The National Economy

The Scope of
Macroeconomics
• http://www.youtube.com/watch?v=cq-
7P__Ck5M&feature=related Introduction (3)
• http://www.youtube.com/watch?v=x7NVH9
CJ60c&feature=related Female economists
(8)
• http://www.youtube.com/watch?v=gaEY-p-
21F8 Circular Flow of Income
• http://www.youtube.com/watch?v=9GlZFiCqIG
o&playnext=1&list=PL032A11D1544151F8
The Financial Crisis and the Death of
Macroeconomics | Joseph T. Salerno (33)
 THE SCOPE OF MACROECONOMICS

• Microeconomics and macroeconomics

• Macroeconomics is the study of the
behavior of the economy as a whole
• forces that affect firms, consumers and
workers in the aggregate
• The major macroeconomic issues
– economic growth
– unemployment
– inflation
– balance of payments and exchange rates
 2 central themes

• Business cycle: the short term

fluctuations in output, employment,
financial conditions, prices (before
Keynes accepted as being as inevitable
as the tides)

• Economic growth: the longer-term

trends in output and living standards.
 Economic growth (average % per annum),
Unemployment (average %), Inflation (average % per annum)
France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore
Growth
1960-9 7.5 4.4 5.3 10.9 2.9 4.3 3.5 4.6 5.4 6.5 8.8
1970-9 3.2 2.6 3.8 4.3 2.0 2.8 3.2 3.6 8.1 7.9 8.3
1980-9 2.2 1.8 2.4 4.0 2.4 2.5 2.2 2.6 3.0 5.8 6.1
1990-9 1.7 2.2 1.5 1.7 2.1 3.0 2.1 2.6 1.8 6.9 7.7
2000–5 2.0 1.0 1.5 1.9 2.7 2.9 2.0 2.6 2.8 5.2 4.6
Unemployment
1960-9 1.5 0.9 5.1 1.3 2.2 4.1 2.5 2.5 n/a n/a n/a
1970-9 3.7 2.3 6.4 1.7 4.5 6.1 4.0 4.3 n/a n/a n/a
1980-9 9.0 5.9 9.5 2.5 10.0 7.2 9.3 7.3 n/a 6.2 3.6
1990-9 10.6 7.7 10.4 3.7 8.1 5.8 9.2 6.9 9.3 3.4 2.8
2000–5 9.2 8.9 9.0 5.0 5.1 5.3 7.9 6.7 10.5 3.5 3.8
Inflation
1960-9 4.2 3.2 4.4 4.9 4.1 2.8 3.7 3.1 46.1 –0.3 1.1
1970-9 9.4 5.0 13.9 9.0 13.0 6.8 10.3 9.2 30.6 7.3 5.9
1980-9 7.3 2.9 11.2 2.5 7.4 5.5 7.4 8.9 332.2 2.2 2.5
1990-9 2.0 2.2 4.7 0.8 3.9 2.4 3.3 4.4 847.0 3.6 1.9
2000–5 1.8 1.4 2.7 –1.3 1.8 2.2 2.1 2.3 7.1 1.6 1.0
 Economic growth (average % per annum),
Unemployment (average %), Inflation (average % per annum)
France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore
Growth
1960-9 7.5 4.4 5.3 10.9 2.9 4.3 3.5 4.6 5.4 6.5 8.8
1970-9 3.2 2.6 3.8 4.3 2.0 2.8 3.2 3.6 8.1 7.9 8.3
1980-9 2.2 1.8 2.4 4.0 2.4 2.5 2.2 2.6 3.0 5.8 6.1
1990-9 1.7 2.2 1.5 1.7 2.1 3.0 2.1 2.6 1.8 6.9 7.7
2000–5 2.0 1.0 1.5 1.9 2.7 2.9 2.0 2.6 2.8 5.2 4.6
Unemployment
1960-9 1.5 0.9 5.1 1.3 2.2 4.1 2.5 2.5 n/a n/a n/a
1970-9 3.7 2.3 6.4 1.7 4.5 6.1 4.0 4.3 n/a n/a n/a
1980-9 9.0 5.9 9.5 2.5 10.0 7.2 9.3 7.3 n/a 6.2 3.6
1990-9 10.6 7.7 10.4 3.7 8.1 5.8 9.2 6.9 9.3 3.4 2.8
2000–5 9.2 8.9 9.0 5.0 5.1 5.3 7.9 6.7 10.5 3.5 3.8
Inflation
1960-9 4.2 3.2 4.4 4.9 4.1 2.8 3.7 3.1 46.1 –0.3 1.1
1970-9 9.4 5.0 13.9 9.0 13.0 6.8 10.3 9.2 30.6 7.3 5.9
