copyright c 2004 by the mcgraw-hill companies, inc. all rights reserved. thinking like an economist...

Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.

Thinking LikeAn EconomistThinking LikeAn Economist

Principles of Macroeconomics

Dr. Gabriel X. Martinez

Ave Maria University

Chapter 1: Thinking Like an EconChapter 1: Thinking Like an Economistomist

22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.

Economics: StudyingEconomics: StudyingChoice In a World of ScarcityChoice In a World of Scarcity

The Scarcity PrincipleThe Scarcity Principle– Boundless wants cannot be satisfied with Boundless wants cannot be satisfied with

limited resources. limited resources. – Therefore, having more of one thing usually Therefore, having more of one thing usually

means having less of another.means having less of another.– Because of scarcity we must make choices.Because of scarcity we must make choices.




Unlimited Wants vs. Limited Resources Unlimited Wants vs. Limited Resources

Scarcity

Choices




Economics Economics – The study of how people make choices under The study of how people make choices under

conditions of scarcity and of the results of those conditions of scarcity and of the results of those choices for society.choices for society.




Economics Economics – Alternatively, the study of how human being Alternatively, the study of how human being

satisfy their wants and desires by satisfy their wants and desires by coordinatingcoordinating the available material resources, given the the available material resources, given the decision-making mechanisms, social customs, decision-making mechanisms, social customs, and political realities of the society.and political realities of the society.



Applying The Cost-Benefit Applying The Cost-Benefit PrinciplePrinciple

The Role of Economic ModelsThe Role of Economic Models– Economic models are abstract constructs Economic models are abstract constructs

(simplified descriptions) that allow us to analyze (simplified descriptions) that allow us to analyze situations in a logical waysituations in a logical way

– Other examples of abstract modelsOther examples of abstract models A computer model of climate changeA computer model of climate change A road mapA road map



Economics: Micro and MacroEconomics: Micro and Macro

M M i i croeconomicscroeconomics– The study of individual choice under scarcity The study of individual choice under scarcity

and its implications for the behavior of prices and its implications for the behavior of prices and quantities in individual markets.and quantities in individual markets.



Economics: Micro and MacroEconomics: Micro and Macro

M M a a croeconomicscroeconomics– The study of the performance of national The study of the performance of national

economies, and of the policies that economies, and of the policies that governments use to try to improve that governments use to try to improve that performance.performance.

Because of scarcity, resources must be coordinated Because of scarcity, resources must be coordinated to satisfy wants. This coordination, on a grand scale, to satisfy wants. This coordination, on a grand scale, is what macroeconomics studies.is what macroeconomics studies.

Macroeconomics:The Bird’s-Eye View of the

Economy

Macroeconomics:The Bird’s-Eye View of the

Economy

Chapter 17: Macroeconomics:The Bird's-Eye View of the Economy

10


Introduction

The Recent U.S. Recession In the U.S.:

The economy almost came to a standstill in 2001. The number of people without jobs increased by

50% From one in every 25 Americans to one in every 16-

17 Americans. Scores of Internet-based businesses collapsed.


11


Real GDP Growth Rate

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Jan

-81

Jan

-83

Jan

-85

Jan

-87

Jan

-89

Jan

-91

Jan

-93

Jan

-95

Jan

-97

Jan

-99

Jan

-01

Jan

-03

Jan

-05


12


Introduction

The Recent U.S. Recession The cause?

The Stock market bubble? Irrational exuberance?

Capitalism? Poor economic planning?


13


Introduction

The Recent U.S. Recession The response:

Macroeconomic policies Government actions designed to affect the

performance of the economy as a whole. The Fed cut interest rates dramatically. The Federal Government cut taxes and increased

spending.


14


Government Surplus % of GDP

-4.0%-3.0%-2.0%

-1.0%0.0%1.0%2.0%3.0%

4.0%5.0%6.0%

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05


15


Introduction

The Argentinian Collapse of 2001 The production of goods and services fell by

nearly 20 percent between 1998 and 2002. About 1 of every 5 Argentinians was

unemployed. The Argentinian peso lost two-thirds of its

value.


16


Introduction

The Response to the Argentinian Collapse Major Reforms to the State and the banking system. Fiscal austerity (control of spending by the provincial

governments, higher taxes on exports). Fiscal: of, or relating to, government expenditures,

revenues, and debt Massive loss of value of the currency made

Argentinian goods attractive to foreigners. As a consequence, in 2003

Production seems to have grown by 8.4% (!!) in 2003. Inflation is (relatively) low, at 3.7% Unemployment has fallen from 18.80% to 14.50%.


17


Introduction

From The Economist


18


Introduction

The East Asian “Miracle” The Japanese economy became 12 times larger

between the end of WWII and today. The Korean economy, in the same period,

became 28 times larger. The US economy, in the same period, became only 4

times larger. The economy of Hong Kong became 10 times

larger over the same period. Why?


19


The Major Macroeconomic Issues

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

1

2

4

5

6

3


20



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.

1


21


Output of the U.S.Economy, 1900-2001

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


22


Economic growth and living standards

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. 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.


23


Economic growth and living standards

Why did the US grow so fast during the 20th century?

Why did the East Asian nations grow faster than the US during the second half of the 20th century?

Is there something about “the nature of India” that makes it different from “the nature of France” so that they grow at a different pace?

What can be done to make Africa grow faster?


