Macroeconomics

1. Macroeconomics The branch of economics that studies the performance of national economies is called macroeconomics.

2. Macroeconomics • Macroeconomics is concerned with two questions: • Factors that determine long-run growth in the size of economies, the standard of living, and the price level. • The second concerns the short run fluctuations in the level of economic activity, unemployment, and inflation. Aggregate economic indicators include GDP (Gross Domestic Product), cost-of-living, and the unemployment rate.

3. Macroeconomic Issues • The U.S. has had a long history of economic growth. • The measure of output is Gross Domestic Product. • It is the measure of the total quantity of goods and services produced in the economy, adjusted to remove the effects of inflation. • Small ups and downs – The Great Depression and WW II.

4. Economic Growth • One reason for rising production is growth in population. • Since 1900, the U.S. population has increased by a factor of 4. The average output of each person increased by a factor of 8. • Economists refer to this quantity of output as (GDP) per capita. • “Per Capita” is a Latin phrase that means “per head”.

5. Economic Growth • Average labor productivity – The economy’s total output divided by the total number of workers employed. • This measures how much each worker can produce. • The average output per person in the U.S. economy in 2008 was $43,000. • Material resources created by higher levels of production make possible longer life, better education, improved healthcare, and a cleaner environment.

6. Recessions and Expansions • Periods of rapid growth of output are called expansions. • Periods of slow growth or decline in output are called recessions. • When a recession is severe, it is called a depression. • 1929 to 1933 was the most severe economic decline in U.S. history. • Alternating periods of expansion and decline are called business cycles.

7. Recessions and Expansions • Periods of recession are associated with declining employment opportunities and slower wage growth, a central focus of macroeconomic policy is to reduce the severity and duration of such periods.

8. Unemployment • The unemployment rate is the percentage of the labor force that would like to work but cannot find employment. • The labor force is made up of individuals who are employed and unemployed. • High unemployment = Hard to find jobs, harder to earn promotions and increase pay. • The unemployment rate is never 0. • There are always new job seekers.

9. Inflation • When all prices rise together, economists call this inflation. • Inflation means that the things people consume are becoming more expensive, it reduces purchasing power and people are worse off. • Keeping inflation low is key. • U.S. inflation rate has fluctuated over time, during both World Wars and the 1970s.

10. International Trade • When exports exceed imports, it is a trade surplus. • When exports are less than imports, it is a trade deficit. • Since the 1970s the U.S. has imported more than exported.

11. Macroeconomic Issues Quiz • What two questions is macroeconomics concerned with? • List two economic indicators used to describe the performance of the aggregate economy. • What does GDP stand for? • The Latin phrase “per capita” literally means? • Define average labor productivity. • The countries with the lowest levels in production are where? • Material resources make possible what three things? • Period of rapid growth is called? Slow growth? • What years did the U.S. have its most severe depression? • Define business cycle. • Define unemployment rate. • The unemployment rate is never 0. T/F • Define inflation. • Define trade surplus.