1980-9 7.3 2.9 11.2 2.5 7.4 5.5 7.4 8.9 332.2 2.2 2.5
1990-9 2.0 2.2 4.7 0.8 3.9 2.4 3.3 4.4 847.0 3.6 1.9
2000–5 1.8 1.4 2.7 –1.3 1.8 2.2 2.1 2.3 7.1 1.6 1.0
 Economic growth (average % per annum),
Unemployment (average %), Inflation (average % per annum)
France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore
Growth
1960-9 7.5 4.4 5.3 10.9 2.9 4.3 3.5 4.6 5.4 6.5 8.8
1970-9 3.2 2.6 3.8 4.3 2.0 2.8 3.2 3.6 8.1 7.9 8.3
1980-9 2.2 1.8 2.4 4.0 2.4 2.5 2.2 2.6 3.0 5.8 6.1
1990-9 1.7 2.2 1.5 1.7 2.1 3.0 2.1 2.6 1.8 6.9 7.7
2000–5 2.0 1.0 1.5 1.9 2.7 2.9 2.0 2.6 2.8 5.2 4.6
Unemployment
1960-9 1.5 0.9 5.1 1.3 2.2 4.1 2.5 2.5 n/a n/a n/a
1970-9 3.7 2.3 6.4 1.7 4.5 6.1 4.0 4.3 n/a n/a n/a
1980-9 9.0 5.9 9.5 2.5 10.0 7.2 9.3 7.3 n/a 6.2 3.6
1990-9 10.6 7.7 10.4 3.7 8.1 5.8 9.2 6.9 9.3 3.4 2.8
2000–5 9.2 8.9 9.0 5.0 5.1 5.3 7.9 6.7 10.5 3.5 3.8
Inflation
1960-9 4.2 3.2 4.4 4.9 4.1 2.8 3.7 3.1 46.1 –0.3 1.1
1970-9 9.4 5.0 13.9 9.0 13.0 6.8 10.3 9.2 30.6 7.3 5.9
1980-9 7.3 2.9 11.2 2.5 7.4 5.5 7.4 8.9 332.2 2.2 2.5
1990-9 2.0 2.2 4.7 0.8 3.9 2.4 3.3 4.4 847.0 3.6 1.9
2000–5 1.8 1.4 2.7 –1.3 1.8 2.2 2.1 2.3 7.1 1.6 1.0
 THE SCOPE OF MACROECONOMICS
• Microeconomics and macroeconomics
• The major macroeconomic issues
– economic growth
– unemployment
– inflation
– balance of payments and exchange rates
• Government macroeconomic policy –
how to combat periodic economic crises
and how to stimulate long-term growth
– choosing between macroeconomic theories
– choosing the order of priorities
 Great Depression – John Maynard
Keynes
• Developed his revolutionary theory
(intellectual leap), which helped explain
the forces producing economic
fluctuations and suggested how
governments can control the worst
excesses of the business cycle
• 1936: The General Theory of
Employment, Interest and Money
• US Congress formally proclaimed
federal responsibility for
macroeconomic performance –
Employment Act (1946) – to promote
maximum employment, production and
purchasing power
 Central questions of macroeconomics
• 1. Why output and employment
sometimes fall, and how can
unemployment be reduced? (GD –
unemployment rose to almost one-
quarter of the workforce, industrial
production fell by one-half)
• 2. What are the sources of price
inflation, and how can it be kept under
control? – key goal low and stable
inflation being in the range from 1 to 3
percent per year (Zimbabwe – 20000000
percent per year in 2008)
• 3. How can a nation increase its rate of
economic growth?
key factors in long-term economic
growth include reliance:
on well-regulated private markets
stable macroeconomic policy
high rates of saving and investment
openness to international trade
accountable and non-corrupt governing
institutions
 Objectives of Macroeconomics

