Chapter 1 -- The Macro Goal Variables
Measures of Economy’s “Health”Definitions, Realistic Goals, and
Recent (US) Performance
#1 -- Real Gross Domestic Product (Real GDP)
Real GDP (Y) -- The total production of final goods and services over a period of time, expressed in constant prices of a base year.
Why Real GDP (GDP in constant dollars), instead of Nominal GDP (GDP in current dollars)?
Real GDP -- Realistic Goal
Realistic Goal for Real GDP -- to be as high as possible without accelerating inflation (overstimulated economy).
Can state this goal in a more formal way.
The Natural Level of Real GDP (Potential Real GDP)
The Natural Level of Real GDP (YN) -- that level of real GDP in which inflation has no tendency to accelerate or decelerate.
Comparing Real GDP to the Natural Level of Real GDP
Y < YN -- sluggish economy with
decelerating inflation
(inflation rate) Y > YN -- economy with
accelerating inflation
Y = YN -- economy with constant
inflation rate
Characteristics of YN
UnobservableGrows at 2.5% per year for the USAffected by
-- labor productivity
-- the price of energy
-- the capital stock
-- the labor force
Getting and Keeping Y at YN: The “Two Cars”
If Y = YN, then seek annual real GDP growth = 2.5%.
If Y < YN, then seek annual real GDP growth > 2.5%, for awhile.
If Y > YN, then seek annual real GDP growth < 2.5%, for awhile.
Special Case -- The Recession
Goal Variable #2 -- The Inflation Rate
Inflation Rate -- the growth or percentage change in the overall price level.
First, measure the price level (P).
-- Consumer Price Index (CPI)
-- GDP DeflatorInflation Rate = Percentage Change in
P
Realistic Goal -- Inflation
Ideal Goal: Inflation Rate = 0%.
Realistic Goal (US):
|Inflation Rate| < 3%.
An Inflation Problem Versus Accelerating InflationInflation Problem --
|Inflation Rate| < 3%.Accelerating Inflation --
Inflation RateConsider -- Inflation Rates of 1981 versus
1985 (Y = YN)
1981 Inflation Rate = 9.0%
1985 Inflation Rate = 2.5%
Goal Variable #3 -- The Unemployment Rate (u)
u = (# of people unemployed)
(total labor force)
Does not measure
-- discouraged workers
-- part-time versus full-time
employment
-- people with multiple jobs
Types of Unemployment
Frictional Unemployment -- Unemployment due to normal labor market frictions.
Structural Unemployment -- Unemployment due to a mismatch of available workers and jobs.
Cyclical Unemployment -- Unemployment due to a generally slow economy.
Realistic Goal -- Unemployment Rate
Realistic Goal -- zero cyclical unemployment
Natural Rate of Unemployment (uN) -- The unemployment rate in which inflation has no tendency to accelerate or decelerate.
Realistic Goal: u = uN
Interpretation: u versus uN
u = uN Inflation Rate Unchanged
(Desired State of Economy)u > uN Inflation Rate
(Sluggish Economy)u < uN Inflation Rate
(Overstimulated Economy)
Real GDP and the Unemployment Rate
u = uN Y = YN,
(Desired State of Economy)u > uN Y < YN,
(Sluggish Economy)u < uN Y > YN,
(Overstimulated Economy)
Goal Variable #4 -- The Federal Budget
Budget = Tax Revenues - Government Expenditure (over a given period)
Budget = Tax Revenues - (Government purchases of goods and services + Transfer Payments + Interest on the National Debt)
Budget Definitions
Budget < 0 -- Budget DeficitBudget > 0 -- Budget SurplusBudget = 0 -- Balanced Budget
Realistic Goal -- The Federal Budget
Realistic Goal -- Balanced Budget when Y = YN.
Sluggish economies tend toward deficits.
Hierarchy of economic problems.
Goal Variable #5 -- The Balance of Trade
Balance of Trade (BOT) -- approximated by net exports.
BOT = Exports - Imports
BOT < 0 -- Balance of Trade DeficitBOT > 0 -- Balance of Trade SurplusBOT = 0 -- Balanced Trade Position
Realistic Goal -- Balance of Trade
Realistic Goal -- BOT close to zero.
Diagnosing the “Patient” --
The Current US Economy and Prospects For the Near Future