Lecture 9: focusing on Macro Issues

Macro Questions What are the facts What is Real GDP? Policy issues Role of Government Practice with EIA to illustrate What will the exam cover?????

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Overheating?

Production expanded quickly in the United States during 1994/95/96.

This rapid growth caused fear that the economy was overheating.

An overheated economy is prone to increasing inflation and a balance of payments deficit.

What, if anything, can be done?

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Origins and Issues of Macroeconomics

Modern macroeconomics emerged during the Great Depression.

People began to doubt the free market economy.

John Maynard Keynes, in 1936, published The General Theory of Employment, Interest, and Money.

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Origins and Issues of Macroeconomics

Macroeconomic Problems

1) Economic Growth

2) Unemployment

3) Inflation

4) Deficits

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Origins and Issues of Macroeconomics

Short-Term Versus Long-Term Goals Keynes focused on the short-term

primarily• He felt the depression was caused by insufficient

private spending

• Government should increase its spending

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Origins and Issues of Macroeconomics

Short-Term Versus Long-Term Goals Long-term consequences were virtually

disregarded• “In the long run, we’re all dead”

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Origins and Issues of Macroeconomics

Short-Term Versus Long-Term Goals Today, macroeconomics is concerned

with:• Long-term economic growth and inflation

• Short-term business fluctuations and unemployment

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Origins and Issues of Macroeconomics

The Road Ahead The focus of macroeconomics has

shifted:• Depression

• Inflation of the 1970’s

• International economics of today

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Economic Growth

Economic growth is the expansion of the economy’s production possibilities.

Measured by real gross domestic product (Real GDP) The value of the total production of all the

nation’s farms, factories, shops, and offices linked back to the prices of a single year (1992)

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Economic Growth in theUnited States

The Growth of Potential GDP When an economy’s labor, capital, land, and

entrepreneurial ability are fully employed

Real GDP fluctuates around potential GDP

Growth slowed during the 1970s Productivity growth slowdown

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Economic Growth in theUnited States

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Economic Growth in theUnited States

Fluctuations Around Potential GDP The business cycle is the periodic but

irregular up-and-down movement in production.

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Economic Growth in theUnited States

Phases of the Business Cycle Recession

• Period during which real GDP decreases for two successive quarters

Expansion• Period during which real GDP increases

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Economic Growth in theUnited States

Turning Points Peak

• Expansion ends, recession begins

Trough• Recession ends, expansion begins

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The Most Recent U.S. Business Cycle

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Long-Term Economic Growth

in the United States

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Economic Growth Aroundthe World

Real GDP per person The growth rate of real GDP divided by

the population is used to compare growth rates over time and across countries.

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Economic Growth Aroundthe World

Growth rates in the U.S., Germany, and Japan have features that are distinct Similar productivity growth slowdowns Similar business cycles Different long-term trends in potential

GDP

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Economic Growth inThree Large Economies

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Growth Rates Around the World

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Benefits and Costs ofEconomic Growth

Benefits Expanded production possibilities

• health care

• medical research

• space exploration

• roads

• environmental improvements (if resources are devoted to solving environmental problems)

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Benefits and Costs ofEconomic Growth

Costs

1) Foregone consumption

2) Depletion of natural resources

3) Increased pollution

4) More frequent job and location changes

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