Macroeconomics - Index of

oppositemincedManagement

Oct 28, 2013 (3 years and 10 months ago)

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Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

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Attribution
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Macroeconomics

“No society can surely be flourishing and happy, of which the
far greater part of the members are poor and miserable.”


Adam Smith, 1776

How Does a Society, as a Group, Solve the Economic
Problem of Unlimited Wants but Only Scarce
Resources?

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

The Product of a Nation

Measure the Economy?


Francois Quesnay (1758)


economic activity as
flow


circular flow of output and income


National income accounting system (~1920)

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Society's Goals for Macro System


Growth


Stable Prices & Money


Full Employment


Stability of Business Cycle


These become Policy Goals.

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Gross Domestic Product

market value of all final goods and
services produced during a year


Different approaches:


Quantities Produced


can't add


Income


Expenditures

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

GDP: Income Approach

value of aggregate output equals
aggregate income paid for
resources used to produce that
output


Wages


Interest


Rent


Profit arising from production

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

GDP: Expenditure Approach

Aggregate expenditure (spending):


Consumption


Investment


Government Purchases


Net Exports


GDP = C + I + G + (X
-
M)

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
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NonCommercial
License

C: Consumption Expenditure

Personal consumption expenditures


Purchases by households


Largest spending category ~
2/3 US GDP


Components


Services


Durable Goods


Nondurable Goods

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

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I: Investment Spending

New buildings and machinery by firms

New residential construction by households

Net Change in Inventories


Increase in inventories = + investment


Decrease in inventories =
-

investment

Not Counted:


Household durable goods


Existing buildings and machines


Financial assets

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

G Government Purchases

Gov’t. consumption and investment

All levels of gov’t.

Excludes transfer payments

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
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Limitations of GDP

Imperfect measure of Welfare


Environment


Externalities


Freedom & Health


Depletion of resources


Leisure

Some production ignored


Products not sold


Household production


Underground & Barter

Some activity must be estimated


“Imputed rental income”


In
-
kind payments

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

From Nominal To Real GDP

Nominal:



observed at then
-
current prices

Real:


estimated effects of
change in prices
removed

Price Index:


estimated change
in prices

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Growth Rates


Expressed as Percentage


Typically as annual rate

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

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NonCommercial
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Policy Goal: Price Stability

Absence of Inflation or Deflation

Price Indices stay constant

Real World:


Maybe 1% inflation


U.S. recent past: 2
-
3%

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Inflation & Deflation Can Destroy

Inflation:


Zimbabwe 2007


Weimar Germany 1923
-
24


Bolivia, 1983
-
84


Russia, 1994
-
96

Deflation:


U.S. 1929
-
1939

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Inflation AND Deflation are Undesirable

Inflation


Hurts fixed incomes


Destroys $
-
based
wealth


Arbitrary
redistribution of
wealth


Raises Interest Rates

Deflation


Spending reduced as
people wait for
prices to drop more


Great Depression


Mass poverty

Revolution

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Full Employment & Cycles

In the long run, the right answer to unemployment is to create
more jobs.






-

George Walker Bush,

Unemployment is of vital importance, particularly to the
unemployed.







-

Edward Heath


Business will be either better or worse.

When more and more people are thrown out of jobs,
unemployment tends to rise.





-

Calvin Coolidge

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

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NonCommercial
License

Business Cycle


Irregular growth of GDP


Business Cycle


Based on
changes in real GDP


Common to capitalist market economies


Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Components of Business Cycles

Two phases


Expansion


“Recovery”


Contraction


“Recession”

Points:


Peak


Trough

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Policy Goal:

Cyclical Stability

Success:


Infrequent recessions, if any.


Mild recessions

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Measuring Stability of Growth


Growth is normal


6+ months of decline is a “
recession



Slow growth (rate < population
growth) sometimes called “
growth
recession



Growth > long
-
run trend is “boom”


“Depression”: multi
-
year recession or
recession without recovery

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Policy Goal: Full Employment

Idea:


Labor most critical resource


Unused labor resources costly:


Lost potential output (social
opportunity cost)


Costs to support the unemployed


Compounded future lost output


Personal costs of unemployment


Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Population



Who Is Unemployed?

Adult

Non
-
Institutional

Civilian

Pop. [A]

Not In

Labor Force

Retired

Don't want employment now

In School

Discouraged
-

quit looking for work

Employed [C]





Unemployed [D]


(Not Employed,

But Actively Looking)


Labor

Force [B]


(willing & able


to work)

Voluntary Quit

Involuntary Quit

Returning

New Entrant

Institutional Pop.

Children (<16)

Active Duty Military

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Measuring Unemployment

Unemployed


no job, but

willing, able, &
looking

for work

Unemployment rate


Unemployed as % labor force


= D / B


Excludes discouraged workers

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
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NonCommercial
License

Why: Types of Unemployment

Why do people not have jobs?


Frictional


Structural


Seasonal


Cyclical

Unit 7: Goals, Growth and GDP

basic

E
conomics


Created:

Aug 2008

by Jim Luke.

This work is licensed under
the Creativ e Commons
Attribution
-
NonCommercial
License

Policy Goal: Full Employment

Full employment



Occurs when the only unemployment
is:


Frictional


Structural


Seasonal


Occurs when Cyclical unemployment
=0


NOT

= 0% unemployment rate


Estimated @ approx 4 %


4.5% (US)