The National Economy Economy –Structure of economic activity In a community, a region, a country, a group of countries, or the world Gross domestic product GDP –Market value –Of all final goods and services –Produced in U.S. –During a given period 2
Exhibit 1 12 Hypothetical Business Cycles Business cycles reflect movements of economic activity around a trend line that shows long- term growth. An expansion (shaded in blue) begins when the economy starts to grow and continues until the economy reaches a peak. After an expansion has peaked, a contraction (shaded in pink) begins and continues until the economy reaches a trough.
Exhibit 2 14 Annual Percentage Change in U.S. Real GDP Since 1929 Years of declining real GDP are shown as red bars and years of growth as blue bars. Note that the year-to-year swings in output became less pronounced after World War II.
The Global Economy Business cycles –Linked among economies Slump in a major economy –Worsen other economies Economic strength in major economies –Improve other economies Financial crisis of 2008 –Affected economies around the world Increasing unemployment and cutting production 15
Exhibit 3 16 U.S. and U.K. Annual Growth Rates in Output Are Similar Though economic fluctuations are not perfectly synchronized across major economies, a link is usually apparent. For example, the United States and the United Kingdom are separated by the Atlantic Ocean, but their real GDPs changed from year to year by roughly similar percentages during the last quarter century.
Exhibit 4 22 Aggregate Demand Curve Real GDP (trillions of 2005 dollars) 0246810121416 50 150 100 Price level (2005 = 100) AD The quantity of aggregate output demanded is inversely related to the price level, other things constant. This inverse relationship is reflected by the aggregate demand curve AD.
Exhibit 5 24 Aggregate Demand and Aggregate Supply in 2009 Real GDP (trillions of 2005 dollars) 0 13.2 50 150 110.7 Price level (2005 = 100) AD AS The total output of the economy and its price level are determined at the intersection of the aggregate demand and aggregate supply curves. This point reflects real GDP and the price level for 2009, using 2005 as the base year. 100
Exhibit 6 30 The Decrease in Aggregate Demand From 1929 to 1933 7.9 10.6 Price level (2005 = 100) AD 1929 AS Real GDP (billions of 2005 dollars) 0977 716 AD 1933 The Great Depression of the 1930s can be represented by a shift to the left of the aggregate demand curve, from AD 1929 to AD 1933. In the resulting depression, real GDP fell from $977 billion to $716 billion, and the price level dropped from 10.6 to 7.9, measured relative to a price level of 100 in the base year 2005.
Exhibit 7 39 Stagflation From 1973 to 1975 33.6 28.1 Price level (2005 = 100) AD AS 1973 Real GDP (trillions of 2005 dollars) 04.92 4.88 The stagflation of the mid- 1970s can be represented as a leftward shift of the aggregate supply curve from AS 1973 to AS 1975. Aggregate output fell from $4.92 trillion in 1973 to $4.88 trillion in 1975, for a decline of about $40 billion (stagnation). The price level rose from 28.1 to 33.6, for a growth of 20 percent (inflation). AS 1975
Eight decades of real GDP & price levels 1929 – 2009 –Long-tern growth in output Real GDP –$1.0 trillion in 1929 to $13.0 trillion in 2009 –Average annual growth rate: 3.3% per year –Average inflation: 3% per year –Population: increased 152% 122 million in 1929 307 million in 2009 52
Eight decades of real GDP & price levels 1929 – 2009 –Employment – increased 198% 47 million in 1929 to 140 million in 2009 –Higher education Human capital –More physical capital –Better technology –Higher productivity –Standard of living – increased Real GDP per capita 53
Exhibit 8 54 Tracking U.S. Real GDP and Price Level Since 1929 As you can see, both real GDP and the price level trended higher since 1929. Blue points indicate years of growing real GDP, and red points are years of declining real GDP. Real GDP in 2009 was 13 times greater than in 1929.