C h a p t e r 2 0 A f i r s t l o o k a t * macroeconomics
I.
Origins and Issues of Macroeconomics
A. Modern macroeconomics emerged during the Great Depression (1929-1939) a decade of
high unemployment and stagnant production throughout the world economy.
B. Short-Term Versus Long-Term Goals
1.
With high unemployment during the Great Depression, the initial focus of
macroeconomics was on the short term.
2.
During the 1970s, inflation increased and economic growth slowed, shifting the focus of
macroeconomics to the long term.
C. The Road Ahead
1.
During the 1990s, as information technologies further shrank the globe, the international
dimension of macroeconomics became more prominent.
2.
Modern macroeconomics is a broad subject that studies long-term economic growth,
unemployment, inflation, the government budget deficit, and the U.S. international
deficit.
II. Economic Growth and Fluctuations
A. Economic growth is the expansion of the economy’s production possibilities.
*
1.
We measure economic growth by the increase in real gross domestic product.
2.
Real gross domestic product (also called real GDP) is the value of the total
production of all the nation’s farms, factories, shops, and offices measured in the prices
of a single year, currently 2000.
* This is Chapter 20 in Economics.
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B. Economic Growth in the United States
1.
Figure 4.1 shows real GDP in
the United States since 1962.
2.
Potential GDP is the real
GDP that the nation produces
when all the economy’s labor,
capital, land, and
entrepreneurial ability are
fully employed.
a)
Figure 4.1 shows that
there is persistent growth
in potential GDP. The
long-term rate of
economic growth is
measured by growth in
potential GDP.
b) Potential GDP grew more
rapidly in the 1960s than
in the 1970s and early
1980s. The slow growth during the 1970s and early 1980s reflected the
productivity growth slowdown. The growth rate of potential GDP increased
during the 1980s and 1990s.
3.
Real GDP fluctuates around potential GDP in a business cycle.
a)
A business cycle is the periodic but irregular up-and-down movement in
production.
b) A business cycle has two turning points, a peak and a trough, and two phases,
recession and expansion.
i)
A peak is the upper turning point, the end of an expansion and the beginning
of a recession.
ii) A trough is the lower turning point, the end of a recession and the start of an
expansion.
iii) A recession is commonly defined as a period during which real GDP
decreases for at least two successive quarters.
iv) An expansion is the period during which real GDP increases.
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79
4.
Figure 4.2 shows the most recent U.S. business cycle, including the most recent
recession in 2001.
5.
Recessions in recent years have been much less severe than the Great Depression.
C. Economic Growth around the World
1.
U.S. real GDP growth fluctuates much more than the growth rate of real GDP in the rest
of the world as a whole.
2.
Among advanced economies, since 1992 Japan has grown the slowest and the newly
industrialized economies have grown the fastest. Among the developing economies, the
most rapid growth has occurred in Asia and the slowest growth has occurred in Africa
and the Western Hemisphere.
3.
The U.S. share of world real GDP is almost constant and is about 21 percent, but some
fast growing nations such as China have gone from 4 percent in 1982 to 13 percent in
2002.
D. The Lucas Wedge and the Okun Gap
1.
The Lucas wedge is the accumulated loss of output that results from a slowdown in the
growth rate of real GDP per person. Since 1970, the Lucas wedge has amounted to a
staggering $50 trillion.
2.
The Okun gap is the gap between real GDP and potential GDP. Since 1970, it has
amounted to an estimated $2.7 trillion.
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3.
Figure 4.5 shows the Lucas
wedge and the Okun Gap.
E. Benefits and Costs of Economic
Growth
1.
The main cost of fast growth is
foregone current consumption.
2.
Two other possible costs are
more rapid depletion of
exhaustible natural resources
and/or more pollution, although
technological advances that
bring economic growth help
economize on natural resources
and clean up the environment.
III. Jobs and Unemployment
A. Jobs
1.
In 2003, 137 million people in
the United States had jobs—17
million more than in 1993 and
37 million more than in 1983.
2.
The pace of job creation
fluctuates with the business
cycle. During the 2001
recession, 2 million jobs
disappeared. During the
expansion of the 1990s, 2
million jobs were created each
year.
3.
Most new jobs are in the
services industries and are, on
the average, higher paying than the ones lost.
B. Unemployment
1.
On any one day in a normal or average year, in the United States 7 million people are
unemployed.
2.
