AN INTRODUCTION TO MACROECONOMICS

Chapter 6

MACROECONOMIC GOALS

Macroeconomics is the study of national economies and the determination of national income. The federal government pursues three major macroeconomic goals:
Economic Growth Price stability Full employment

Fiscal policy (the federal budget) and monetary policy (the Federal Reserve System) are the main tools that guide the economy towards these goals

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? Is anticipated or unanticipated government policy more effective?
LO2

6-3

THREE KEY ECONOMIC STATISTICS

Real GDP measures the value of all final goods and services produced in a country during a specific period of time. Unemployment rate measures the percentage of all workers who are not able to find paid employment despite being willing and able to work at currently available wages. Inflation rate - measures the extent to which the overall level of prices is rising in the economy.

REAL GDP IN THE UNITED STATES 1947-2011

REAL GDP PER CAPITA 1960-2010

SAVINGS AND INVESTMENT

Saving Trade-off current for future

consumption Investment Financial investment Economic investment Banks and financial institutions
LO4

6-7

ECONOMIC GROWTH AROUND THE WORLD

Country Japan Mexico Period 1890-2008 1900-2008 Real GDP at Beginning $1,504 779 Real GDP at End $35,220 10,070 Growth Rate (per year) 2.71% 2.40

Germany
China U.S. United Kingdom India Indonesia

1870-2008
1900-2008 1870-2008 1870-2008 1900-2008 1900-2008

2,184
716 4,007 4,808 675 623

35,940
6,020 46,970 36,130 2,960 1,440

2.05
1.99 1.80 1.47 1.38 0.78
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Source: Robert J. Barro and Xavier Sala-i-Martin, Economic Growth (New York: McGraw-Hill, 1995) and calculations by Greg Mankiw.

EXPECTATIONS MATTER

Expectations affect current behavior

Pessimistic about the future today Optimistic about the future

less investment
more investment today

When expectations are not met we experience a shock

Negative vs Positive Demand vs Supply GDP Growth rate is explained by market shocks

REAL GDP GROWTH RATE 1947-2011

10

LONG RUN GROWTH VS. SHORT RUN ECONOMIC FLUCTUATIONS

Level of Real Output

Expansion

Trend Line

Deviation line

Recession

Time

11

WILL THE REAL SUPPLY CURVE PLEASE STAND UP?

12

DEMAND SHOCKS
$40,000

Flexible Prices

Price

$37,000

$35,000

DM DL

DH
13

900
LO5

Cars per week

6-13

STICKY PRICES

Many prices are sticky in the short

run Menu Cost Consumers prefer stable prices Firms want to avoid price wars All prices are flexible in the long run Firms adjust to unexpected, but permanent changes in demand
LO5

14

6-14

DEMAND SHOCKS
Fixed Prices

Price

$37,000

DH DL
700
LO5

DM
15

900

1150

Cars per week

6-15

CATEGORIZING MACROECONOMIC MODELS USING PRICE STICKINESS

Immediate Short Run lasts as long as both input prices and output prices stay fixed. Can last anywhere from a few days to a few months. Short Run is a period of time during which output prices are flexible, but input prices are either totally fixed or highly flexible.

Long Run is the time horizon over which both input prices as well as output prices are fully flexible.

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THURSDAYS THOUGHT QUESTION

Whats the best country for you to work in?

Suppose a financial firm offers you a job after graduation. Because the firm has offices in Canada and China, and because you are fluent in English and Mandarin, you get to choose the country in which you will work and live. One factor in your decision is likely to be the growth rate of GDP in each country. In 2006, the growth rate of GDP 2.6 percent in Canada and 10.5 percent in China. *See Questions on Next Slide.
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THURSDAYS THOUGHT QUESTION

What effect do these two very different growth rate have on you decision to work and live in one country or the other? If Chinas much larger growth rate does not necessarily lead you to decide to work and live in China, why not?

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