economic Growth in theUnited States
Turning Points Peak
• Expansion ends, recession begins
Trough• Recession ends, expansion begins
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The Most Recent U.S. Business Cycle
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Long-Term Economic Growth
in the United States
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Economic Growth Aroundthe World
Real GDP per person The growth rate of real GDP divided by
the population is used to compare growth rates over time and across countries.
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Economic Growth Aroundthe World
Growth rates in the U.S., Germany, and Japan have features that are distinct Similar productivity growth slowdowns Similar business cycles Different long-term trends in potential
GDP
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Economic Growth inThree Large Economies
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Growth Rates Around the World
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Benefits and Costs ofEconomic Growth
Benefits Expanded production possibilities
• health care
• medical research
• space exploration
• roads
• environmental improvements (if resources are devoted to solving environmental problems)
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Benefits and Costs ofEconomic Growth
Costs
1) Foregone consumption
2) Depletion of natural resources
3) Increased pollution
4) More frequent job and location changes
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