The unemployment rate is the number of unemployed people expressed as a
percentage of all the people who have jobs or are looking for one. The unemployment
rate is not a perfect measure of the underutilization o f labor for two main reasons:
a)
It excludes people who are so discouraged that they’ve given up the effort to find
work.
b) Part-time workers, who desire full-time work but cannot find it, are not counted as
unemployed.
C. Unemployment in the United States
1.
The unemployment rate reached a peak during the Great Depression in the early 1930s.
It has been high, but not nearly as high, during recessions in recent years.
2.
Figure 4.6 shows the unemployment rate in the United States from 1929 through 2003.
A FIRST LOOK AT MACROECONOMICS
81
D. Unemployment Around the World
1.
Since 1983, the unemployment rate has been generally higher in the United States than in
Japan, but higher still in Canada and Western Europe. Business cycle fluctuations in
unemployment occurred at similar times in the United States and Canada, but were out of
phase when compared to Western Europe.
2.
Figure 4.7 shows the
unemployment rate in the
United States, Canada,
Western Europe, and Japan.
E. Why Unemployment Is a
Problem
1.
Unemployment represents
lost production and income.
2.
Prolonged unemployment
can cause lost human capital,
which seriously hurts the
person’s future job
prospects.
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IV. Inflation
A. Inflation is a process of rising prices. The average level of prices is called the price level,
and the inflation rate is measured as the percentage change in the price level. A common
measure of the price level is the Consumer Price Index (CPI).
B. Inflation in the United States
1.
Figure 4.8 shows the U.S. inflation rate from 1963 through 2003.
2.
In the early 1960s the U.S. inflation rate was low; it reached its highest levels in 1974
and 1980. Inflation then decreased during the 1980s and has stayed relatively low in the
1990s.
3.
Deflation occurs when the inflation rate is negative so that the price level is falling.
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83
C. Inflation Around the World
1.
Figure 4.9 shows inflation
around the world since 1983.
2.
Other industrial countries
shared the same pattern of
inflation as the United States.
Developing countries have
displayed much higher rates
of inflation, although
inflation has dropped closer
to the levels of industrial
countries in recent years.
D. Is Inflation a Problem?
1.
Unanticipated changes in the
value of money mean that the
amounts actually paid and
received vary unpredictably.
2.
People use resources to
predict the inflation rate
rather than to produce
additional goods and
services.
3.
At high inflation rates money
loses value very quickly;
therefore people try to spend
their money more rapidly. In
the extreme case of a
hyperinflation — defined as
an inflation rate that exceeds
50 percent per month —
inflation brings economic
chaos and social disruption.
4.
Getting rid of inflation is
costly in terms of higher unemployment, although most economists believe this cost is
temporary.
V. Surpluses and Deficits
A. Government and Budget Surplus and Deficit
1.
The federal government has a government budget surplus if it collects more in
taxes than it spends.
2.
The federal government has a government budget deficit if it spends more than it
collects in taxes.
3.
Figure 4.10(a) shows the federal government and total government budget surplus and
deficit measured as a percentage of GDP since 1962.
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4.
Since 1970, the government has had a budget surplus from 1998 to 2000 and a budget
deficit in the other years. As a fraction of GDP, the budget deficit was highest in the
1980s.
B. International Deficit
1.
The value of the goods and services sold to other countries (exports) plus net interest
receipts minus the value of the goods and services purchased from other countries
(imports) is the current account balance.
2.
Figure 4.10(b) shows the history of the U.S. current account balance from 1962 to 2002.
3.
Until 1982, the United States generally had a current account surplus; that is, it sold
more to the rest of the world than it purchased. From 1982 to 1987, the current account
deficit became large. It then decreased significantly between 1988 and 1991, after which
it has increased once more and is currently near 5 percent of GDP.
C. Do Deficits Matter?
1.
Deficits can be harmful if the borrowing is used to buy consumption goods rather than
more investment.
VI. Macroeconomic Policy Challenges and Tools
A. Until the development of modern macroeconomics, it was widely believed that the only
economic role for government was to enforce property rights.
B. Policy Challenges and Tools
1.
There are now five widely agreed challenges for macroeconomic policy:
a)
Boost economic growth
b) Keep inflation low
c)
Stabilize the business cycle
d) Reduce unemployment
A FIRST LOOK AT MACROECONOMICS
e)
85
Reduce government and international deficits
2.
Making changes in tax rates and government spending programs is called fiscal policy.
3.
Changing interest rates and the amount of money in the economy is called monetary
policy. The Federal Reserve (Fed) is in charge of monetary policy.