1. Introduction to Macroeconomics
Chapter 23

2. Performance and Policy
There are many pieces of data an economist can look at to measure the economy
We will look at three major components:
Real GDP (Gross Domestic Product)
Unemployment
Inflation

3. Performance and Policy
Real means that they have adjusted the numbers for inflation
Nominal means that they are just using the raw numbers
Why is it more useful to use real instead of nominal?
Read example p 473
Policymakers care about GDP because more output means more consumption ability

4. Performance and Policy
GDP measures the FINAL goods and services produced within the borders of a country during a specific year
We compare ourselves to other countries and use this data to see if we grew from one year to the next
Does it make sense to assume the US grows in GDP from one year to the next?
Do all nations grow in GDP annually?

5. 2016 Data GDP by Country 1 - USA $18.57 Trillion 2 – China $11.39 T
3 – Japan $4.73 T
4 – Germany $3.5 T
5 – United Kingdom $2.65 T
6 – France $2.49 T
7 – India $2.25 T
8 – Italy $1.85 T
9 – Brazil $1.77 T
10 – Canada $1.53 T

6. Performance and Policy
Unemployment
When a person is willing and seeking work but unable to find a job
Nations do not like this because it is wasting their resources (labor)
It also prevents production of goods which prevents consumption
One of the biggest issues is the high crime, political unrest, and poverty
Magic number for US is 4%

7. Performance and Policy
Inflation is an increase in overall prices
Inflation causes a person to have to spend more money to buy the same products they bought last year
It will cause people to have to make choices and sacrifices which means they will buy less
Their savings accounts will be worth less than they expected ($1M dollars will not be enough to retire on these days)

8. Performance and Policy
Macroeconomics seeks to clarify government power:
Can governments promote long-run economic growth?
Can they reduce the severity of recessions by smoothing out short-run fluctuations?
Are fiscal or monetary policies more efficient?
Is there a trade-off between lower rates of unemployment and higher rates of inflation?
These questions are at the heart of
Macroeconomics
They help us understand the large differences between nations in growth, unemployment, and inflation

9. The Miracle of Modern Economic Growth
The concept of economic growth is fairly new
There was no real economic difference between Rome in AD 500 and 1500
The standard of living for Chinese peasants was the same in AD 100 as it was in 1800
While these civilizations experienced economic expansion, they also had proportional population expansion
The Industrial Revolution ushered in the phenomenon of economic growth outpacing population growth

10. The Miracle of Modern Economic Growth
In industrialized nations…
If GDP grows consistently at 2%/year, then wealth will double every 35 years
An income of $10,000 will become $20,000 over the course of 35 years
After another 35 years, it will be at $40,000
Prior to the Industrial Revolution, the wealthiest nations were only 2-3x richer than the poorest nations
Today, the wealthiest nations are, on average, more than 50x richer than the poorest

11. The Miracle of Modern Economic Growth
Per capita GDP (PPP)
Nation
2016 Per Capita GDP
Qatar
Macao, SAR
Luxembourg
Singapore
Brunei
$124,927
$114,430
$109,192
$90, 531
$76,743
Iceland
$72,632
Norway
Kuwait
$70,590
$69,669
United Arab Emirates
$68,245
Switzerland
USA (13th)
$61,360
$59,495
Burundi
$551
Dem Rep of Congo
$415

12. The Miracle of Modern Economic Growth
Saving vs. Investing
Saving occurs when spending is less than income
Economic investment is when we create or expand a business through spending on capital goods
There are opportunity costs/tradeoffs
If we want economic investment in the future, we have to limit consumption in the present
Households are the principle source of savings
Businesses are the principle source of investment

13. The Miracle of Modern Economic Growth
Household savings contribute to business investment
You put your money in a savings account at
Citi Corp
Boeing wants to invest in a new production line; they need to borrow the cash in order to do so
Citi Corp uses your savings (combined with other customers’ savings) to lend Boeing the money
Boeing pays the loan back with interest
Citi Corp pays interest into your savings account

14. The Miracle of Modern Economic Growth
Investing can be tricky
Expectations don’t always pan out
Companies can experience shocks
Unexpected changes in demand
Unexpected changes in supply
Stocks and Mutual Funds can be very profitable, can also destroy parts or all of investments

15. The Miracle of Modern Economic Growth
Microsoft invested tons of money in developing the Zune
MP3 player with video capability
Released soon after the iPod; hoped to cash in on the popularity of portable digital music
A demand shock occurred…nobody wanted the thing
The iPod had already cornered the market
Microsoft lost millions in the investment

16. The Miracle of Modern Economic Growth
In the 1970s, OPEC decided to drastically cut oil production, and set an oil embargo against the United States
This created a supply shock
There was much less gasoline available in the US
Created shortages and long gas lines

17. The Miracle of Modern Economic Growth
Most economists believe that short-run fluctuations in GDP are caused by demand shocks
Demand shocks create problems for companies because of “sticky prices”
It takes time to enact price changes in response to changes in demand
Plus, people would get annoyed if the price of Coca-Cola changed every other day
Why doesn’t price of gasoline follow this precept?
Inventory control and production are based on previous trends, but are ultimately a “best guess”
Maintaining an inventory helps smooth out the rough spots

18. The Miracle of Modern Economic Growth
Some products change prices more than others
Raw materials more flexible vs. consumer goods and services
Oil prices can change daily
Gas prices change, on average, about every 2-3 weeks
Coin-operated laundries change ever 4 years
Particularly sticky goods can cause major economic problems
They don’t fluctuate with the market

19. The Business Cycle