Chapter 4 – Goals of the Macroeconomy
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
&
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Goals & Problems of the Macroeconomy
Contents
Macroeconomy Overview
Unemployment & Full Employment
Employment & Unemployment Stats.
Inflation & Stable Prices
Deflation & Disinflation
Production Overview
Possible Policy Problem
Goals & Problems of the Macroeconomy
Chapter Objectives
• To introduce the three fundamental areas on which macroeconomics
focuses: employment, prices, and production.
• To define unemployment, explain its consequences, and identify
different types of unemployment.
• To introduce common measures and statistics on employment and
unemployment and discuss the interpretation of these data.
• To discuss full employment.
• To define inflation, explain its consequences, and identify its causes.
• To introduce measures and statistics on inflation.
• To distinguish between deflation and disinflation.
• To define full production and economic growth.
• To identify factors contributing to economic growth and to introduce
some costs associated with growth.
• To introduce GDP, the primary measure or production.
• To define productivity and discuss changes in U.S. productivity over
the years.
Macroeconomy Overview
• Macroeconomy
 Study of the operation of the economy as a whole.
 Focuses on:
• The roles of household, business, and government sectors.
 Includes:
•
•
•
•
•
•
Aggregate employment & production
Unemployment
Inflation
Economic growth
Money
Government stabilization policies
4-1
Unemployment & Full Employment
• Employment Act of 1946
 Legislation giving the federal government the right and
responsibility to provide an environment for the
achievement of full employment, full production, and
stable prices.
• Unemployment
 Resources available for production are not being used.
• Consequences of Unemployment
 Economic loss for society
• Unemployment intensifies the scarcity problem, and the
loss to society is the goods and services that might have
been enjoyed.
 Individual hardships
• Unemployment intensifies an individual’s struggle with
scarcity because spending habits and lifestyles are altered
due to the lack of employment.
4-2a
Unemployment & Full Employment
• Types of Unemployment
 Frictional Unemployment
• Occurs when people are voluntarily out of work for a short
period of time while searching for a job.
 Cyclical Unemployment
• Involuntary unemployment that results from a downswing in
a business cycle, or recession.
– Continues until the economy breaks out of the recession.
 Structural Unemployment
• Involuntary unemployment that results when a worker’s job
is no longer part of the production structure of the economy.
– Continues indefinitely; no prospect for rehire.
• Full Employment
 Occurs when only those voluntarily out of work are
unemployed, or the unemployment rate includes only
frictional unemployment.
4-2b
Employment & Unemployment Statistics
• Measures & Statistics Overview
 Labor Force
• All persons 16 years of age and older who are working or
actively seeking work.
 Participation Rate
• Percentage of some specified group that is in the labor
force.
 Unemployment Rate
• Percentage of the labor force that is unemployed and
actively seeking work.
4-3a
Employment & Unemployment Statistics
• Measures & Statistics Overview (cont.)
4-3b
Employment & Unemployment Statistics
• Measures & Statistics Overview (cont.)
4-3c
Employment & Unemployment Statistics
• Measures & Statistics Overview (cont.)
4-3d
Employment & Unemployment Statistics
• Calculating Unemployment Statistics
 Calculated:
• By the U.S. Department of Labor, Bureau of Labor Statistics
(BLS).
• Monthly and annually.
• Using results from the Current Population Survey.
– Survey issued to a scientifically developed sample of
households across the U.S. each month.
 Considered employed if:
• Did any work during the survey week as a paid employee.
– Includes self-employed individuals.
• Worked without pay for 15 or more hours in a familyoperated business.
• Was temporarily away from a job or business due to illness,
weather, vacation, labor-management disputes, or personal
reasons.
4-3e
Employment & Unemployment Statistics
• Interpreting Unemployment Statistics
 Factors to consider:
• Discouraged Workers
– Persons who drop out of the labor force because they
have been unsuccessful for a long period of time in
finding a job.
• Regional differences in unemployment
• Types of jobs held by the unemployed
• Underemployment
– Resources are not used to their fullest productive
capability.
4-3f
Employment & Unemployment Statistics
• Goal of Full Employment
 Does not mean 100% of the labor force is working.
 Rate associated with full employment has changed over
the years due to factors such as:
• Changes in the composition of the work force
– Women used to have higher unemployment rates than
men, but those rates are not comparable to male workers.
• Duration and quantity of government assistance programs
– May influence people’s decisions to remain out of work.
• Growth in temporary and part-time work
– Jobs are plentiful and people are counted as employed.
• Natural Rate of Unemployment
 Unemployment rate that includes the frictionally and
structurally unemployed.
4-3g
Inflation & Stable Prices
• Inflation
 An increase in the general level of prices.
• Hyperinflation
 Extremely rapid increases in the general level of prices.
• Consequences of Inflation
 Intensifies scarcity when income does not rise as quickly
as prices.
 Penalizes some groups, such as savers receiving low
interest rates.
 Changes the value of assets.
 Politically and socially destabilizing.
