INTRODUCTION TO

MACROECONOMICS

Macroeconomic Concerns
Output Growth
Unemployment
Inflation and Deflation

The Components of the

Macroeconomy
The Circular Flow Diagram
The Three Market Arenas
The Role of the Government in the
Macroeconomy
A Brief History of Macroeconomics
The U.S. Economy Since 1970
 Economics

❑ Two major divisions

✓Macroeconomics o Microeconomics

Done with last term

 Microeconomics and Macroeconomics

Microeconomics Examines the functioning of individual industries and

the behavior of individual decision-making units—firms and households.

Macroeconomics Deals with the economy as a whole. Macroeconomics

focuses on the determinants of total national income, deals with
aggregates such as aggregate consumption and investment, and looks at
the overall level of prices instead of individual prices.

Aggregate behavior The behavior of all households and firms together.

 Macroeconomics and Microeconomics

▪ The nation's unemployment rate, inflation, interest rate trends,

government budgets, government fiscal policies, economic
growth, and monetary policy, are topics discussed in
Macroeconomics.

▪ Price elasticity (sensitivity) of demand for goods and services,

firms’ production behavior, cost functions, market behavior, and
market failure are topics discussed in Microeconomics
 Macroeconomics Macroeconomi
cs
Studies:

▪ Average prices and total employment, income

and production
▪ Effects of taxes, government spending, budget
deficit on total jobs and incomes
▪ Effects of money and interest rates

6
 Important Issues in Macroeconomics Important Issues
in
Macroeconomics
Macroeconomics, the study of the economy as a whole,
addresses many topical issues:

▪ What is the government budget deficit?

▪ How does it affect the economy?
▪ Why does the Philippines have such a huge trade deficit?
▪ Why are so many countries poor?
What policies might help them grow out of poverty?
 The Roots of Macroeconomics
In 1936, John Maynard Keynes published The General Theory of
Employment, Interest, and Money.
Keynes arguments:
The level of output and employment in an economy is determined
by the aggregate demand (AD)
Governments could intervene in the economy and affect the level of
output and employment
Two important objectives of macroeconomic policies:
(a) Sustained growth in GDP, and (b) Price stability
EC ON OMIC S IN PRACTICE

John Maynard Keynes

Much of the framework of modern

macroeconomics comes from the
works of John Maynard Keynes,
whosebook, The General Theory of
Employment, Interest and Money
was published in 1936.
 Macroeconomic ConcernsMacroeconomic
▪
Concerns
Macroeconomics considers the performance of the economy as a
whole.

▪ We try to understand changes in

- The rate of economic growth (Output growth)
- The rate of inflation or deflation
- Unemployment
- Our trade performance with other countries

▪ Macroeconomics also includes an evaluation of the relative success or

failure of government economic policies
 Macroeconomic Concerns
Output Growth
Business cycle The cycle of short-term ups and downs in the
economy.
Aggregate output The total quantity of goods and services
produced in an economy in a given period.
Recession A period during which aggregate output declines.
Conventionally, a period in which aggregate output declines for
two consecutive quarters.

Depression A prolonged and deep recession.

 Macroeconomic Concerns
Output Growth

Expansion or boom The period in the business cycle

from a trough up to a peak during which output and
employment grow.
Contraction, recession, or slump The period in the
business cycle from a peak down to a trough during which
output and employment fall.
 Expansion and
An expansion, or boom, is the period in
the business cycleContraction:
from a trough up to a
peak, during whichThe
outputBusiness
and
employment rise.
Cycle
• A contraction, recession, or slump
is the period in the business cycle
from a peak down to a trough, during
which output and employment fall.
 Macroeconomic Concerns
Output Growth

 FIGURE 20.2 U.S. Aggregate Output (Real GDP), 1900–2009

The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output.
 Economic Growth
2020 Gross Domestic Product estimated in millions of dollars,
and Per Capita (person) GDP
Country/Area GDP Per Capita GDP
World 84,577,963 10,714
United States 20,936,600 63,543
China 14,722,730 10,500
Canada 1,644,039 43,258
Denmark 356,084 61,063
Hong Kong 346,585 46,323
Korea 1,630,525 31,489
Luxembourg 73,264 115,873
Qatar 166,908 50,805
Japan 4,975,415 39,539
Philippines 361,489 3,299
Vietnam 271,158 2,785
Nigeria 432,293 2,097
Singapore 339,988 59,797
Switzerland 752,248 87,097
Tanzania 62,409 1,076
Timor Leste 1,821 1,381
Macao, SAR, China 55,153 86,117
Ethiopia 107,645 936
India 2,622,983 1,900
Uganda 37,372 817
Thailand 501,795 7,189
 Economic Growth and FluctuationsEconomic
Growth and
The long term
growth rate is …
Potential GDP is the value of real
GDP when all the economy’s Fluctuations … 3.1 percent
per year

labour, capital, land, and

entrepreneurial ability are fully
employed. … 2.8 percent
per year

Potential
Real GDP
During the 1970s and early 1980s, GDP

real GDP growth slowed—a … 4.4 percent

per year
productivity growth slowdown. … 2.9 percent
per year

16
 Economic
Economic Growth Growth
▪ Countries with the highest overall economic
standard of living have the freest markets (more
elements of capitalism).

▪ Examples: Hong Kong, the United States, Japan,

Taiwan, Great Britain, Canada, Sweden, South
Korea, and Singapore.
 Unemployment Unemployment
▪ Unemployment is a state in which a person does not have a job but is available
for work, willing to work, and has made some effort to find work within the
previous four weeks.