24



Productivity In 2001 the average U.S. worker could

produce five times more than in 1900. Average labor productivity:

Note Average Labor Productivity is NOT the same as output per person (there are people who aren’t workers).

workeremployedper output employed people ofNumber

output Total

2


25


Output per Person and per 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


26


Productivity

Productivity and Living Standards in China and the 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


27


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

Why did productivity slow down for 20 years? Why did it speed up? Is this worrisome / encouraging? Is there a government policy that can replicate US

success (or avoid its mistakes) and make other people from other countries more productive?


28


Recessions and Expansions

Secular growth trend

0Jan.-Mar

Tot

al O

utpu

t

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

Expans

ion

Recession

3


29


U. S. Business Cycles

20

10

0

–10

–20

‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000

Civil War

Recoveryof 1895

World War I

Panicof 1893 Panic

of 1907Great

Depression

Korean War Vietnam War

World War II


30


Recessions and Expansions

What causes recessions? Can they be avoided? Whom do they hurt?

What causes prosperities? Do they have any costs?

Should we use government policy to eliminate business cycles?


31


The U.S. UnemploymentRate, 1900-2001

The unemployment rate:•% of the labor force that is out of workObservations:•Rises during recessions•Always greater than zero

4


32


Increases In Unemployment During 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 (%)


33


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.


34


Unemployment Rate, %

3.0

5.0

7.0

Jan

-01

Ap

r-0

1

Jul-

01

Oct

-01

Jan

-02

Ap

r-0

2

Jul-

02

Oct

-02

Jan

-03

Ap

r-0

3

Jul-

03

Oct

-03

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

Ap

r-0

5

Jul-

05


35


Unemployment

What is the relation between output and unemployment?

Why do some countries always have more unemployed people than others?

Why is unemployment never zero, not even in the best of economic times? The lowest unemployment rate since WWII was 2.5%

in 1953. And that’s even after government started intervening

to reduce unemployment.

Should unemployment be zero?


36


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

5


37


Inflation

Inflation Rate The speed at which prices rise.

Why is Inflation a problem? People who live on fixed incomes are able to

buy less with the same income. What causes inflation? What can be done about it?


38


Consumer Price Index

0.0

50.0

100.0

150.0

200.0

250.0

Jan

-81

Jan

-83

Jan

-85

Jan

-87

Jan

-89

Jan

-91

Jan

-93

Jan

-95

Jan

-97

Jan

-99

Jan

-01

Jan

-03

Jan

-05


39


Inflation Rate

0%

2%

4%

6%

8%

10%

12%

14%

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05


40



National economies are becoming increasingly interdependent: In 2005 the U.S. (which is a pretty closed

economy): Exported 13.56% of all goods and services

produced. Imported 19.07% of the goods and services used

by Americans. Countries like Hong Kong export and import

more than 100% percent of what they produce.

6


41


Exports and Imports as a Share of U.S. Output, 1900-2001.

0%

4%

8%

12%

16%

20%

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Imports/GDP

Exports/GDP


42


Economic interdependence among nations

The international flows create political and economic issues: The impact of trade on jobs

The steel and textile industries Trade agreements (NAFTA and CAFTA)

Trade imbalances When exports and imports differ significantly Trade deficit: exports < imports Trade surplus: exports > imports

Capital flows and financial crises.


43


Cost of a3-minute

phone callNew Yorkto London

Transport and Communication Cost, 1930-1990 (Index 1930 = 100)

01930 19901940 1950 1960 1970 1980

20

40

60

80

100

120

Index(1930 = 100)

Year

Averageair-transport cost

per passenger mile

Average ocean freight and port charges

per short ton of cargo


44



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


45


Macroeconomic Policy

Monetary Policy Determination of the nation’s money supply Controlled by the central bank

In the U.S., the Federal Reserve System (Fed) It affects the interest rate… …and through it, the cost of consuming, of

buying a house, setting up a plant,… …and through it, the expansions and

recessions of a country.


46


0.00

2.00

4.00

6.00

8.00

10.00

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Fed Funds Interest Rate Unemployment Rate

Every time unemployment rises, the Fed makes borrowing cheaper, in order to move the economy forward.


47


Fiscal Policy Decisions that determine the government’s

budget, including the amount and composition of government expenditures and government revenues.

It affects people’s income after taxes. It creates (and destroys) jobs. It alters the size of the government.



48


Fiscal policy influences the balance between government spending and taxes: A deficit occurs when government spending is

greater than tax revenue. A surplus occurs when government spending

is less than tax revenue.



49


Structural Policy Government policies aimed at changing the

underlying structure, or institutions, of the nation’s economy.

Best analyzed by microeconomics. But has major macroeconomic effects

Remember the resolution of the Argentinian crisis.



50


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.

What are the facts? What is the production of a country? How fast are prices rising? How can we give jobs to more people?



51


Normative Analysis Addresses the question of whether a policy

should be used; normative analysis inevitably involves the values of the person doing the analysis.

These values are derived from disciplines other than economics: theology, philosophy, etc., and from one’s own reflection and experience.

Should the country grow faster? Should inflation be stopped at the cost of a

recession? Is unemployment too high?



52


Aggregation

Aggregation The adding up of the individual economic

variables to obtain economy-wide totals Used to take a “bird’s-eye view” of the economy

Aggregate measurements in dollar values allow economists to compare broad categories of goods and services, such as exports and imports.

Aggregation often obscures the fine detail of an economic situation, but it simplifies the analysis.


53


Aggregation

Aggregation M a croeconomics deals with aggregates.

M i croeconomics deals with separate markets.

copyright c 2004 by the mcgraw-hill companies, inc. all rights reserved. thinking like an economist...

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