4-4a
Inflation & Stable Prices
• Nominal Income (Money)
 Income measures in terms of current currencies.
• Real Income
 Income measured in terms of the goods and services
that can be purchased with a particular amount of money
income.
• Cost of Living Adjustments (COLAs)
 Arrangement whereby an individual’s wages
automatically increase with inflation.
4-4b
Inflation & Stable Prices
• Cost of Living Adjustments (cont.)
FIGURE 4-1
The Purchasing Power of Income
4-4c
Inflation & Stable Prices
• Inflation and the Interest Rate
 Interest Rate
• The price of money.
– Determines the return to savers and lenders of money,
and the cost to borrowers.
 The Real Rate of Interest
• Nominal, or stated, rate of interest minus the inflation rate.
– Nominal interest rate adjusted for inflation.
• Wealth and the Interest Rate
 Wealth
• Measure of the value of tangible assets.
– Includes such items as real estate and corporate
securities.
4-4d
Inflation & Stable Prices
• Social and Political Consequences of Inflation
4-4e
Inflation & Stable Prices
• Causes of Inflationary Pressure
 Demand-Pull Inflation
• Pressure on prices from the buyers’ side of the market.
• Tends to occur when spending is greater than the
productive capability of the economy, and when an
economy is close to or at full employment.
 Cost-Push Inflation
• Pressure on prices from the sellers’ side of the market,
particularly from increases in the costs of production.
• Occurs due to increased costs of labor, raw materials, fuels,
machinery, borrowing, and even attempts to increase profit.
 Role of Expectations
• Our expectations about inflation can cause inflation to
occur.
4-4f
Inflation & Stable Prices
• Measures of Inflation
 Price Index
• Measures changes in the price of an item or a group of
items using a percentage scale.
– Consumer price index
– Producer price index
– GDP price index
• Constructing a Price Index
 Base Year
• Year against which prices in other years are compared in a
price index.
4-4g
Inflation & Stable Prices
• Constructing a Price Index (cont.)
4-4h
Inflation & Stable Prices
• Consumer Price Index
 Measures changes in the prices of goods and services
that consumers typically purchase.
FIGURE 4-6
Consumer Price Index: All Items and Various Categories
for Selected Years (1982–1984 = 100.0)
4-4i
Inflation & Stable Prices
• Consumer Price Index (cont.)
FIGURE 4-2
Annual Percentage Changes in the Overall CPI
4-4j
Inflation & Stable Prices
• Other Price Indexes
 Producer Price Index (PPI)
• Measures changes in the prices of goods that businesses
buy, either for further processing or for sale to a consumer.
 GDP Price Index
• Price index used when calculating price changes for the
entire economy.
4-4k
Deflation & Disinflation
• Deflation and Disinflation
 Deflation
• Sustained decrease in the general level of prices.
 Disinflation
• Slowing of the inflation rate.
4-5
Production Overview
• Production
 Creation of goods and services.
• Full Production and Economic Growth
 Full Production
• Occurs when an economy is producing at its maximum
capacity, or when it is experiencing full employment.
 Economic Growth
• Increase in an economy’s full production output level over
time.
4-6a
Production Overview
• Full Production and Economic Growth (cont.)
FIGURE 4-3
Economic Growth
4-6b
Production Overview
• Achieving Economic Growth
 Technology
• Increase in knowledge about production and its processes.
 Human Capital Investments
• Investments, such as formal education, that increases the
productivity of people.
FIGURE 4-4
U.S. Economic Growth: Real Output per Capita
4-6c
Production Overview
• Costs of Economic Growth
 Increased amounts of waste
 Depletion of resources
 Reasons to purchase new or better items
• Dissatisfaction of possessions must be instilled in a person
to encourage them to continually want replacement items.
• Measures of Production
 Gross Domestic Product (GDP)
• Dollar figure that measures the value of all finished goods
and services produced in an economy in one year.
 Nominal GDP (Money GDP)
• Measures the value of production in terms of prices at the
time of production.
 Real GDP (Constant GDP)
• Money GDP adjusted to eliminate inflation.
4-6d
Production Overview
• Measures of Production (cont.)
4-6e
Production Overview
• Assessing U.S. Production
TABLE 4-8
Money GDP, Real GDP, and the GDP Price Index for Selected Years
4-6f
Production Overview
• Underground Economy
 Productive activities that are not reported for tax
purposes and are not included in GDP.
• Nonmarket productive activities
– Volunteer work, maintaining your car, etc.
• Unreported work
– Mowing lawns, full-time housecleaning, tips, etc.
• Swapped services
– Dental work in exchange for legal advice.
4-6g
Production Overview
• Productivity
 Concept of assessing the amount of output produced by
an economy’s resources.
• Often measures specifically by output per worker.
TABLE 4-9
Growth in Labor Productivity: Business Sector, 1970–2001
4-6g
Possible Policy Problem
• Dilemma Facing Policymakers
 Full production and full employment with inflation, or
 Stable prices and less than full production with
unemployment?
4-7
Chapter 4 – Goals of the Macroeconomy
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work
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