Macroeconomics Section 2 Macroeconomics the study of the performance of national economies including the study of the policies used to improve that performance o Summations and aggregates Three major macro issues o Standard of living o Cost of living o Economic fluctuations recessions and expansions Microeconomics the individual decision making unit Both micro and macro use basic principles of economics Macroeconomic policies government actions designed to affect the performance of the economy as a whole Learning objective 1 Standard of Living Economic growth can increase the standard of living by increasing the available quantity and quality of goods per person Living standards the degree to which people have access to goods and services that make their lives easier healthier safer and more enjoyable o Goods physical objects and services used for benefit In wealthy industrialized nations the standard of living is better than at any previous time or place in history Typically economic growth improves standard of living but not for everyone Standard of living depends on o Quantities of goods and services produced o Number of people who share those goods and services Unemployment influences national standard of living Learning objective 2 Relate Output per Person and Average Labor Productivity to the Standard of Living Output per person output population Average labor productivity o Output per employed worker o Productivity of employed workers o Average amount of output per employed worker output employees o Rate improvement has slowed since 1970 s but has increased recently To increase standard of living the increase in goods and services must be sufficient enough to overcome the larger population over which output must be shared Standard of living average output per person One reason for the increased growth is the rapid growth of the US population o More workers over time standard of living Since population increased standard of living may not be increased Output of person is a better indicator of the average living standard The greater the value of production per person the higher is the Increased output per worker increased output per person Average labor productivity and output per person are closely related Average labor productivity is related to standard of living Average labor productivity standard of living output per person Learning objective 3 Recession Great Recession Depression Expansion and Boom Recession reductions in economic output o Peak to trough o A recession ends at a trough Depression extremely severe contractions in economic output 2 Expansions periods of increasing economic output o Trough to peak o An expansion ends at a peak Booms strong expansion Major macroeconomic issues o Economic growth o Labor productivity o Recessions and expansions o Unemployment o Inflation o International economic interdependence The Great Depression o In the US Factories cut production by 31 Number of people who lost jobs tripled 25 unemployment Stocks lost 1 3 of their value in 3 weeks o In Germany 1 3 without jobs Banking system collapsed o Brazil Russia India China BRIC countries all have high growth rates no negative growth rates Learning objective 4 Unemployment Rate and its Relationship to National Output Unemployment that state of being available and willing to work but unable to find stable work Unemployment rate the fraction of the labor force who are searching but can t find work or who are temporarily out of work and expect to return shortly o Peaked to 10 ish in 1993 and 2010 o Increased big 4 5 5 in 2001 to 2002 and 5 10 from 2008 to 2009 3 o Spain and Nigeria are the highest o Japan and China are the lowest Unemployment rate involves the fraction of the labor force employed and unemployed who are unemployed Increases during recessions and decreases during expansions Harder it is to find a job longer unemployment period The average unemployment rate in the US in the past 20 years has been 6 and it takes about 15 weeks to find a suitable job Learning objective 5 Influence and Determination of Price Level and Inflation Rate Inflation rate percent rate of growth of prices in an economy o A rising cost of living o The rate at which prices are increasing over time o Imposes a variety of costs on the economy o Recently been climbing from a low level o Low prices are associated with inflation recession There are costs associated with high rates of inflation Cost of living the number of dollars it takes to buy the goods and services that achieve a certain standard of living Economic growth a process of of steady increase in the quantity and quality of goods and services the economy can provide o Output in the US has increased o Real GDP change in physical output Learning objective 6 Begin to Understand Global Economic Relationships The value of the nations currency relative to other nations currency influences trade and asset purchases Consumption patterns around the world are compared by country income National economies are increasingly interdependent Trade imbalances exist when the quantity of goods and services that a country sells abroad exports differs significantly from the quantity of goods and services its citizens buy from abroad imports 4 o When exports and imports differ significantly International flows create political and economic issues Outsourcing o The impact of trade on jobs o The steel and textile industries o Trade agreements NAFTA Trade deficits o Exports imports o Exist when imports are larger than exports o Imports exports o Trade deficit gets smaller during recessions Trade surplus o Exports imports Learning objective 7 Monetary Fiscal and Structural Policies Monetary policy involves the nations central bank determining the nations money supply and interest rates o Changes in the money supply effect National output Employment Interest rates Inflation Stock prices International value of the dollar o Controlled by a central bank the federal reserve system in the Fiscal policy involves decisions by the executive and legislative branches determining government expenditure and taxes o A deficit government spends more than what is collected by o A surplus government spends less than what is collected in US taxes taxes 5 Structural policy involves government policies aimed at changing the underlying structure or institutions of the nations economies o Ex Determination of the size of government economic activity relative to private economic activity o