Introduction to Macroeconomics Chapter 11 0 Syracuse Economics

Introduction to Macroeconomics Chapter 11. 0 Syracuse Economics

• Microeconomics: the study of the individual interdependent markets that make up an economy • Macroeconomics: the study of the overall economy as a whole

Basic Macro questions • Why doesn’t the economy always produce up to its full capacity? • Ex. Great Depression • Why are resources (like people) unemployed? • What causes this to persist? • Can high unemployment happen again?

Intervention and non-Intervention • Most economists lie on a continuum between intervention and nonintervention • Therefore, there are differing opinions as to what are appropriate policies for macro problems

• Gross Domestic Product (GDP) • value of all new production in the nation in the year • Full, sustainable capacity GDP – greatest level of production the economy can sustain over at he long haul • We’ll call this full GDP

Recession • 2 quarters (6 months) of falling actual GDP Depression • Prolonged period of declining GDP • If Real GDP declines for 8 quarters = Depression • GDP not adjusted for inflation

The Macroeconomic Variables Gross Domestic Product (GDP) – Real/Actual GDP (Y): the value of final goods/services produced in a year, adjusted for inflation – Nominal GDP (Unadjusted GDP): total production at current prices – Full Sustainable Level of Real GDP (YF): the maximum level of real GDP the economy can sustain

Gross Domestic Product (GDP) What do the following say about the economy? – Y < YF – Y = YF – Y > YF

Unemployment Rate (U) the percentage of the labor force that is unemployed – Labor Force: all people 16+ who are participating in or looking for work – The labor force consists of two groups: A. Employed B. Unemployed – Voluntarily Unemployed: all those people who are not working and do not want a job

• Percentage of the labor force that is unemployed • Great Depression- 25% • WWII – 1% • Currently- 9. 7% • There are different reasons why people are unemployed

Job search process

Different Types of Unemployment Frictional Unemployment: when people are looking for jobs and there are jobs out there, but the people haven’t found the jobs yet (job search) Structural Unemployment: a time when people are looking for jobs but there is a mismatch between the person seeking the job and the job itself Demand-Deficient (Cyclical) Unemployment: a lack of jobs for all those who want one Natural Rate of Unemployment (UN): the sum of the frictional & structural unemployment rates

• Economists expect to find both frictional and structural unemployment • These two together are called the natural rate of unemployment • Full employment means at the natural rate • Full employment does NOT mean zero percent unemployment Natural rate is generally believed to be between 4 and 7%

Demand-Deficient unemployment • Not enough jobs for those who want one Loss of productive capacity, plus many other social costs • 1929 – 3. 2% • 1933 – 25% Great Depression

Inflation • A rise in the overall level of prices, or a fall in the purchasing power of money • Costs of Inflation Efficiency Costs Equity Costs • Calculated by using the Consumer Price Index or GDP Deflator

• Inflation – rise in the overall level of prices, or a fall in the purchasing power of money • Deflation – fall in the overall level of prices, or a rise in the purchasing power of money

Inflation imposes costs on an economy • Efficiency cost - money loses some of the useful roles it usually plays • Hyperinflation – unbelievably high inflation – Germany after WWI • Money ceases to become a store of value, a medium of exchange, or a unit of account

Another cost of inflation • Equity cost- when inflation causes a redistribution of wealth • People with a fixed wage lose value because money is worth less and less • Those who can’t take steps to account for inflation fall further and further behind

• Indexing – automatically adjusting payments for wages/loans to account for inflation Ex. If Inflation goes up 10%, your paycheck goes up 10% • COLA – cost of living adjustment • Social Security is indexed

• Nominal value- the actual number, the face value • Real value- the underlying true value Ex. Earning $10, 000 a year in 1963 vs. Earning $10, 000 a year in 2003 • Nominally, they are the same In real terms, 1963 was worth much more because of inflation

CPI • CPI – Consumer Price Index Government selects a “market basket” of goods that a typical household consumes Food, clothes, housing, transportation, etc. As an orientation point, the government chooses a base year. Everything gets measured against the base year

• Pmb in target year / Pmb in base year X 100 • Base year will always have a value of 100 If 5095/4450 X 100 = 114 • Then 114 is the price index for that target year • It takes 114 cents to buy what used to cost 100 cents in the base year

• One can use these measures to calculate the inflation rate • CPItarget /CPIbase year X 100% • 114/100 X 100% = 14% • This tool allows use to transform nominal values into real values

• Nominal value = (Real value) X (Price level) Or • (Nominal value) / (Price level) = Real value • When comparing over time, Keep it real