National Economic Objectives. Introduction zMacroeconomics is the study of the economy as a whole...
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Transcript of National Economic Objectives. Introduction zMacroeconomics is the study of the economy as a whole...
Introduction
Macroeconomics is the study of the economy as a whole
Behavior/condition of economy has a profound influence on us
Policymakers and economists use data to monitor the performance of the economy
Economic Growth
GDP measures both total income earned in an economy as well as total expenditure on the economy’s output
GDP is a good measure of economic prosperity
Increases in GDP are a good measure of economic progress (growth)
Economic Growth
Country GDP GDP Yearly 1870 1987 GrowthUS 2244 18,258 1.76%Japan 842 16,144 3.00%Brazil 436 3417 2.39%China 401 1748 1.71%India 378 662 0.65%
Economic Growth
Table shows GDP per person (economic prosperity) varies widely across nations
Table shows the the growth rates in GDP per person (economic growth) varies widely across nations
Differences in growth rates will cause economic prosperity to change drastically over time
Economic Growth
Small differences in growth rates are important over time
The rule of 70 states that if some variable grows at a rate of x percent per year, then the variable will double in approximately 70/x years If GDP grows at 1% per year, it will
double in 70 years. If it grows at 2% per year, it will double in only 35 years
Economic Growth
One of the economic objectives policymakers follow is to pursue policies that will enhance economic growth
Even policies that have a small impact on growth rates in GDP can have significant impacts over the long term
Unemployment
Unemployment affects both the economy and the individual
When there is unemployment, we produce fewer goods and services
When there is unemployment, crime rates increase, there is more domestic violence, there is more drug use
Individuals who become unemployed experience both physical and psychological effects
Unemployment
There are several types of unemployment: frictional, structural, cyclical
Frictional results when people enter the labor force or change jobs
Structural results when there are changes in the technological requirements of the workplace
Unemployment
Cyclical occurs when the economy goes into a downturn (recession)
Policymakers try to pursue policies that will minimize cyclical unemployment
Policymakers also try to pursue policies that will lower the natural rate of unemployment - the rate of unemployment normally experienced by the economy
Unemployment
When unemployment is at the natural rate, the economy is said to be experiencing full employment Cyclical unemployment is zero Only frictional and structural
unemployment exist This means that full employment is not
zero unemployment
Price Stability
Inflation refers to an increase in the overall level of prices The overall level of prices is determined
by looking at an average of prices, the general price level
The inflation rate is the percentage change in overall prices from one period to another
Inflation can impose many costs on the economy
Price Stability
Shoeleather CostsMenu CostsRelative-Price Variability and the
Misallocation of ResourcesInflation Induced Tax DistortionsConfusion and InconvenienceArbitrary Redistributions of Wealth
Price Stability
Shoeleather costs refer to the costs involved in reducing your money balances There is a time cost and inconvenience
involved when attempting to minimize your money balances - this is a waste of resources
Price Stability
Menu costs are the costs of changing prices
Printing new price lists, catalogs, etc. takes resources that could have been used in more productive activities
Price Stability
Relative prices determine the distribution of resources
Inflation distorts relative pricesThe distortion has an impact on
consumer choices and the distribution of resources
Resources are no longer allocated optimally
Price Stability
Inflation can result in tax distortions; these distortions can affect individual’s behavior and the allocation of resources
Inflation causes capital gains to rise at a faster rate
This will cause more taxes to be paid on capital gains
Price Stability
Inflation causes nominal interest rates to increase, thereby increasing interest income
This will cause more taxes to be paid on interest income
Price Stability
Inflation makes us unsure as to how well prices reflect the value of goods and services
Money is how we measure the value of different items in an economy
Inflation erodes the value of money, so we are no longer sure if it measures the value of goods and services accurately
Price Stability
Inflation redistributes wealth in the economy
Those living on fixed incomes are harmed
Creditors are hurt while debtors benefit by inflation
Price Stability
Because of these problems with inflation, policymakers pursue policies that will result in price stability (stability of the general price level)
Price stability does not mean a zero rate of inflation It does mean an absence of significant
changes in the general price level and relatively low rates of inflation
International Sector
Trade allows us to have goods and services that would not otherwise be available to us; it also allows an economy to concentrate on producing those goods that it can produce most efficiently
Trade can raise living standardsIn recent times, policymakers have
pursued policies that result in greater trade between the U.S. and other nations