Macroeconomic Goals and GDP
Measuring Broad Economic Goals

The goals of U.S. macroeconomic policies are
captured into two laws:

The Employment Act of 1946
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Full Employment and Balanced Growth Act of 1978
(Humphrey-Hawkins Act)

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Committed the federal government to maximize employment
and economic growth, and maintain a stable price level
Went further and committed the government to reach an
unemployment rate of 4 percent, to stabilize the price level with
a target inflation rate of zero percent, and to maintain steady
economic growth
Macroeconomic Goals: 1)Full Employment, 2)Price
Stability, 3)Economic Growth
1) Full Employment


Exists when most individuals who are
willing to work at the prevailing wages in
the economy are employed (natural level
of unemployment)
Unemployment



Frictional unemployment
Structural unemployment
Cyclical unemployment
2) Price Stability


Exists when the average level of prices in
the economy is neither increasing or
decreasing
Price Instability


Inflation
Deflation
3) Economic Growth
Measuring Employment

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Labor Force= People at work (employed)
+ people actively looking for work
(unemployed) (16+)
LFPR= # in labor force/adult population * 100
UR= # of unemployed/Labor Force
Measuring Price Changes


Consumer Price Index (CPI)= weighted cost of
base-period items in current-year prices/
weighted cost of base-period items in base-year
prices * 100
Price change= change in CPI/ beginning CPI *
100
Gross Domestic Product (GDP)

GDP= C (consumption spending) +I (investment
spending) +G (government spending) + NX (net
exports: exports-imports)

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Only final retail price of new good or service
No purely financial transactions
Real GDP vs. Nominal GDP
Real GDP in Year 1= (nominal GDP* 100)/ Price
Index
Output Growth= (real GDP in Year 2 – real GDP
in Year 1)/ real GDP in Year 1 * 100
Inflation


Cost-push inflation: inflation created when an
increase in the cost of production (wages or raw
materials) shifts the short-run AS curve to the
left; tends to push prices up while reducing the
level of real GDP at the same time (stagflation)
Demand-pull inflation: inflation that follows
from an increase in aggregate demand, which
will cause equilibrium real GDP (Y) to increase
and the equilibrium price level (P) to increase.
Inflation



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Anticipated inflation- built in and
expected to occur
Unanticipated inflation- not expected or
unforeseen
Boot-leather costs/ menu costs
Fishers= Nominal interest rate=real
interest rate + inflation
Real interest rate= nominal - inflation