CHAPTER 20
A First Look at Macroeconomics
Origins and Issues of Macroeconomics
Economists began to study economic growth, inflation, and
international payments during the 1750s.
Modern macroeconomics dates from the Great
Depression, a decade (1929-1939) of high unemployment
and stagnant production throughout the world economy.
John Maynard Keynes book, The General Theory of
Employment, Interest, and Money, began the subject.
Origins and Issues of Macroeconomics
Short-Term Versus Long-Term Goals
Keynes focused on the short-term—on unemployment and
lost production.
“In the long run,” said Keynes, “we’re all dead.”
During the 1970s and 1980s, macroeconomists became
more concerned about the long-term—inflation and
economic growth.
Origins and Issues of Macroeconomics
Macroeconomic Problems
1) Economic Growth
2) Unemployment
3) Inflation
4) Deficits
1- Economic Growth and Fluctuations
Economic growth is the expansion of the economy’s
production possibilities—an outward shifting PPF.
We measure economic growth by the increase in real
GDP.
Real GDP (real gross domestic product) is the value of the
total production of all the nation’s farms, factories, shops,
and offices, measured in the prices of a single year.
1- Economic Growth and Fluctuations
Growth of Potential GDP
Potential GDP is the value
of production when all the
economy’s labor, capital,
land, and entrepreneurial
ability are fully employed.
1- Economic Growth and Fluctuations
Fluctuations of Real GDP
Around Trend
Real GDP fluctuates
around potential GDP in a
business cycle—a
periodic but irregular up-
and-down movement in
production.
1- Economic Growth and Fluctuations
Every business cycle has two phases:
1. A recession
2. An expansion
and two turning points:
1. A peak
2. A trough
Figure 4.2 on the next slide illustrates these features of
the business cycle.
1- Economic Growth and Fluctuations
A recession is a period during which real GDP
decreases for at least two successive quarters.
An expansion is a period during which real GDP
increases.
2- Jobs and Unemployment
Unemployment
Not everyone who wants a job can find one.
On an average day in a normal year, 7 million people in
the United States are unemployed.
In a recession, the number is larger. For example, in 1990-
1991 recession, 9 million people were looking for jobs.
The unemployment rate is the number of unemployed
people expressed as a percentage of all the people who
have jobs or are looking for one.
2- Jobs and Unemployment
Why Unemployment Is a Problem
Unemployment is a serious economic, social, and
personal problem for two main reasons:
Lost production and incomes
Lost human capital
The loss of a job brings an immediate loss of income and
production—a temporary problem.
A prolonged spell of unemployment can bring permanent
damage through the loss of human capital.
3- Inflation
We measure the level of prices—the price level— as the
average of the prices that people pay for all the goods and
services that they buy.
The Consumer Price Index—the CPI—is a common
measure of the price level.
We measure the inflation rate as the percentage change
in the price level.
Inflation arises when the price level is rising persistently.
If the price level is falling, inflation is negative and we have
deflation.
3- Inflation
Hyperinflation
The most serious type of inflation is hyperinflation—an
inflation rate that exceeds 50 percent a month.
Why Inflation is a Problem
Inflation is a problem for many reasons, but the main one is
that once it takes hold, it is unpredictable.
Unpredictable inflation is a problem because it
Redistributes income and wealth
Diverts resources from production
4- Surpluses, Deficits, and Debts
Government Budget Balance
If a government collects more in taxes than it spends, it
has a government budget surplus.
If a government spends more than it collects in taxes, it
has a government budget deficit.
4- Surpluses, Deficits, and Debts
International Surplus and Deficit
If a nation imports more than it exports, it has an
international deficit.
If a nation exports more than it imports, it has an
international surplus.
The balance on the current account equals U.S. exports
minus U.S. imports but also takes into account interest
payments paid to and received from the rest of the world.
4- Surpluses, Deficits, and Debts
Deficits Bring Debts
A debt is the amount that is owed.
When a government or a nation has a deficit, its debt
grows.
A government’s or a nation’s debt equals the sum of all
past deficits minus past surpluses.
A government’s debt is called national debt.
Macroeconomic Policy Challenges
and Tools
Classical and Keynesian Views
Economists’ views fall into two broad schools:
Classical view: The economy behaves best if the
government leaves people free to pursue their own self-
interest. Attempts by the government to improve
macroeconomic performance will not succeed.
Keynesian view: The economy behaves badly if left alone
and that government action is needed to achieve and
maintain full employment.
RECALL THAT:
Origins and Issues of Macroeconomics
are:
Macroeconomic Problems
1) Economic Growth
2) Unemployment
3) Inflation
4) Deficits
Macroeconomic Policy Challenges
(Goals) are:
Five widely agreed policy challenges for macroeconomics
are to:
1. Boost economic growth
2. Keep inflation low
3. Stabilize the business cycle
4. Reduce unemployment
5. Reduce government and international deficits
Macroeconomic Policy Tools
Two broad groups of macroeconomic policy tools are
Fiscal policy—making changes in tax rates and
government spending
Monetary policy—changing interest rates and changing
the amount of money in the economy
The government conducts fiscal policy.
The Federal Reserve (the Fed) conducts monetary policy.
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