Macroeconomic Issues: Macroeconomic Issues Principles of Macroeconomics Professor Dalton ECON 201 – Spring 2006 Boise State University


Introduction: Introduction The Great Depression In the U.S.: Factories cut production 31%; prices fell 30% Unemployment tripled by 1933 to rate of 25% Stocks lost a third of their value in 3 weeks In Germany: Nearly a third of all workers were without jobs Banking system collapsed; prices fell 30%


Introduction: Introduction The Great Depression The cause? Failure of The Stock market? Failure of Capitalism? Failure of Government planning? The response: Macroeconomic policy - Government actions designed to affect the performance of the economy as a whole


Introduction: The major macroeconomic issues are: Economic growth and standards of living Productivity Business cycles (business fluctuations) Unemployment Inflation Economic interdependence Introduction


Two Frameworks:Long Run and Short Run: Two Frameworks: Long Run and Short Run Most (not all) economists argue: Forces that dominate long-run different than those that dominate short-run Growth considered in long-run framework Emphasizing supply Fluctuations considered in short-run framework Emphasizes demand Inflation and unemployment fall within both What is short-run/long-run distinction?


Major Macroeconomic Issues: Major Macroeconomic Issues Standard of Living The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable Economic Growth A process of steady increases in the quantity and quality of the goods and services the economy can produce


Standard of Living: Standard of Living In the U.S.: 60 million households own two or more automobiles. 98% of household own a television (95% a color TV). 67% of households subscribe to cable.


Major Macroeconomic Issues: Major Macroeconomic Issues In the U.S.: In 2002, 60 % of adults were regular Internet users. 80% of the adult population has a high school diploma. 25% of the adult population has a college degree.


Economic Growth: The primary measurement of growth is rate of change in real gross domestic product (real output). Real gross domestic product (real GDP ) – the market value of final goods and services produced in a year, stated in stable (base year) prices. Economic Growth


U.S. Output, 1900-2001: U.S. Output, 1900-2001 In 2001 output of the U.S. economy was: 25 times the 1900 level 5 times the 1950 level


Economic Growth: The U.S. growth rate is about 2-3 percent per year. Per capita real output is real GDP divided by the total population. U.S. per capita real growth about 1.6% since 1820. World per capita real growth about 1.1%. Economic Growth


Output/Person and Output/Worker in the U.S. Economy, 1900-2001: Output/Person and Output/Worker in the U.S. Economy, 1900-2001 In 2001: Output/person was 7 times the 1900 level Output/worker was 5 times the 1900 level


Productivity: Productivity Productivity Average labor productivity: In 2001 the average U.S. worker could produce five times more than in 1900.


Productivity: Productivity Productivity U.S. trends in output per employed worker 1950 - 1973: increased 2.1%/yr 1973 - 1995: increased less than 1%/yr 1995 - present: increased nearly 2%/yr


Productivity andStandards of Living: Productivity and Standards of Living China v. United States 2001 United States China Output $10,200 billion $1,160 billion (U.S.) Population 285 million 1,262 million Employed 135 million 710 million Output/person $35,790 $919 Average labor productivity $75,556 $1,634


Benefits and Costs of Growth: Benefits and Costs of Growth Benefits of Growth: Per capita real growth means rising standards of material well-being. Growth allows governments to avoid difficult allocation issues. Costs of Growth: Resource exhaustion Pollution and destruction of natural habitat.


Business Cycles: Business Cycles Business fluctuations are the upward and downward movements of real GDP that occurs around the secular growth rate trend. Major Questions: Are business fluctuations facts of economic life? Does government action make fluctuations better or worse?


Views of Business Cycles: Views of Business Cycles “Classical” economists Business cycles are either natural adjustments to changes in preferences or technology or consequence of ill-advised government action Government action usually makes things worse Laissez-faire policy Keynesians Business cycle is an indication of fundamental problems of market economies Government action usually makes things better Policy Activism


U. S. Business Cycle History: U. S. Business Cycle History Civil War Recovery of 1895 World War I Panic of 1893 Panic of 1907 Great Depression Korean War Vietnam War World War II


Phases of the Business Cycle: Phases of the Business Cycle Peak: top of the business cycle. Downturn: declining economic activity from a peak. Recession: decline in output for more than two consecutive quarters. Depression: a large recession, representing a big decrease of output. Trough: bottom of recession or depression. Expansion: increase in output for more than two consecutive quarters. Boom: a large expansion, representing a big increase of output.


