Introduction
Micro and Macro Economics
http://www.youtube.com/watch?v=VVp
8UGjECt4
Important terms in Macroeconomics?
What is Macroeconomics?
Macroeconomics is the study of issues
that affect the economy as a whole.
Examples are the effects of inflation,
and unemployment on economic
growth and economic well-being.
Divisions of
Macroeconomics
The science of macroeconomics is
positive economics: the study of
economic facts and theories and how
they work.
Policy practice of macroeconomics is
concerned with policies to achieve
goals.
Normative Macroeconomic
Goals
High growth
Avoiding large swings in
economic output
Low unemployment
Low inflation
Low income inequality
No poverty
Why These Goals?
High growth
Avoiding large swings in
economic output
Low unemployment
Low inflation
Income distribution
Poverty
Normative Economic Goals
Economic policy is dependent on
normative economic goals.
Political processes determine
which goals have the highest
priority.
Once priority has been established,
macroeconomics deals with the
ways to achieve those goals
Goals: Output
U.S. Real Gross Domestic Product
U.S. Recession?
GDP
Genuine Progress Indicator
It adds in the
economic
contributions of
household and
volunteer work,
but subtracts
factors such as
crime, pollution,
and family
breakdown
The World
Values
Survey
Working Hours
Goals: Unemployment
The unemployment rate is the
percentage of the labor force
looking for work, but unable to
find it.
U.S. Unemployment
Each one-point increase in the unemployment rate is
associated with:
920 more suicides
650 more homicides
4000 more people admitted to state mental institutions
3300 more people sent to state prisons
37,000 more deaths
Increases in domestic violence and homelessness
Goals: Inflation
Inflation is the continual increase in the
average price of goods and services.
Inflation usually increases as actual
output rises above potential output and
usually decreases if output falls below
potential output.
Policymakers may face a trade-off
between high inflation and low
unemployment.
U.S. Inflation
Inflation – The Great Moderation
(median for developing- and GDP weighted mean for high-income)
25
20
15
10
5
0
Jan91
Jan92
Jan93
Jan94
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Inflation
in
Zimbabwe
Poverty?
U.S. Poverty
Wage Inequality?
Measuring Inequality I
(ratio of 90th to 10th percentile)
Measuring Inequality II
(Gini Coefficient)
U.S. Wage Inequality
Since the early 1980s, the
relative wages of workers with a
low education level have fallen;
the relative wages of workers
with a high education level have
risen.
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The Budget Balance
The budget balance is the difference
between tax revenues collected by the
government and expenditures made by the
government.
If taxes are greater than expenditures there
is a budget surplus.
If expenditures are greater than taxes,
there is a budget deficit.
The budget balance is affected by both
changes in the economy and fiscal policy.
U.S. Government Budget
What is the current U.S.
government’s
surplus/deficit?
U.S. Government Deficit
The U.S. Budget Deficit, Since 1945
(Ratio to Output, in percent).
U.S. Trade Balance
Policies Used to Achieve
Goals
Demand-side policies
Supply-side policies
Demand-Side Policies
Monetary Policy

Changes in the money supply
implemented by the Federal Reserve
Fiscal Policy

Changes in government spending
and/or taxes implemented by
Congress and the president
Supply-Side Policies
Supply-Side Policies are
designed to increase potential
output by encouraging:
 Productivity and innovation
by the labor force
 Investment in capital
 Advances in technology
Models in Economics
Models are simplified representations of
relationships within an economy.
Models are used to predict economic outcomes
in different situations.
Models have three ingredients
 Assumptions
 Exogenous variables determined outside the
model
 Endogenous variables determined inside the
model
Models II
Using a Model to Predict
OPEC decreases the supply of oil to the United States. What
happens to the price of gasoline?
Supply
A decrease in supply
shifts the supply curve
to the left and increases
price and decreases
quantity.
P2
P1
Demand
Q2 Q1
Quantity of Gasoline