• Output
– High level and rapid growth of output

• Employment
– High level of employment with low
involuntary unemployment

• Stable prices
 Instruments of Macroeconomics

• Monetary Policy
– Buying and selling bonds, regulating
financial institutions

• Fiscal Policy
– government expenditures
– Taxation
 Measuring economic success

• GDP – gross domestic product –

measure of the market value of all final
goods and services
• Nominal
– figure that has not been adjusted for
inflation
– expressed in current prices
• Real
– expressed in the prices of some base year
 Example

• Suppose in the year 2000, the economy

of a country produced $100 billion worth
of goods and services based on year
2000 prices. Since we're using 2000 as a
basis year, the nominal and real GDP are
the same. In the year 2001, the economy
produced $110B worth of goods and
services based on year 2001 prices.
Those same goods and services are
instead valued at $105B if year 2000
prices are used.
• Then:
• Year 2000 Nominal GDP = $100B, Real
GDP = $100B

Year 2001 Nominal GDP = $110B, Real

GDP = $105B

Nominal GDP Growth Rate = 10%

Real GDP Growth Rate = 5%
• Once again, if inflation is positive, then
the Nominal GDP and Nominal GDP
Growth Rate will be less than their
nominal counterparts.
• The difference between Nominal GDP
and Real GDP is used to measure
inflation in a statistic called The GDP
Deflator.
 % growth rate of real GDP in year t

GDPt – GDPt-1
100 X
GDPt-1
Despite the short-term fluctuations seen in business
cycles, advanced economies generally exhibit a
steady long-term growth in real GDP and an
improvement in living standards – economic growth
 Potential GDP
• Maximum sustainable level of output that
the economy can produce
• Operating at the economy’s potential –
high levels of utilization of the labor force
and the capital stock
• When output rises above potential output
– price inflation tends to rise
• While a below-potential level of output
leads to high unemployment
• It is determined by productive capacity
(inputs available) + technological
efficiency
 Recession – Depression

• Recession
– A period of significant decline in total
output, income and employment,
– usually lasting more than a few months
– and marked by widespread contractions in
many sectors of the economy.
• Depression
– A severe and protracted downturn
High employment – low unemployment

• Unemployment rate
– The percentage of the labor force that is
unemployed
– The labor force includes all employed
persons + those unemployed individuals
who are seeking jobs
• The unemployment rate tends to reflect
the state of the business cycle: when
output is falling, the demand for labor
falls and the unemployment ret rises.
 Price stability

• To track prices, government statisticians

construct price indexes, or measure of
the overall price level
• E.g. : Consumer Price Index (CPI) -
– Which measures the trend in the average
price of goods and services bought by
consumers
• (overall price level P)
• Measuring price stability by looking at
inflation or the rate of inflation
 Inflation rate

• The percentage change in the overall

level of prices from one year to the next
• E.g. CPI = 201,6 in 2006 and 207.3 in
2007