Phases of the Business Cycle: Phases of the Business Cycle


Business Cycle Statistics: Business Cycle Statistics Data (1854-1945) versus (1945-2003): Downturns and panics have generally been less severe. The duration of business cycles (trough to trough) has increased. The average length of expansions (trough to peak) has increased while the average length of contractions (peak to trough) has decreased. Improvement in data or real change? Majority of economists argue real change due to larger role of government in post-WWII era


U.S. Unemployment Rate,1900-2001: U.S. Unemployment Rate, 1900-2001 The unemployment rate: % of the labor force that is out of work Observations: Rises during recessions Always greater than zero


Unemployment and Recessions: Unemployment and Recessions Unemployment rate at beginning of recession (%) 4.8 (Nov. 1973) 9.0 (May 1975) + 4.2 6.3 (Jan. 1980) 10.8 (Nov./Dec. 1982) + 4.5 5.5 (July 1990) 7.8 (June 1992) + 2.3 Peak unemployment rate (%) Increase in unemployment rate (%)


Unemployment: Unemployment Unemployment rates differ from country to country: For the past 20 years, more than 10% of the European workforce has been unemployed. European unemployment is double the rate in the U.S. During the 1950s & ‘60s, the European unemployment rate was generally lower than in the U.S.


Unemployment as a Problem: Unemployment as a Problem Wage labor created the possibility of unemployment to offset freedom of movement, higher incomes and improved resource allocation Individual viewpoint: unemployment means loss of income (“fear of hunger”) Social viewpoint: unemployment means loss of output – reduced consumer goods


Is all unemployment bad?: Is all unemployment bad? What if an individual prefers not to work? Some types of unemployment are good! Retirement Shifting jobs to earn higher income Quitting jobs that are unsatisfactory


Inflation: Inflation Inflation is a continual rise in the price level. From 1800 until World War II, the U.S. inflation rate and price level fluctuated. Since World War II, the rate fluctuated, but the movement of the price level has been consistently upward.


The U.S. Inflation Rate,1900-2001: The U.S. Inflation Rate, 1900-2001 Inflation The rate prices in general are increasing over time Varies over time -- high in the ‘70s and low in the ‘90’s and today Varies between countries -- in 2001 3% in U.S. & 400% in Ukraine


Measuring Inflation: Measuring Inflation Inflation is measured by changes in a price index. Price index – a number that summarizes what happens to a weighted composite of prices of a selection of goods over time. There are several different price indices used by economists.


International Interdependency: International Interdependency National economies are becoming increasingly interdependent: In 1999 the U.S.: Exported 10.8% of all goods and services produced. Imported 13.3% of the goods and services used by Americans.


International Interdependency: International Interdependency The international flows create political and economic issues: The impact of trade on jobs The steel and textile industries Trade agreements (NAFTA) Trade imbalances When exports and imports differ significantly Trade deficit: exports imports


Exports and Imports as a Share of U.S. Output, 1900-2001.: Exports and Imports as a Share of U.S. Output, 1900-2001. Export-Import Imbalances Why were exports so much larger than imports in the late 1910s and the 1940s? Why have imports consistently exceeded exports since the early 1980s?


Major Macroeconomic Issues: Major Macroeconomic Issues The Major Economic Issues Economic growth and living standards Productivity Business Cycles Recessions and expansions Unemployment Inflation Economic interdependence among nations


Macroeconomic Policy: Macroeconomic Policy Monetary Policy Determination of the nation’s money supply Controlled by the central bank or, in the U.S., the Federal Reserve System (Fed) Fiscal Policy Decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues Structural Policy Government policies aimed at changing the underlying structure, or institutions, of the nation’s economy


Analysis and Policy: Positive versus Normative Analyses of Macroeconomic Policy Positive Analysis Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable Normative Analysis Addresses the question of whether a policy should be used; normative analysis inevitably involves the values of the person doing the analysis Analysis and Policy