1. 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?????

2. 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? 2

3. 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.

4. Origins and Issues of Macroeconomics
Macroeconomic Problems
1) Economic Growth
2) Unemployment
3) Inflation
4) Deficits

5. 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

6. 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”

7. 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

8. Origins and Issues of Macroeconomics
The Road Ahead
The focus of macroeconomics has shifted:
Depression
Inflation of the 1970’s
International economics of today

9. 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)

10. Economic Growth in the United 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

11. Economic Growth in the United States
Instructor Notes:
1) The long-term economic growth rate, measured by the growth of potential GDP, was 4.4 percent a year during the 1960s but slowed to 2.6 percent a year during the mid-1970s.
2) Growth has remained slower into the 1990s.
3) Real GDP fluctuates around potential GDP.

12. Economic Growth in the United States
Fluctuations Around Potential GDP
The business cycle is the periodic but irregular up-and-down movement in production.

13. Economic Growth in the United States
Phases of the Business Cycle
Recession
Period during which real GDP decreases for two successive quarters
Expansion
Period during which real GDP increases

14. Economic Growth in the United States
Turning Points
Peak
Expansion ends, recession begins
Trough
Recession ends, expansion begins

15. The Most Recent U.S. Business Cycle
Instructor Notes:
1) A business cycle has two phases: recession and expansion.
2) The most recent recession (highlighted) ran from the third quarter of 1990 through the first quarter of 1991.
3) Then a new expansion began in the second quarter of 1991.
4) A business cycle has two turning points, a peak and a trough.
5) In the most recent business cycle, the peak occurred in the second quarter of 1990 and the trough occurred in the first quarter of 1991.

16. Long-Term Economic Growth in the United States
Instructor Notes:
1) The thin black line shows potential GDP.
2) Along this line, real GDP grew at an average rate of 3.3 percent a year between 1870 and 1994.
3) The blue areas show when real GDP was above potential GDP, and the red areas show when it was below potential GDP.
4) During some periods, such as World War II, real GDP expanded quickly.
5) During other periods, such as the Great Depression and more recently in 1975 (following the OPEC oil price hike), 1982, and , real GDP declined.

17. Economic Growth Around the 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.

18. Economic Growth Around the 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

19. Economic Growth in Three Large Economies
Instructor Notes:
1) Economic growth in three large economies, the United States, Germany, and Japan, has followed a similar pattern.
2) The growth rate in all three countries slowed during the 1970s, and each country has had similar business cycles.
3) But Japan has grown fastest, and German too has grown faster than the United States.

20. Growth Rates Around the World
Instructor Notes:
1) Between 1978 and 1996, the growth rate of real GDP has been lower in the United States than in some other industrial countries.
2) The developing countries of Asia have had the most rapid growth rates and those of Africa, Central and Eastern Europe, and Russia have had the slowest growth.

21. Benefits and Costs of Economic Growth
Expanded production possibilities
health care
medical research
space exploration
roads
environmental improvements (if resources are devoted to solving environmental problems)

22. Benefits and Costs of Economic Growth
1) Foregone consumption
2) Depletion of natural resources
3) Increased pollution
4) More frequent job and location changes