Rate of
Pt – Pt-1
inflation = 100 X
in year t Pt-1
= 2,8%
 Inflation
• Deflation - prices decline
• Hyperinflation – a rise in the price level
of a thousand or a million percent a year
• E.g. Weimer Germany 1920s; Brazil 1980s, Russia
1990s, Zimbabwe in recent years
• Price stability is important: a smoothly
functioning market system requires that
prices accurately convey information
about relative scarcities.
• High inflation – taxes become highly
variable, the real values of pensions are
eroded
 Tools of macroeconomic policy
1. Fiscal policy
• Government expenditure
– Government purchases (construction of
roads, salaries of judges… )
– Government transfer payments – increasing
the incomes of targeted groups
• Taxation
– Taxes affect people’s income (disposable
income, private saving)
– Affect the prices of goods and factors of
production - incentives, behavior
2. Monetary Policy
• The government conducts through
managing the nation’s money, credit and
banking system.
• Primarily by setting short-run interest-
rate targets and
• Through buying and selling government
securities to attain those targets
• Historically Fed has raised interest rates
when inflation threatened to rise too
high (reduced investment, consumption
– causing a decline in GDP and lower
inflation
 Fiscal policy
• Government expenditure and taxation
– G.e. influences the relative size of collective
spending and private consumption
– Taxation subtracts form incomes, reduces
private spending and affects private saving.
– + it affects investment and potential output
• FP is primarily used to affect long-term
economic growth through its impact on
national saving and investment
• + to stimulate spending in deep or sharp
recessions
 Monetary Policy

• Conducted by the central bank,

determines short-run interest rates
• Affects credit conditions, including asset
prices such as stock and bond prices
and exchange rates
• Changes in interest rates (with other
financial conditions) affect spending in
sectors such as business investment,
housing, foreign trade.
• MP has an important effect on both
actual and potential GDP.
 Aggregate supply and demand

• AS-AD analysis help explain the major

trends in output and prices
1. AS:
– Total quantity of goods and services that
the nation’s businesses willingly produce
and sell in a given period
– Depends upon:
• Price level
• Productive capacity of the economy
• Level of costs
• 2. AD:
– Total amount that different sectors in the
economy willingly spend in a given period
– equals total spending on goods and
services
– Components of AD:
• Consumption
• Investment
• Government purchases
• Net exports
– AD is affected
• Prices at which goods are offered
• Exogenous forces
• Government policies
 AS and AD determine the major
macroeconomic variables
Monetary policy Output, real
GDP
Fiscal policy Aggregate
Demand
Other forces Employment and
unemployment
Intersection
of AS and
AD Prices and
Price level and costs inflation

Potential output Aggregate

Supply Foreign
Capital, labor, trade
technology
 Caution!

