DR. PETROS KOSMAS LECTURER VARNA FREE UNIVERSITY ACADEMIC YEAR LECTURE 8 MICROECONOMICS AND MACROECONOMICS ECO-1067

Macroeconomic Questions Why does output fluctuate? What determines economic growth? Why do we have unemployment, and why is unemployment a problem? Why do we have inflation, and why is inflation a problem? ECO-1067

Which governmental policy affects output, growth, unemployment, and inflation? How do changes in the amount of money in the economy affect output, growth, unemployment and inflation? How do domestic economic activities affect other counties and our trade? Macroeconomic Questions ECO-1067

Forms of Cultural Imperialism ECO-1067

Macroeconomic Goals Full Employment Price Stability Economic Growth ECO-1067

Definitions of Employed, Unemployed and Unemployment Rate Employed = everyone currently working, including part time workers Unemployed = people looking for work or temporarily laid off from work Unemployment Rate = unemployed labor force Labor force = employed + unemployed Labor force participation rate = labor force population aged 16 and older ECO-1067

Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Other Employment Concepts Natural Rate of Unemployment Full Employment ECO-1067

Phases of the Business Cycle ECO-1067

First look at:  Output and its rate of growth  Inflation rate  Unemployment rate  International trade What is macroeconomics? ECO-1067

Gross Domestic Product (GDP)  Value of all final goods and services produced within a country in a given time period Real GDP  The volume of goods and services produced within a country (i.e. GDP adjusted for inflation, GDP in terms of goods) Economic Growth:  Percentage rate of increase of real GDP Measuring Economic Growth ECO-1067

Measuring Inflation Percentage change in the price level  GDP deflator  Consumer Price Index (CPI)  In the Eurozone: Harmonized Index of Consumer Prices (HICP) ECO-1067

Measuring Unemployment Labor force = employed + unemployed Unemployment rate=Unemployment/Labor Force Unemployed: does not have a job and has been looking for one in the past 4 weeks The long term unemployment rate is the share of unemployed persons since 12 months or more in the total number of active persons in the labor market. European Labor Force Survey (LFS) Discouraged workers Labor force participation varies across countries and time ECO-1067

Measuring trade with other countries ECO-1067

Growth, Unemployment and Inflation in the Euro area and the US since forecast Output Growth rate EU2.3%2.0%2.7%2.6%0.7%-4.2% US3.1%3.4%3.3%2.1%0.4%-2.7% Unemploymen t rate EU7.4%8.7%7.6%7.5%7.6%9.9% US6.2%5%4.6% 5.8%9.3% Inflation rateEU5.4%1.8%1.7%2.1%3.3%0.3% US4%2%2.9% 3.8%-0.4% ECO-1067

Government Policies Short-term/Medium term policies  Monetary and fiscal policies  Affects output, prices, interest rates employment Long term policies  Affect productive capacity ECO-1067

Monetary Policy Independent Central Banks Change in money supply affects interest rates and ultimately demand for goods and equilibrium output Eurosystem (ESCB)  European Central Bank  National Central Banks ECO-1067

Tasks of the ECB Sets interest rates Manages foreign exchange operations Holds and manages some official reserves of euro area countries Promotes smooth operation of payment systems NCBs  Lend to national financial institutions  Ensure settlement of cashless domestic and trans-border payments  Collect national statistics ECO-1067

Fiscal policies Government spending and taxes Affect economy’s output and price level Stability and Growth Pact  National government deficit no larger than 3% of GDP debt-to-GDP ratio of 60%  Reduces inflationary pressures (and free-riding)  Main purpose of fiscal policy should be stabilization But fiscal policy is main tool left to governments where monetary policy is constrained  Evidence that most fiscal policy is pro-cyclical  Automatic stabilizer ECO-1067

Other Public Policies  Investing in productivity (technology policy)  Improving human capital (education)  Improving physical capital (infrastructure)  External relations (e.g. war expenditures in Iraq) In the EU, these public policies mostly not integrated ECO-1067

Euro: Optimal Currency Area? Common currency: Benefits: elimination of foreign exchange transactions lead to reduction in costs (0.5% of GDP), increased competition  The euro is as stable as the best-performing currencies previously used in the euro area countries Costs: loss of monetary policy Optimal currency area (Robert Mundell):  Countries have to experience similar shocks  If not: countries must have high factor (labor) mobility ECO-1067