What is Macroeconomics?
GDP
Other Measures
The Big Picture
Macro Principles
Lecture 1
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Today’s Topics
The main ideas in this lecture
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What do we mean by ”macroeconomics”?
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What are the major variables studied in macroeconomics?
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Introduce concepts of economic growth, and economic
fluctuations
Fluctuations
What is Macroeconomics?
GDP
Other Measures
What is Macroeconomics?
Study of the economy as a whole
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Structure
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Decision-making
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Performance
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Macro vs Microeconomics
Macroeconomics
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Large area
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Many actors (firms, households, government)
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Country, region, state
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Unemployment, savings, exports, ...
Microeconomics
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Study of individual- or firm-level decision-making
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How many cars are sold, how many hours to work, how much
should you bid on eBay, ...
What is Macroeconomics?
GDP
Other Measures
Growth
Macroeconomic Data
Use data to measure and explain macroeconomic outcomes
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GDP
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Unemployment rate
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Inflation rate
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Interest rate
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Types of data
Flow variable
I Measured over a specific period of time
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$
year
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# of people immigrating to US in 2010
Stock variable
I Measured at a specific time
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$
# of immigrants living in the US in 2010
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Gross Domestic Product
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Total value of goods and services produced in the country
Final goods only
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Don’t count Intel processors
Count entire value of Dell laptop
Flow value
Fluctuations
What is Macroeconomics?
GDP
Long Term GDP Trend
Other Measures
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Unemployment Rate
Unemployment rate
I Percentage of the people who want to work that do not have
a job
I Currently 7.5%
I Rises (quickly) during recessions, falls (slowly) during
expansions
I Stock value
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Inflation Rate
Inflation rate
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Percentage change in the average price across all goods
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Currently 0.7%
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Falls during recessions, overall decreasing trend over last 30
years
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Flow value
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Interest Rate
Interest rate
I Per year percentage cost of borrowing money
I Two components - loss due to inflation, time-value of money
I Currently 0.69% baseline for a 1-year loan
I Falls during recessions, but to some extent ontrolled by
central bank
I Flow value
What is Macroeconomics?
GDP
Other Measures
Growth
Gross Domestic Product
Measures productive capacity in dollars
Higher is better
General observations for US, most countries:
I Long term - steady growth around a trend
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US averages about 3% per year output growth
About 2% per year growth rate of GDP per capita
Exponential growth trend
Short term - can vary a lot, and even decline
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Long Term GDP Trend
Use a log scale (exponential growth draws a straight line)
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Long Term GDP Trend - Per Capita
GDP per capita is measure of average well-being
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Potential GDP
Potential GDP: Total output the economy is capable of producing
I Grows over time with growth in
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Population (labor supply)
Capital
Technology
Other inputs to production
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Not observed
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Estimate: smooth curve fit to real GDP graph
What is Macroeconomics?
Potential GDP
GDP
Other Measures
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
GDP Growth Rates
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Small differences in growth rates add up quickly
After 25 years
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3% /year gives GDP 12% higher than 2.5%/year
6% /year gives GDP 141% higher than 2.5%/year
Fluctuations
What is Macroeconomics?
GDP
GDP Growth Rates
Average growth rates in red
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%
1960-1975: 2.5 year
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%
1976-1995: 2.1 year
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%
1996-2005: 2.3 year
Other Measures
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Business Cycle
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Recession: A period of decline in real GDP
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Officially defined by National Bureau of Economic Research
Rule of thumb is 6 months or more of declining output
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Expansion: A sustained period of growth
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Peak: The maximal point of GDP before a recession
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Trough: The minimal point of GDP during a recession
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Recovery: The early part of an expansion, when GDP is
catching back up to the previous peak
Based on GDP, not GDP per capita
Fluctuations
What is Macroeconomics?
Business Cycle
GDP
Other Measures
Growth
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Volatility Over Time
One goal of economic policy is to maintain steady GDP growth
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before 1984: GDP growth volatile
1984-2007: GDP growth less volatile
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The Great Moderation
2007-now: Deep recession and slow recovery
Fluctuations
What is Macroeconomics?
GDP
Other Measures
Growth
Fluctuations
Summing Up
Today’s important points
I Tools to study economy of the US
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GDP
Unemployment rate
Interest rate
Inflation
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GDP growth is powerful for improving economic outcomes in
the long term
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GDP fluctuates over the business cycle