The Big Picture The Big Picture 1 M A C R O EC O N O M IC S
2. The Problem.. Fluctuations aroundthe expected trend in economic growth 3. Business Cycles a type offluctuationfound in theaggregate economic activityof nations who organize their work mainly inbusiness enterprises : a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly generalrecessions, contractions, and revivalsand expansions . . .; business cycles vary from more than one year to ten or twelve years . . .- Arthur F. Burns and Wesley C. Mitchell, 1946 4. The Business Cycle Cyclical Expansion Begins The Recession becomes a Contraction Peak Trough Revival 5. The Business Cycle Cyclical Expansion Begins The Recession becomes a Contraction Peak Trough Revival 6. A Recession? Business Cycle Dating CommitteeNBER The Three Ds Duration Depth Diffusion Two Months% Changein Real GDP& Un/E Rate % Industries w/ Declining Emplmt http://www.econlib.org/library/Enc1/Recessions.html 7. Prediction Conference Board
8. Prediction Conference Board
9. IndicatorsBCI Of a change in the direction of economic growth. Leading - new orders, backlogs, permits Coincident - employment & consumption Lagging -labor costs, interest rates 10. Output The annual aggregate value of final goods & services produced and sold at current prices. GDP D domestic factors (any)of production GNPN domestically-owned factors of production (anywhere) 11. Data GDP GNP Per ca p ita Luxemburg $ 87,000 $ 45,000 USA $ 46,000 Liberia $16 Mozambique $80 USA (2009) $ 14 trillion (2.4%) over 08 USAGovt Debt $ 13 trillion rising $ 4B/day 12. Prices The goal is stable prices.Inflation and Deflation both distort economic behavior. The CPI 1971-77 + 47.4 percent 1999-08 + 17.2 percent 2008+3.8 percent 2009 - 0.4 percent* 2010+0.9 percent in the 1 stquarter * First decline in the CPI since 1955.GDP deflator + 1.36%. 13. The C.P.I.(BLS) A weighted (by portions) index of the average prices of a basket (about 159 items) of Good & Services purchased (CES survey data) by urban households. There are 7 product groups:Food & Bev 15%, Housing42% , Apparel, Transportation17% , Medical, Recreation, Education & Communications, Other.With sub-groups & strata. Revised periodically (last 1998): added - alcohol away, parking fees, car leases, cell phones (dropped long distance charges recently). 14. Substitution Bias
Thus, the CPIoverstatesincreases in the cost of living. 15. Newer Goods
Thus, the CPIoverstatesincreases in the cost of living. 16. Improvements increases in Quality
Thus, theCPIoverstates increases in the cost of living. 17.
TheCPIand theGDPDeflator
18. CPI vs. GDP deflator
19. Answers
20. Comparing Dollar Figures from Different Times
21. The Price of Gasoline
Answer:Multiply the 1981 gas price by the ratio of theCPIin 2005 to theCPIin 1981. 22. Solution: TheRealPrice of Gasoline
$2.50 $3.15 Gas price in2005 dollars Ratio = 2.22 x 196.4 $2.50 2005 88.5 $1.42 1981 CPI Price per Gallon Date 23. Exercise
24. Solution
Solution Convert 2000 salary of $34,000 todays dollars $34,000 x (195.3/152.4) = 1.28 x $34,000 = $43,520. After adjusting for inflation,salary is higher todaythan in 2000. 25. Real vs. Nominal Interest Rates
Real interest rate =(nominal interest rate) (inflation rate) 26. Real and Nominal Interest RatesEXAMPLE
27. Real and Nominal Interest Rates in the U.S. 28. Employment Population Population > 15 but < 66Less the institutionalized (prisons, etc.), Armed Forces, stay at home parents, retired persons, some others. Labor Forceincludes the unemployed, discouraged, etc. Labor Force World 3 Billion USA 153 million 49% women 40% of employed women are in management or professional occupations. 29. Employment and the BP Spill 30. Unemployment Rate Monthly labor force surveys. 60,000 households.U1:Percentage of labor force unemployed 15 weeks or longer.U2:Percentage of labor force who lost jobs or completed temporary work.U3:Official unemployment rate per ILO definition - currently not working but arewillin g,able , andavailableto work for pay, and areactivel ysearchin g for work. U4:U3 + " discouraged workers ,U5:U4 + other "marginally attached workers.U6:U5 + Part time workers who want to work full time. 31. Types of Unemployment Frictional location & season, skill mismatch informational inefficiencies in the labor market. Cyclical- due insufficient Aggregate Demand Structural technological change and disruptions, globalization causing skill mismatch.Classical-due to rigidities in labor markets and institutional disincentives. 32. Unemployment At the end of 2009, the proportion of the unemployed who had been jobless for 27 weeks or longer wasthe highest since 1948 . On Saturday (July 3 rd ) the number of people cut from unemployment benefits will surge to 1.63 million.By mid-July, about 2 million unemployed Americans could lose their benefits. 33. Data BLSQ2 2010 Unemployment rates were higher in May than a year earlier in 222 of the 372 metropolitan areas, lower in 141 areas, and unchanged in 9 areas.In May, 270 metropolitan areas reported over-the-year decreases in nonfarm payroll employment, 95 reported increases, and 7 were unchanged.In May, employers took 1,412 mass layoff actions involving135,789 workers . 34. Data BLS Quarterly Census of Employment and Wages (QCEW)Metropolitan Area Employment and Unemployment (Monthly) Mass Layoffs (Monthly) 35. History To 1776 Mercantilists vs Smith Wealth of Nations 19 thCentury Classical Economics Says Law some fundamental I/O work 20 thCentury Great Depression 1936 Keynes General Theory later Neoclassical Economics Game Theory Significant advances in computing Today waiting for the revolution 36. The Classical View Says Law
37. A barter economy?
38. Says Law in a Money Economy
The classical economists argued thatsaving (S) is matched by an equalamount of investment (I) because ofinterest rate (i) flexibility in the creditmarket. 39. Savings and Investment are linked in the Loanable Funds market 40. If Saving rises and Consumption falls, will total spending in the economy decrease?
41. What is the Classical position on prices and wages?
42. Policy Implication of Believing the Economy is Self-Regulating Laissez-faire Classical, new classical, and monetarist economists believe that the economy is self-regulating.For these economists, full employment is the norm:The economy always moves back to Natural Real GDP . 43. Simple Model
CHAPTER 2THINKING LIKE AN ECONOMIST 44. Factors of Production
CHAPTER 2THINKING LIKE AN ECONOMIST 45. The Circular-Flow Diagram Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services