economics

• Macroeconomics


  The study of economic growth, inflation, unemployment, and government and international surpluses and deficits
• Origins of macroeconomics


  • Economists began to study economic growth, inflation, and international payments during the 1750s
  • Modern macroeconomics dates from the Great Depression (1929-1939)
• John Maynard Keynes


  Began the subject of macroeconomics with his book "The General Theory of Employment, Interest, and Money"
• Short-term focus


  Keynes focused on unemployment and lost production
• Long-term focus


  Macroeconomists became more concerned about inflation and economic growth during the 1970s and 1980s

  
• Economic growth


  The expansion of the economy's production possibilities - an outward shifting PPF
• Real GDP


  The value of the total production of all the nation's farms, factories, shops, and offices, measured in the prices of a single year
• Potential GDP


  The value of real GDP when all the economy's labour, capital, land, and entrepreneurial ability are fully employed

  
• During the 1970s and early 1980s, real GDP growth slowed - a productivity growth slowdown

  
• Business cycle


  A periodic but irregular up-and-down movement in production
• Phases of the business cycle

  • Recession
  • Expansion
• Turning points of the business cycle

  • Peak
  • Trough
• Recession


  A period during which real GDP decreases for at least two successive quarters
• Expansion


  A period during which real GDP increases

  
• Okun gap


  The gap between potential GDP and actual real GDP, another name for the output gap

  
• The Okun gaps since 1973 are $2.7 trillion or about 3 months real GDP

  
• Benefits of economic growth

  • Expanded consumption possibilities, including more health care, research, space exploration, infrastructure, housing, and a cleaner environment
• Costs of economic growth

  • Forgone consumption in the present, more rapid depletion of nonrenewable natural resources, and more frequent job changes
• Unemployment


  A state in which a person does not have a job but is available for work, willing to work, and has made some effort to find work within the previous four weeks
• Labour force


  The total number of people who are employed and unemployed
• Unemployment rate


  The percentage of the people in the labour force who are unemployed
• Discouraged worker


  A person who is available for work, willing to work, but has given up the effort to find work
• During recent recessions, the unemployment rate increased
• The unemployment rate has averaged 6 percent since World War II
• Why unemployment is a problem

  • Lost production and incomes
  • Lost human capital
• Inflation


  A process of rising prices

  
• Inflation rate


  The percentage change in the average level of prices or the price level

  
• Consumer Price Index (CPI)


  A common measure of the price level
• The inflation rate fluctuates, but it is always positive - the price level has not fallen during the years shown

  
• Deflation


  A falling price level - a negative inflation rate
• Problems with inflation


  • Unpredictable changes redistribute income in arbitrary ways
  • A high inflation rate diverts resources from productive activities to inflation forecasting
  • Eradicating inflation is costly because it brings a period of greater than average unemployment

  
• Government budget surplus


  When a government collects more in taxes than it spends
• Government budget deficit


  When a government spends more than it collects in taxes
• International surplus


  When a nation exports more than it imports
• International deficit


  When a nation imports more than it exports
• Current account deficit or surplus

  The balance of exports minus imports plus net interest paid to and received from the rest of the world
• Macroeconomic policy challenges


  • Boost economic growth
  • Keep inflation low
  • Stabilize the business cycle
  • Reduce unemployment
  • Reduce government and international deficits
• Macroeconomic policy tools


  • Fiscal policy - making changes in tax rates and government spending
  • Monetary policy - changing interest rates and changing the amount of money in the economy