• Microeconomic S and D curves show the

quantities and prices of individual
commodities
– with such things as national income and
other good’s prices held as given.
• AS and AD curves show the
determination of total output and the
overall price level
– with such things as the money supply,
fiscal policy and the capital stock held
constant
 Macroeconomic history (USA- 1900-2008)
• Wartime boom:
– 1960s – J. F. Kennedy brought Keynesian
economics to Washington
– Expansionary policy – cuts in personal and
corporate taxes in 1963 and 1964
– GDP grew rapidly + unemployment declined
+ inflation was contained = economy was at
its potential output
– BUT: government underestimated the
magnitude of the buildup for the Vietnam
war
– Defense spending grew by 55% 1965-1968 –
major inflationary boom under way
• Johnson postponed fiscal steps to slow
the economy – tax increases and civilian
expenditure cuts came only in 1968 – too
late to prevent inflationary pressures from
overheating the economy
• Fed accommodated the expansion
• With rapid money growth and low interest
rate: economy grew very rapidly over the
period 1966-1970
• Under the pressure of low unemployment
and high factory utilization inflation began
to rise – inaugurating the „Great inflation’
1966-1981
 Tight money 1979-1982
1970s
– Rising oil prices
– Grain shortages
– Sharp increase in import prices
– Union militancy
– Accelerating wages
• Price inflation became embedded (double digit
levels)
• Paul Volcker – interest rates rose sharply in
1979,1980, stock market fell, credit was hard to find
• Tight monetary policy reduced spending and
produced a leftward and downward shift o the AD
curve.
• Effects of tight money:
• Output moved below its potential and
unemployment rose sharply - decline in
inflation (average 12% per year 1978-
1980 to 4% in the subsequent period)
• END to the Great inflation
 The Growth Century
• Output has grown by a factor of 34 since
the beginning of the 20th century
• Explanation?
• US – average growth rate 3,33 % per
year
• Growth due to:
– Growth in the scale of production (capital,
labor, land rose sharply)
– Improvements in efficiency (new products,
processes)
– Less visible factors (improved management
techniques
 Growth in Potential Output Determines
Long-run Economic Performance
P – price level
AS2008
P2008
AD2008
AS1900
P1900
AD1900 Q – real output
Q1900 Q2008
The End
• http://www.biography.com/people/janet-yellen-21362135 - Janet
Yellen
Trends in 2013:
• http://www.youtube.com/watch?v=OQQMcMnxVrg (52)
• http://www.youtube.com/watch?v=3ZaL3UdTSMo
• http://www.youtube.com/watch?v=tA5M3HYzlhc
Trends in 2014:
ECONOMIC Trends In 2014 Gold, Real Estate, Stock Markets
by: Fabian Calvo -
https://www.youtube.com/watch?v=B3j_OJB2AhY
Outlook on 2015 global trends -
https://www.youtube.com/watch?v=jLcJRd3GP_I
2015 Global Economy Will Decline as Indicators Reveal REPEAT of
GREAT DEPRESSION! -
https://www.youtube.com/watch?v=hx1Fik0DHTw
Martin Wolf on global economy in 2017 | Opinion
https://www.youtube.com/watch?v=T4Cx8oRCdSw
2018- Global Economic Outlook
• https://www.youtube.com/watch?v=4wt-zgOSmTo
 All Laureates in Economic Sciences
2017 - Richard Thaler 1989 - Trygve Haavelmo
2016 - Oliver Hart, Bengt Holmström
1988 - Maurice Allais
2015 - Angus Deaton
2014 - Jean Tirole 1987 - Robert M. Solow
2013 - Eugene F. Fama, Lars Peter Hansen, Robert J. Shiller 1986 - James M. Buchanan Jr.
2012 -Alvin E. Roth, Lloyd S. Shapley 1985 - Franco Modigliani
2011- Thomas J. Sargent, Christopher A. Sims
1984 - Richard Stone
2010- Peter A. Diamond, Dale T. Mortensen, Christopher A.
Pissarides 1983 - Gerard Debreu
2009 - Elinor Ostrom, Oliver E. Williamson 1982 - George J. Stigler
2008 - Paul Krugman
1981 - James Tobin
2007 - Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson
2006 - Edmund S. Phelps 1980 - Lawrence R. Klein
2005 - Robert J. Aumann, Thomas C. Schelling 1979 - Theodore W. Schultz, Sir Arthur Lewis
2004 - Finn E. Kydland, Edward C. Prescott 1978 - Herbert A. Simon
2003 - Robert F. Engle III, Clive W.J. Granger
1977 - Bertil Ohlin, James E. Meade
2002 - Daniel Kahneman, Vernon L. Smith
2001 - George A. Akerlof, A. Michael Spence, Joseph E. 1976 - Milton Friedman
Stiglitz 1975 - Leonid Vitaliyevich Kantorovich, Tjalling
2000 - James J. Heckman, Daniel L. McFadden C. Koopmans
1999 - Robert A. Mundell 1974 - Gunnar Myrdal, Friedrich August von
1998 - Amartya Sen Hayek
1997 - Robert C. Merton, Myron S. Scholes
1996 - James A. Mirrlees, William Vickrey
1973 - Wassily Leontief
1995 - Robert E. Lucas Jr. 1972 - John R. Hicks, Kenneth J. Arrow
1994 - John C. Harsanyi, John F. Nash Jr., Reinhard Selte 1971 - Simon Kuznets
1993 - Robert W. Fogel, Douglass C. North 1970 - Paul A. Samuelson
1992 - Gary S. Becker
1991 - Ronald H. Coase
1969 - Ragnar Frisch, Jan Tinbergen
1990 - Harry M. Markowitz, Merton H. Miller, William F. Sharpe