11Key Macroeconomic VariablesAgenda• Key Endogenous Variables• Key Exogenous Policy Variables2Macroeconomic Goals• Macroeconomic goals are determined by governments as representatives of society.• Final Goals:¾ High Growth,¾ Smooth Growth,¾ Low Unemployment, and ¾ Low Inflation.• Goals may be incompatible with one another.3Major Macroeconomic Variables• Economic output¾ Short-run business fluctuations¾ Long-run economic growth• Unemployment and Employment• Inflation4Key Macroeconomic Variables• Interest rates• Government budget balances and finance• International trade balances and finance• Productivity5Economic Output• Real Output or GDP: A measure of the economy’s total output of goods and services, Y.6Real Gross Domestic Product2,0004,0006,0008,00010,00012,0001960 1965 1970 1975 1980 1985 1990 1995 2000 2005Billions of 2000 Dollars27Real Gross Domestic Product-4048121960 1965 1970 1975 1980 1985 1990 1995 2000 2005Year-on-Year Percent Change8Economic Output• Key Questions?¾ What accounts for its rising long-term trend?¾ Why has it been so volatile over time?¾ What can be done to dampen the volatility?¾ Why has volatility apparently been reduced since 1984?9Potential Economic Output• Potential (or Natural) Output or GDP: The maximumsustainable output of goods and services, Y*. • Standard against which economy is measured.¾ Policy recommendations are highly dependent on estimates of potential output.• Output Ratio: Ratio of actual-to-potential GDP, Ŷ.10The Output RatioOutput Ratio: Ratio of actual-to-potential GDP, Ŷ.11Real Gross Domestic ProductActual versus Potential2,0004,0006,0008,00010,00012,0001960 1965 1970 1975 1980 1985 1990 1995 2000 2005Billions of 2000 DollarsSeries5RecessionsPotential GDPActual GDP12The Output Ratio• Output Ratio: Ratio of actual-to-potential GDP, Ŷ.¾ Ŷ = [ ( Y – Y*) / Y* ] * 100313Output Ratio-10-8-6-4-202461960 1965 1970 1975 1980 1985 1990 1995 2000 2005Percent: Actual to Potential GDP14Unemployment Rate• The percentage of people who are not working but who are actively seeking employment, U.15Unemployment Rate246810121960 1965 1970 1975 1980 1985 1990 1995 2000 2005Percent16Unemployment Rate• Key Questions?¾ Why has it been so high and so variable at times?¾ Why was it rising between 1970 and 1983?¾ Why has it been falling since then?¾ What can be done to dampen its volatility?¾ What are the economic and social consequences of high and volatile unemployment?17Natural Rate of Unemployment• The unemployment rate that is consistent with the economy being at potential GDP, U*.¾ Neither desirable nor immutable• The unemployment rate that is consistent with stable inflation.¾ NAIRU: Non-Accelerating Inflation Rate of Unemployment18Unemployment Rates0246810121960 1965 1970 1975 1980 1985 1990 1995 2000 2005PercentActual Unemployment Rate Natural Unemployment Rate419Employment• Employment: The total number of people who are working, N.20Payroll Employment50751001251501960 1965 1970 1975 1980 1985 1990 1995 2000 2005Millions21“Full” Employment• The level of employment that is consistent with the economy being at potential GDP and the natural rate of unemployment, N*.22Inflation• The rate of change in the price of a basket of goods and/or services, π.¾ π = ( Pt–Pt-1) / Pt-1• where P is the general price level.23Inflation Rate04812161960 1965 1970 1975 1980 1985 1990 1995 2000 2005Year-on-Year Percent Change24Inflation• Key Questions?¾ Why has it been so high and so variable at times?¾ Why was it rising between 1965 and 1983?¾ Why has it been falling since then?¾ What can be done to dampen its volatility?¾ What are the economic and social consequences of high and volatile inflation?525Interest Rates• The (realized) annualized rate of return on a financial investment.¾ Nominal: Includes inflation, r.¾ Real: Excludes inflation, R.• Influenced by changes in output and changes in monetary policy.26Interest Rates, 10-Year US Treasury-5051015201960 1965 1970 1975 1980 1985 1990 1995 2000 2005Percent per AnnumRealNominal27Interest Rates• Key Questions?¾ Why have they been so high and so variable at times?¾ Why were real interest rates negative in the 1970s?¾ Why were real interest rates so high in the 1980s?¾ Why have real interest rates being falling since the early 1980s?¾ What are the economic consequences of high and volatile interest rates?28Government Budget Balance• The difference between government receipts and outlays, BB = T – G.¾ If receipts > outlays, a budget surplus, BB > 0.¾ If receipts < outlays, a budget deficit, BB < 0.• Influenced by changes in output and changes in fiscal policy.29Federal Government Budget Balance-4-3-2-10121960 1965 1970 1975 1980 1985 1990 1995 2000 2005Percent of GDP30Government Budget Balance• Key Questions?¾ Why did the government’s budget fall into persistent deficit between 1980 and 1995?¾ Why did the government’s budget soared into surplus between 1995 and 2001?¾ Why did the government’s budget fall into deep deficit between 2002 and 2004?¾ What are the economic consequences of large persistent budget deficits (or surpluses)?631International Trade Balance• The difference between exports & imports, NX = X – M.¾ If exports > imports, a trade surplus, NX > 0.¾ If exports < imports, a trade deficit, NX < 0.• Influenced by changes in output andchanges in trade policy.32Current Account Balance-7-5-3-111960 1965 1970 1975 1980 1985 1990 1995 2000 2005Percent of GDP33International Trade Balance• Key Questions?¾ Why has the trade deficit been so large and so persistent since 1975?¾ What are the economic consequences of large persistent budget deficits (or surpluses)?34Labor Productivity• A measure of output per worker.¾ Equals real GDP/Number of Workers, Y/N.• Can be very volatile in the short-run but longer-term trends are most important.35Nonfarm Business Productivity2.561.492.7301231951-73 1973-95 1995-06Percent per Annum36Productivity• Key Questions?¾ Why was productivity growth so slow between 1973 and 1995?¾ Why has productivity growth accelerated so sharply since 1995?¾ What are the economic and social consequences of slow (fast) productivity growth?737Key Exogenous Variables• Key Exogenous Variables¾ Fiscal Policy¾ Monetary Policy¾ Other Government Policies• Demand-side vs. Supply-side Policy Variables¾ Demand-side policy is generally short-run.¾