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Understanding Macroeconomics: Goals and Policies

Explore the normative goals of macroeconomics, such as high growth and low unemployment, and the policies used to achieve them. Learn about important terms in macroeconomics and the impact on economic well-being.

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Understanding Macroeconomics: Goals and Policies

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  1. Introduction

  2. Micro and Macro Economics • http://www.youtube.com/watch?v=VVp8UGjECt4 • Important terms in Macroeconomics?

  3. What is Macroeconomics? Macroeconomicsis the study of issues that affect the economy as a whole. Examples are the effects of inflation, and unemployment on economic growth and economic well-being.

  4. Divisions of Macroeconomics • The scienceof macroeconomics is positive economics: the study of economic facts and theories and how they work. • Policy practice of macroeconomics is concerned with policies to achieve goals.

  5. Normative Macroeconomic Goals • High growth • Avoiding large swings in economic output • Low unemployment • Low inflation • Low income inequality • No poverty

  6. Why These Goals? • High growth • Avoiding large swings in economic output • Low unemployment • Low inflation • Income distribution • Poverty

  7. Normative Economic Goals • Economic policy is dependent on normative economic goals. • Political processes determine which goals have the highest priority. • Once priority has been established, macroeconomics deals with the ways to achieve those goals

  8. Goals: OutputU.S. Real Gross Domestic Product

  9. U.S. Recession?

  10. GDP

  11. Genuine Progress Indicator It adds in the economic contributions of household and volunteer work, but subtracts factors such as crime, pollution, and family breakdown

  12. The World Values Survey

  13. Working Hours

  14. Goals: Unemployment • The unemployment rate is the percentage of the labor force looking for work, but unable to find it.

  15. U.S. Unemployment Each one-point increase in the unemployment rate is associated with: • 920 more suicides • 650 more homicides • 4000 more people admitted to state mental institutions • 3300 more people sent to state prisons • 37,000 more deaths • Increases in domestic violence and homelessness

  16. Goals: Inflation • Inflation is the continual increase in the average price of goods and services. • Inflation usually increases as actual output rises above potential output and usually decreases if output falls below potential output. • Policymakers may face a trade-off between high inflation and low unemployment.

  17. U.S. Inflation

  18. Inflation – The Great Moderation(median for developing- and GDP weighted mean for high-income)

  19. InflationinZimbabwe

  20. Poverty?

  21. U.S. Poverty

  22. Wage Inequality?

  23. Measuring Inequality I(ratio of 90th to 10th percentile)

  24. Measuring Inequality II(Gini Coefficient)

  25. U.S. Wage Inequality Since the early 1980s, the relative wages of workers with a low education level have fallen; the relative wages of workers with a high education level have risen.

  26. The Budget Balance • The budget balance is the difference between tax revenues collected by the government and expenditures made by the government. • If taxes are greater than expenditures there is a budget surplus. • If expenditures are greater than taxes, there is a budget deficit. • The budget balance is affected by both changes in the economy and fiscal policy.

  27. U.S. Government Budget What is the current U.S. government’s surplus/deficit?

  28. U.S. Government Deficit

  29. The U.S. Budget Deficit, Since 1945 (Ratio to Output, in percent).

  30. U.S. Trade Balance

  31. Policies Used to Achieve Goals • Demand-side policies • Supply-side policies

  32. Demand-Side Policies • Monetary Policy • Changes in the money supply implemented by the Federal Reserve • Fiscal Policy • Changes in government spending and/or taxes implemented by Congress and the president

  33. Supply-Side Policies • Supply-Side Policies are designed to increase potential output by encouraging: • Productivity and innovation by the labor force • Investment in capital • Advances in technology

  34. Models in Economics • Models are simplified representations of relationships within an economy. • Models are used to predict economic outcomes in different situations. • Models have three ingredients • Assumptions • Exogenous variables determined outside the model • Endogenous variables determined inside the model

  35. Models II

  36. Using a Model to Predict OPEC decreases the supply of oil to the United States. What happens to the price of gasoline? Supply A decrease in supply shifts the supply curve to the left and increases price and decreases quantity. Price of Gasoline P2 P1 Demand Q2 Q1 Quantity of Gasoline

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