Chapter 23
An Introduction
to
Macroeconomics
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Long-run economic growth and
short-run fluctuations
• GDP, inflation, and
unemployment
• Sustained increase in living
standards
• Savings and investment
• Shocks and sticky prices
23-2
Performance and Policy
• Real GDP
–Corrects for price changes
• Nominal GDP
–Uses current prices
• Unemployment
• Inflation
–Increase in overall level of prices
23-3
Performance and Policy
• Can governments:
–Promote economic growth?
–Reduce severity of recession?
• Is monetary or fiscal policy more
effective at mitigating recession?
• Is there a tradeoff between
inflation and unemployment?
23-4
Economic Performance
• Output growth
–3.1% per year 1995-2005
• Unemployment rate
–4.6% in 2007
• Inflation rate
–2.7% in 2007
23-5
Economic Growth
• Standard of living measured by
output per person
• No growth in living standards
prior to Industrial Revolution
• Modern economic growth
–Output per person rises
–Not experienced by all countries
23-6
GDP Per Person 2007
U.S. dollars based on purchasing power parity
United States
Canada
United Kingdom
Japan
France
South Korea
Saudi Arabia
Russia
Mexico
China
India
North Korea
Tanzania
Burundi
Zimbabwe
$45,845
$38,345
$35,134
$33,576
$33,187
$24,782
$23,243
$14,692
$12,774
$5,292
$2,659
$1,900
$1,256
$371
$188
23-7
Savings and Investment
• Saving
–Tradeoff current for future
consumption
• Investment
–Financial investment
–Economic investment
• Banks and financial institutions
23-8
Shocks
• Demand shocks and flexible
prices
–Price falls if demand low
–Sales unchanged
• Demand shocks and sticky prices
–Maintain inventory
–Sales change
–Business cycles
23-9
Expectations
• The future is uncertain
• Expectations affect investment
• Shocks
–What happens is not what you
expected
• Demand shocks
• Supply shocks
23-10
Demand Shocks
Flexible Prices
Price
$40,000
$37,000
$35,000
DH
DM
DL
900
Cars per week
23-11
Demand Shocks
Price
Fixed Prices
$37,000
DH
DL
700
900
1150
DM
Cars per week
23-12
Sticky Prices
• Explain fluctuations is GDP
• Average months between price changes
Coin-operated
Laundry Machine
Newspaper
Haircut
Taxi fare
Veterinary service
Magazine
46.4
29.9
25.5
19.7
14.9
11.2
Beer
Microwave Ovens
Milk
Electricity
Airline ticket
Gasoline
Computer software
4.3
3.0
2.4
1.8
1.0
0.6
5.5
23-13
Sticky Prices
• Many prices sticky in short run
–Consumers prefer stable prices
–Firms want to avoid price wars
• All prices flexible in long run
–Firms adjust to unexpected, but
permanent changes in demand
23-14
Inventory Management
• Computerized inventory tracking
• Unexpected changes in demand
easier to observe
• Firms make better output and
employment decisions
• Less severe business cycles
• Only two mild recessions since
adoption
– Possible explanation
23-15
Key Terms
•
•
•
•
•
•
•
business cycle
recession
real GDP
nominal GDP
unemployment
inflation
modern economic
growth
• savings
• investment
• financial investment
• economic investment
• expectations
• shocks
• demand shocks
• supply shocks
• inventory
• inflexible prices
(“sticky prices”)
• flexible prices
23-16
Next Chapter Preview…
Measuring
Domestic Output
and National
Income
23-17