MACRO
• Topics
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Economic Growth
Economic Fluctuations
Inflation
Unemployment
Monetary Policy
Fiscal Policy
• Requires a theory of
the whole economy
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not one firm
not one consumer
not one industry
not one market
Important
Different
Fascinating
Even controversial
Put on your
“Big Picture Glasses”
Growth and fluctuations during
the last forty years
19_01
REAL GDP
(BILLIONS OF 1992 DOLLARS)
8,000
7,000
6,000
5,000
4,000
Real GDP
Line showing
long-term
growth trend
3,000
2,000
1960
1965
1970
1975
1980
1985
1990
1995
2000
Tr
ou
gh
k
Pe
a
Pe
ak
19A
Tr
ou
gh
Important Definitions
Boom
Recovery
Recession
Expansion
Recession
19_03A
The Business Cycle Surrounding the 1974–75 Recession
REAL GDP
(BILLIONS OF
1992 DOLLARS)
4,400
4,300
4,200
4,100
Peak
4,000
Trough
3,900
3,800
Recession
3,700
3,600
3,500
1972
1973
1974
1975
1976
1977
19_03B
The Business Cycle Surrounding the 1990–91 Recession
REAL GDP
(BILLIONS OF
1992 DOLLARS)
6,400
Peak
6,300
Trough
6,200
6,100
6,000
Recession
5,900
5,800
5,700
5,600
5,500
1987
1988
1989
1990
1991
1992
Employment growth slows
during recessions
19_05
MILLIONS OF
WORKERS
120
110
100
Total employment
90
80
70
60
1960
1965
1970
1975
1980
1985
1990
1995
2000
Unemployment rises in
recessions
19_06
PERCENT
11
Unemployment
rate
10
9
8
7
6
5
4
3
1960
1965
1970
1975
1980
1985
1990
1995
2000
Inflation falls during and after
recessions
19_08
PERCENT
15.0
12.5
10.0
7.5
Inflation rate
5.0
2.5
0.0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Interest rates rise before
recessions and fall in recessions
19_09
PERCENT
15.0
12.5
10.0
Interest rate
7.5
5.0
2.5
0.0
1960
1965
1970
1975
1980
1985
1990
1995
2000
A Longer Historical Perspective
19_04
REAL GDP
(BILLIONS OF
1992 DOLLARS)
8,000
1990–91 recession
1980–82 recessions
Longest and secondlongest peacetime
expansion in U.S.
history
4,000
Long expansion
during Vietnam War
2,000
World War II
Postwar recessions
Roaring 20s
1,000
Great Depression
1920–21 recession
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Unemployment was massive
during the Great Depression
19_07
PERCENT
25
20
Unemployment rate
15
10
5
0
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Measuring GDP
• Look at the most recent GDP (CNNfn)
• The market value of all the final goods and
services newly produced in a country during
some time period
• Three approaches to measuring GDP
– Spending
– Income
– Production
The Spending Approach
Example 1998.3 (billions of dollars)
Gross Domestic Product
Consumption
Investment
Net Exports
Government purchases
8526.5
5843.0
1361.8
- 168.8
1490.5
68.5 %
16.0%
- 2.0%
17.5%
Key Ideas of the Spending Approach
• keep your eye on the ball: we want to
measure production
• four spending groups:
– households, firms, governments, foreigners
– consumption by households
– investment by firms
• why add inventory investment?
• why add net exports?
• government purchases only--not transfers
End of Lecture