Frank and Bernanke Ch. 5: Macroeconomics: The Bird’s- Eye View of the Economy.

Frank and BernankeFrank and Bernanke

Ch. 5: Macroeconomics: The Bird’s-Eye View of the Economy

Econ 202 2

Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html

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The United States Business Cycle, 1890-1940The United States Business Cycle, 1890-1940


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The United States Business Cycle, 1950-1990The United States Business Cycle, 1950-1990


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Great DepressionGreat DepressionRoaring twenties: by September 1929 stock

prices were 40% above their fundamental value.

The Fed tried to cool off the market by raising interest rates (providing less money in the economy).

The slow-down was viewed in terms of typical market adjustments.

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Great DepressionGreat DepressionGovernments tried to balance budgets,

further slowing down the economy.Huge deflation made bank collateral

worthless in defaults.Bank failures triggered bank panics.Financial system ground to a stop.Falling prices provided incentives to

postpone investment.

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Great DepressionGreat DepressionGold standard restricted countries to expand

money supply only when they acquired gold as a result of trade surpluses.

Those countries that abandoned the gold standard (Scandinavian countries, Japan) slipped away from the Great Depression.

To acquire gold, countries passed protectionist policies (Smoot-Hawley in US).

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Spiral of World Trade: Jan. Spiral of World Trade: Jan. 1929 to Mar. 19331929 to Mar. 1933

0

500

1000

1500

2000

2500

3000Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Imports of 75 Countries. Source: E. Ray Canterbury, A Brief History of Economics,(World Scientific, Singapore: 2001), p. 209.

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MacroeconomicsMacroeconomics

The need to view the economy beyond the supply and demand of individual markets grew from the experience of the Great Depression.

John Maynard Keynes published his General Theory in 1936.

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Keynesian MacroeconomicsKeynesian MacroeconomicsKeynes claimed that in the short run total

expenditures (aggregate demand) can fall creating unemployment, recessions, depressions.

It is the responsibility of the government to stimulate the economy in these cases through monetary and fiscal policies.

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Modern MacroeconomicsModern MacroeconomicsKeynesian macroeconomics only

concentrates on the short run.Living standards depend on long run

behavior of the economy.Living standards rise as a result of

productivity.

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Source: U.S. Department of Commerce, Bureau of Economic Analysishttp://research.stlouisfed.org/fred/data/gdp/gdpca

Real GDP (Chained 2000 Dollars)

0

2000

4000

6000

8000

10000

12000

1925 1945 1965 1985 2005

Bill

ion

$

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Population and Employment

0

50000

100000

150000

200000

250000

300000

1945 1955 1965 1975 1985 1995 2005

Years

(00

0)

CE16OV POP

Source: http://www.stls.frb.org/fred/data/employ.html

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Source: http://www.economist.com/displayStory.cfm?story_id=346598

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http://www.dallasfed.org/research/swe/2005/swe0502.pdf

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From about 1750, this iron law of history was broken. Growth began to be no longer invisibly slow nor confined, as it largely had been before, to farming. The new increase in human productivity was staggeringly large: it not only supported a hitherto unimaginable 7 1/2-fold rise in the world’s population, but entirely transformed the lives of ordinary people throughout the West.

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Source: Bureau of Labor Statistics: http://www.bls.gov/cps/home.htm

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Source: http://www.newyorkfed.org/research/directors_charts/i-bcd_15.pdf

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US TradeUS Trade The goods and services deficit in 2004 was $617.7 billion, the highest

on record. As a percentage of U.S. gross domestic product, the goods and services deficit increased from 4.5 percent in 2003 to 5.3 percent in 2004.

Exports increased $125.6 billion in 2004 to $1,146.1 billion. Goods were $807.6 billion and services were $338.6 billion.

Imports increased $246.9 billion in 2004 to $1,763.9 billion. Goods were $1,473.8 billion and services were $290.1 billion.

For goods, the deficit was $666.2 billion in 2004, the highest on record. For services, the surplus was $48.5 billion in 2004, down from $51.0 billion in 2003.

Source: http://www.census.gov/indicator/www/ustrade.html

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Types of Macroeconomic Types of Macroeconomic PoliciesPolicies

MonetaryFiscalStructural

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Types of AnalysisTypes of Analysis

PositiveNormative

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Types of DataTypes of Data

AggregateDetailed

Frank and Bernanke Ch. 5: Macroeconomics: The Bird’s- Eye View of the Economy.

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Transcript of Frank and Bernanke Ch. 5: Macroeconomics: The Bird’s- Eye View of the Economy.