The Big Picture. Macro Principles. Lecture 1

Transcription

1 What is Macroeconomics? GDP Other Measures The Big Picture Macro Principles Lecture 1 Growth Fluctuations

2 Today s Topics The main ideas in this lecture What do we mean by macroeconomics? What are the major variables studied in macroeconomics? Introduce concepts of economic growth, and economic fluctuations

3 What is Macroeconomics? Study of the economy as a whole Structure Decision-making Performance

4 Macro vs Microeconomics Macroeconomics Large area Many actors (firms, households, government) Country, region, state Unemployment, savings, exports,... Microeconomics Study of individual- or firm-level decision-making How many cars are sold, how many hours to work, how much should you bid on ebay,...

5 Macroeconomic Data Use data to measure and explain macroeconomic outcomes GDP Unemployment rate Inflation rate Interest rate

6 Types of data Flow variable Measured over a specific period of time $ year # of people immigrating to US in 2010 Stock variable Measured at a specific time $ # of immigrants living in the US in 2010

7 Gross Domestic Product Total value of goods and services produced in the country Final goods only Flow value Don t count Intel processors Count entire value of Dell laptop

8 Long Term GDP Trend

9 Unemployment Rate Unemployment rate Percentage of the people who want to work that do not have a job Currently 7.5% Rises (quickly) during recessions, falls (slowly) during expansions Stock value

10 Inflation Rate Inflation rate Percentage change in the average price across all goods Currently 0.7% Falls during recessions, overall decreasing trend over last 30 years Flow value

11 Interest Rate Interest rate Per year percentage cost of borrowing money Two components - loss due to inflation, time-value of money Currently 0.69% baseline for a 1-year loan Falls during recessions, but to some extent ontrolled by central bank Flow value

12 Gross Domestic Product Measures productive capacity in dollars Higher is better General observations for US, most countries: Long term - steady growth around a trend US averages about 3% per year output growth About 2% per year growth rate of GDP per capita Exponential growth trend Short term - can vary a lot, and even decline

13 Long Term GDP Trend Use a log scale (exponential growth draws a straight line)

14 Long Term GDP Trend - Per Capita GDP per capita is measure of average well-being

15 Potential GDP Potential GDP: Total output the economy is capable of producing Grows over time with growth in Population (labor supply) Capital Technology Other inputs to production Not observed Estimate: smooth curve fit to real GDP graph

16 Potential GDP

17 GDP Growth Rates Small differences in growth rates add up quickly After 25 years 3% /year gives GDP 12% higher than 2.5%/year 6% /year gives GDP 141% higher than 2.5%/year

18 GDP Growth Rates Average growth rates in red : 2.5 % year : 2.1 % year : 2.3 % year

19 Business Cycle Recession: A period of decline in real GDP Officially defined by National Bureau of Economic Research Rule of thumb is 6 months or more of declining output Expansion: A sustained period of growth Peak: The maximal point of GDP before a recession Trough: The minimal point of GDP during a recession Recovery: The early part of an expansion, when GDP is catching back up to the previous peak Based on GDP, not GDP per capita

20 Business Cycle

21 Volatility Over Time One goal of economic policy is to maintain steady GDP growth before 1984: GDP growth volatile : GDP growth less volatile The Great Moderation 2007-now: Deep recession and slow recovery

22 Summing Up Today s important points Tools to study economy of the US GDP Unemployment rate Interest rate Inflation GDP growth is powerful for improving economic outcomes in the long term GDP fluctuates over the business cycle