1. Macroeconomics and the
Unit 2
Macroeconomics and the
Circular Flow

2. Macroeconomics
The part of economics concerned with the economy as a whole; with such aggregates as the household, business, and government sectors; and measures of the total economy

3. Why does output fluctuate?
As output rises and falls, it can affect;
# of goods and services people have
Standard of living
# of people employed
Macroeconomics looks at the determinants of output fluctuation and how these factors can be controlled

4. What determines economic growth?
Growth (long-run) in the economy depends on:
Number of workers
Education and training of workers
Technological advances
Amount of machinery and technology labor has to work with
Basic material resources
Macroeconomics addresses how society can encourage the development of these factors, which determine economic growth

5. Why do we have unemployment,and why is unemployment a problem?
The unemployed are people who are actively seeking jobs or are temporarily laid off
Unemployment means that society has fewer products because workers are not working
Unemployment also imposes social and psychological costs on society

6. Why do we have inflation, and why is inflation a problem?
An increase in the average price level over time (price level –weighted avg. of the prices of all final goods & services)
Unpredictable
Macroeconomics studies the causes of inflation, the misallocation of resources that result from inflation, and methods for controlling inflation.

7. Which government policy affects output, growth, unemployment and inflation?
Fiscal policy
Summary of the government’s decisions about expenditures and taxation
Government decisions on taxes and spending will affect the level of output, growth, unemployment and inflation.

8. How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?
Decisions of the central bank – the Federal Reserve in the United States – determine the amount of money (money supply) in the economy
Monetary policy
Summary of the Federal Reserve’s decisions about money and interest rates

9. How do domestic economic activities affect other countries?
A nation’s economy does not operate independent of other countries’ economies
Trade, Monetary, and Fiscal policies all affect the impact of the domestic economies of other nations

10. Activities 9 and 10

11. Economic goals of U.S. society
Full Employment
Price Stability
Economic Growth
Goals may conflict
Trade-offs

12. Activity 11

13. Unemployment Rate Broad measure of economic activity
However, if policy makers are going to create and implement programs to help the unemployed, they need to know more about the unemployed:
Skill level
Ethnic and racial groups
Age groups

14. Measuring Price Changes
Critical Issues
The CPI (Consumer Price Index)measures the price level; and from this the inflation rate can be calculated
The CPI is only one of several price level measures
The CPI may overstate the actual change in the cost of living
The growth rate in real GDP is a better measure of the change in macroeconomic conditions than the growth rate of nominal GDP because real GDP includes the effects of inflation
The growth rate in real GDP per capita captures a measure of changes in the standard of living

15. Fluctuations in output and long-run economic growth
Fluctuations in output (short-run economic growth)
Measured by the changes on real GDP from quarter to quarter or year to year
In general, caused by greater or lesser utilization of existing capital stock and technology
Fluctuations in long-run economic growth
Long-run economic growth refers to changes in the productive capability of the economy through changes in the amount of plant, equipment, and technology

16. GDP and national income accounting
Only final goods and services are included in GDP
Market activities are included, but financial transactions are not
GDP = C+Ig+G+Xn
C= consumption spending
Ig= investment spending
G= government spending
Xn= net exports (exports-imports)

17. GDP
Consumption (C)
All expenditures by households on final goods and services
Investment Spending (Ig)
All final purchases of capital by businesses
All construction
All changes in inventories
Government Spending (G)
Expenditures for goods and services
Expenditures for social capital (schools, highways)
Net Exports (Xn)
(Exports – Imports)

18. GDP
INCLUDED
All final goods & services produced with-in the country for a given year
NOT INCLUDED
Purely financial transactions
Public transfer payments
Private transfer payments
Stock market transactions
Secondhand sales

19. Two approaches to calculate GDP
Expenditures Approach (C+Ig+G+Xn)
All the spending on final goods and services throughout the year
Income Approach
Sums employee compensation, rent, interest, proprietor's income, & corporate profits to obtain national income. Then add indirect business taxes, depreciation, and net foreign factor income to measure GDP

20. Shortcomings of GDP Nonmarket transactions Leisure
Improved Product Quality
Underground Economy
Environment

21. Activity 12

22. Price Indexes and Inflation
An index number that shows how the weighted-average of a “market basket”of goods changes over time

23. Activity 13

24. Inflation Inflation Increase in the overall level of prices
Anticipated inflation
The level of inflation people expect to occur and have built into their economic decisions
Unanticipated inflation
Level of inflation that is not expected or is unforeseen

25. Who is hurt or helped by unanticipated inflation?
Fixed-income receivers, savers, creditors
Why? Redistributes real income away from them and toward others
Helped
Flexible-income receivers, debtors (borrowers)
Why? Redistributes real income toward them and away from others

26. Activity 15

27. Unemployment Employed Unemployed Labor force Unemployment rate
Everyone currently working, including part-time workers
Unemployed
People looking for work or temporarily laid off from work
Labor force
Employed + unemployed
Unemployment rate
Unemployed / labor force
Labor force participation rate
Labor force / population aged 16 and older

28. Issues with Unemployment
Discouraged workers
People who were looking for work but gave up because they didn’t succeed in finding a job
Underemployed workers
People who are working part time but would like to work full time, or who hold a job that requires a lower skill than they possess
Unequal burdens of unemployment
Occupation, age, race & ethnicity, gender, education

29. Types of Unemployment Frictional Cyclical Structural
People who are temporarily between jobs
Cyclical
People who are not working because firms do not need their labor due to lack of demand or a downturn in the business cycle
Structural
Mismatches between job seekers and job openings

30. Other terms Natural rate of unemployment “Full employment”
There is no cyclical unemployment
Frictional and structural unemployment may exist
“Full employment”
Occurs when the economy is at the natural rate of unemployment

31. Activity 16

32. The Business Cycle What causes output to rise and fall?
What causes unemployment to rise and fall?
The Business Cycle describes economic fluctuations
the rising and falling of output in relation to potential output

33. Phases of the Business Cycle
Recession/Contractionary
Two consecutive quarters (six months) of negative growth in real GDP
Peak
The point at which output starts to decline; beginning of recession
Trough
The point at which output starts to increase; end of recession
Recovery or expansion
The economy begins to move forward; period between the trough and the next peak

34. Business Cycle’s affect on Output, Employment & the Price Level
Recession
Period of decline in output and employment. Price level will fall only if a depression occurs
Peak
Economy is at full employment, level of real output is at or close to capacity, & the price level is likely to rise
Trough
Output and employment “bottom out”, they are at there lowest levels. Price level may fall
Recovery or Expansion
Output and employment rise toward full employment. As recovery intensifies the price level may begin to rise

35. Key Points There is no consistent length of time for each phase
Business cycles are unpredictable
After the fact, economists can identify some causes but predicting the actual downturn is hard
Countercyclical and Procyclical variables
Countercyclical – move in opposite direction from real GDP
Procyclical – move in same direction as real GDP

36. Activity 17 and 18