IntroductionIntroduction

Micro and Macro Economics

http://www.youtube.com/watch?v=VVp8UGjECt4Important terms in Macroeconomics?

MacroeconomicsMacroeconomics is the study of issues is the study of issues that affect the economy as a whole. that affect the economy as a whole. Examples are the effects of inflation, Examples are the effects of inflation, and unemployment on economic and unemployment on economic growth and economic well-being.growth and economic well-being.

What is What is Macroeconomics?Macroeconomics?

Divisions of Divisions of MacroeconomicsMacroeconomicsDivisions of Divisions of MacroeconomicsMacroeconomics

The science of macroeconomics is positive economics: the study of economic facts and theories and how they work.Policy practice of macroeconomics is concerned with policies to achieve goals.

Normative Normative Macroeconomic GoalsMacroeconomic Goals

High growthAvoiding large swings in economic outputLow unemploymentLow inflationLow income inequalityNo poverty

Why These Goals?Why These Goals?

High growthAvoiding large swings in economic outputLow unemploymentLow inflationIncome distributionPoverty

Normative Economic GoalsNormative Economic Goals

Economic policy is dependent on normative economic goals.Political processes determine which goals have the highest priority.Once priority has been established, macroeconomics deals with the ways to achieve those goals

Goals: OutputU.S. Real Gross Domestic Product

U.S. Recession?

GDP

Genuine Progress Indicator

It adds in the economic contributions of household and volunteer work, but subtracts factors such as crime, pollution, and family breakdown

The World Values Survey

Working Hours

Goals: UnemploymentGoals: UnemploymentGoals: UnemploymentGoals: UnemploymentThe unemployment rate is the percentage of the labor force looking for work, but unable to find it.

U.S. UnemploymentU.S. Unemployment

Each one-point increase in the unemployment rate is associated with:

920 more suicides

650 more homicides

4000 more people admitted to state mental institutions

3300 more people sent to state prisons

37,000 more deaths

Increases in domestic violence and homelessness

Goals: InflationGoals: InflationGoals: InflationGoals: InflationInflation is the continual increase in the average price of goods and services.Inflation usually increases as actual output rises above potential output and usually decreases if output falls below potential output.Policymakers may face a trade-off between high inflation and low unemployment.

U.S. InflationU.S. Inflation

Inflation – The Great Moderation(median for developing- and GDP weighted mean for high-income)

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InflationinZimbabwe

Poverty?

U.S. Poverty

Wage Inequality?

Measuring Inequality I(ratio of 90th to 10th percentile)

Measuring Inequality II(Gini Coefficient)

30 of 32

U.S. Wage InequalitySince the early 1980s, the relative wages of workers with a low education level have fallen; the relative wages of workers with a high education level have risen.

The Budget BalanceThe Budget BalanceThe budget balance is the difference between tax revenues collected by the government and expenditures made by the government.If taxes are greater than expenditures there is a budget surplus.If expenditures are greater than taxes, there is a budget deficit.The budget balance is affected by both changes in the economy and fiscal policy.

U.S. Government BudgetU.S. Government Budget

What is the current U.S. government’s surplus/deficit?

U.S. Government Deficit

The U.S. Budget Deficit, Since 1945 (Ratio to Output, in percent).

U.S. Trade BalanceU.S. Trade Balance

Policies Used to Policies Used to Achieve GoalsAchieve Goals

Demand-side policiesSupply-side policies

Demand-Side PoliciesDemand-Side Policies

Monetary Policy Changes in the money supply

implemented by the Federal Reserve

Fiscal Policy Changes in government spending

and/or taxes implemented by Congress and the president

Supply-Side PoliciesSupply-Side PoliciesSupply-Side Policies are designed to increase potential output by encouraging: Productivity and innovation by the labor force

Investment in capital Advances in technology

Models in EconomicsModels in Economics

Models are simplified representations of relationships within an economy.Models are used to predict economic outcomes in different situations.Models have three ingredients Assumptions Exogenous variables determined

outside the model Endogenous variables determined

inside the model

Models II

Using a Model to Using a Model to PredictPredict

OPEC decreases the supply of oil to the United States. What happens to the price of gasoline?

Q2 Q1

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f G

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ine

Demand

Supply

P2

P1

Quantity of Gasoline

A decrease in supplyshifts the supply curveto the left and increasesprice and decreasesquantity.