copyright © 2002 by the mcgraw-hill companies, inc. all rights reserved. 1-1 chapter 1 introduction...

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.1-1

CHAPTER 1

Introduction to Macroeconomics


Questions

• How much richer are we than our parents?

• How much richer will our children be than our grandparents were?

• Will changing jobs be easy or hard in five years?

• How many of us will have jobs in five years?


Questions

• Will the businesses we work for vanish as demand for the products they make dries up?

• Will inflation make us poor by destroying our savings or rich by eliminating our debts?


Macroeconomics...

• is the subdiscipline of economics that tries to answer these six questions

• is the branch of economics related to the economy as a whole


Macroeconomists...

• try to figure out why overall economic activity rises and falls

• try to understand what determines the level and rate of change of the price level

• study other variables that play a major role in determining the overall levels of production, income, employment, and prices


Why Macroeconomics Matters

• Cultural Literacy– ability to follow and participate in public

debates and discussions

– understanding of news reports on changes in the economy


Figure 1.1 - The Daily Flow of Economic News



• Self-Interest– effects of macroeconomy on our daily

lives

– understanding of changing opportunities as the economy fluctuates



• Civic Responsibility– more informed voting

– more responsible macroeconomic policy


Macroeconomic Policy

• Growth Policy– policies to accelerate or decelerate long-

run economic growth

– most important policies for the long-run


Figure 1.2 - Long-Run Economic Growth: Sweden and Argentina, 1900-2000


Macroeconomic Policy

• Stabilization Policy– policies to smooth out the business cycle

by diminishing the depth of recessions and depressions

– business cycles are fluctuations in production and employment•booms or expansions occur when

production grows and unemployment falls• recessions or depressions occur when

production falls and unemployment rises


Figure 1.3 - The American Business Cycle: Fluctuations in Total Production Relative to the

Long-Run Growth Trend


Macroeconomics versus Microeconomics

• Macroeconomists– examine the economy as a whole– focus on the feedback from one

component of the economy to another– study the total level of production and

employment– believe that imbalances between supply

and demand may be resolved by changes in quantities rather than prices


Macroeconomics versus Microeconomics

• Microeconomists– study the markets for single commodities

and the behavior of individual households and firms

– focus on how competitive markets allocate resources to create consumer and producer surplus

– assume that imbalances between demand and supply are resolved by changes in prices


Economic Statistics and Economic Activity

• Economic activity is the pattern of transactions in which things of real, useful value are created, transformed, and exchanged.

• National Income and Product Accounts (NIPA)– reported by the U.S. Commerce

Department’s Bureau of Economic Analysis


Table 1.2 - The Flow of Economic Data,2000-2001


Six Key Economic Variables

• Real Gross Domestic Product (GDP)– is corrected for changes in the price level

(real)– includes the replacement of worn-out and

obsolete equipment and structures as well as new investment (gross)

– counts economic activity that happens in the United States (domestic)

– represents the production of final goods and services (product)



• Real Gross Domestic Product– often divided by the number of workers in

the economy– measures how well the economy produces

goods and services that people find useful– does not indicate the relative distribution

of the nation’s economic product– is an imperfect measure of economic well-

being


Figure 1.4 - Officially Measured Real GDP per Worker in the United States



• The Unemployment Rate– to be unemployed, a person must want

to work and be actively looking for a job (but have not yet found one)

– the labor force consists of those who are employed and those who are unemployed

– the unemployment rate is equal to the number of unemployed people divided by the labor force


Figure 1.5 - The U.S. Unemployment Rate



• The Unemployment Rate– frictional unemployment occurs because

workers and firms spend time searching for the best match

– cyclical unemployment occurs during recessions and depressions

– the unemployment rate is the best indicator of how well the economy is doing relative to its productive potential



• The Inflation Rate– is a measure of how fast the overall price

level is rising

– hyperinflation occurs when the price level is rising by more than 20% per month


Figure 1.6 - Inflation in the United States



• The Interest Rate– is important because it governs the

redistribution of purchasing power across time

– the many different interest rates in the economy vary by duration and degree of risk• often move up and down together



• The Interest Rate– nominal interest rate is the interest rate

in terms of money• does not take into account the effects of

inflation

– real interest rate is the interest rate in terms of goods and services• does take into account the effects of inflation


Figure 1.7 - U.S. Real Interest Rates,1960-1999



• The Stock Market– is heard about most often (every day)

– is an index of expectations for the future• a high value means that investors expect

economic growth to be rapid, profits to be high, and unemployment to be low


Figure 1.8 - Real Stock Index Prices



• The Exchange Rate– governs the terms on which international

trade and investment take place– nominal exchange rate is the rate at

which monies of different countries can be exchanged for one another

– real exchange rate is the rate at which the goods and services produced in different countries can be exchanged for one another



• The Exchange Rate– if domestic currency appreciates

• its value in terms of other currencies increases

• foreign-produced goods are relatively cheap for domestic buyers

– imports are likely to be high

• domestic-made goods are relatively expensive for foreigners

– exports are likely to be low



• The Exchange Rate– if domestic currency depreciates

• its value in terms of other currencies declines• domestic-produced goods are relatively cheap

for foreign buyers– exports are likely to be high

• foreign-made goods are relatively expensive for domestic buyers

– imports are likely to be low


Figure 1.9 - The U.S. Real Exchange Rate:The Dollar against a Composite Index

of Foreign Currencies


The CurrentMacroeconomic Situation

• The United States - 2001– economic growth has slowed to a very

weak pace• forecast for 2001 is that real GDP will grow by

no more than 1.8%

– interest rates lowered through Fed policy• due to lags, effects of lower interest rates will

not be felt until end of 2001 (at the earliest)

– inflation continues to be low



• The United States - recent past– from early 1990s to 2000, there was an

economic boom– unemployment fell during the 1990s

• lowest unemployment rate in two decades (4%)

– real wages increased only slightly• helped to keep inflation low



• Europe– economic growth in countries belonging

to the European Monetary Union slowing– low inflation

• less than 2% per year

– relatively high unemployment• near 10%



• Japan– slow growth rate

• real GDP grew only 1.8% in 2000• real GDP is expected to grow only by 1.4% in

2001

– deflation is occurring• the overall price level fell by 0.7% in 2000


Chapter Summary

• Macroeconomics is the study of the overall economy.

• There are three key reasons to study macroeconomics– to gain cultural literacy– to understand how economic trends

affect you personally– to exercise your responsibility as a

voter and citizen


Chapter Summary

• The key indicators in macroeconomics are– real GDP– the unemployment rate– the inflation rate– the interest rate– the level of the stock market– the exchange rate

copyright © 2002 by the mcgraw-hill companies, inc. all rights reserved. 1-1 chapter 1 introduction...

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