▪ The labor force is the total number of people who are employed and
unemployed.

▪ The unemployment rate is the percentage of the people in the labor force who
are unemployed; key indicator of the economy’s health.

▪ The existence of unemployment seems to imply that the aggregate labor

market is not in equilibrium. Why do labor markets not clear when other
markets do?
18
Unemployment
Measuring Unemployment
Employed Any person 16 years old or older (1) who works for
pay, either for someone else or in his or her own business for 1
or more hours per week, (2) who works without pay for 15 or
more hours per week in a family enterprise, or (3) who has a
job but has been temporarily absent with or without pay.

Unemployed A person 16 years old or older who is not

working, is available for work, and has made specific efforts to
find work during the previous 4 weeks.
Unemployment
Measuring Unemployment
Not in the labor force A person who is not looking for work
because he or she does not want a job or has given up looking.
Labor force The number of people employed plus the
number of unemployed.
labor force = employed + unemployed

population = labor force + not in labor force

Unemployment
Measuring Unemployment
Unemployment rate The ratio of the number of people
unemployed to the total number of people in the labor force.

unemployed
unemployment rate =
employed + unemployed

Labor force participation rate The ratio of the labor force

to the total population 16 years old or older.
labor force
labor force participation rate =
population
Unemployment
Measuring Unemployment

TABLE 22.1 Employed, Unemployed, and the Labor Force, 1950–2009

(1) (2) (3) (4) (5) (6)
Labor Force
Population Participation Unemployment
16 Years Labor Rate Rate
Old or Over Force Employed Unemployed (Percentage (Percentage
(Millions) (Millions) (Millions) (Millions) Points) Points)
1950 105.0 62.2 58.9 3.3 59.2 5.3
1960 117.2 69.6 65.8 3.9 59.4 5.5
1970 137.1 82.8 78.7 4.1 60.4 4.9
1980 167.7 106.9 99.3 7.6 63.8 7.1
1990 189.2 125.8 118.8 7.0 66.5 5.6
2000 212.6 142.6 136.9 5.7 67.1 4.0
2009 235.8 154.1 139.9 14.3 65.4 9.3
Note: Figures are civilian only (military excluded).
Unemployment
Components of the Unemployment Rate
Unemployment Rates for Different Demographic Groups

TABLE 22.2 Unemployment Rates by Demographic Group, 1982 and 2010

Years November 1982 June 2010
Total 10.8 9.5
White 9.6 8.6
Men 20+ 9.0 8.9
Women 20+ 8.1 7.1
Both sexes 16–19 21.3 23.2
African American 20.2 15.4
Men 20+ 19.3 17.4
Women 20+ 16.5 11.8
Both sexes 16–19 49.5 39.9
Unemployment
Components of the Unemployment Rate
Unemployment Rates in States and Regions
TABLE 22.3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010
1975 1982 1991 2003 2010
U.S. avg. 8.5 9.7 6.7 6.0 9.7
Cal. 9.9 9.9 7.5 6.7 12.4
Fla. 10.7 8.2 7.3 5.1 11.7
Ill. 7.1 11.3 7.1 6.7 10.8
Mass. 11.2 7.9 9.0 5.8 9.2
Mich. 12.5 15.5 9.2 7.3 13.6
N.J. 10.2 9.0 6.6 5.9 9.7
N.Y. 9.5 8.6 7.2 6.3 8.3
N.C. 8.6 9.0 5.8 6.5 10.3
Ohio 9.1 12.5 6.4 6.1 10.7
Tex. 5.6 6.9 6.6 6.8 8.3
Unemployment

Components of the Unemployment Rate

Discouraged-Worker Effects
Discouraged-worker effect The decline in the measured
unemployment rate that results when people who want to
work but cannot find jobs grow discouraged and stop
looking, thus dropping out of the ranks of the unemployed
and the labor force.
Unemployment
Components of the Unemployment Rate
The Duration of Unemployment
TABLE 22.4 Average Duration of Unemployment, 1970–2009
Weeks Weeks Weeks
1970 8.6 1984 18.2 1997 15.8
1971 11.3 1985 15.6 1998 14.5
1972 12.0 1986 15.0 1999 13.4
1973 10.0 1987 14.5 2000 12.6
1974 9.8 1988 13.5 2001 13.1
1975 14.2 1989 11.9 2002 16.6
1976 15.8 1990 12.0 2003 19.2
1977 14.3 1991 13.7 2004 19.6
1978 11.9 1992 17.7 2005 18.4
1979 10.8 1993 18.0 2006 16.8
1980 11.9 1994 18.8 2007 16.8
1981 13.7 1995 16.6 2008 17.9
1982 15.6 1996 16.7 2009 24.4
1983 20.0
Unemployment
Some Unemployment Is Inevitable
When we consider the various costs of unemployment, it
is useful to categorize unemployment into three types:

Frictional unemployment

Structural unemployment

Cyclical unemployment
 Unemployment
Frictional, Structural, and Cyclical Unemployment

Frictional unemployment - The portion of unemployment that is due to the normal

turnover in the labor market; used to denote short-run job.
Unemployment that results from time spent between jobs when a worker is
searching for, or transitioning from one job to another; sometimes called search
unemployment and can be based on the circumstances of the individual.

A person may be looking for job change for better opportunity, services, higher
salary and wages etc. It is also that there may be conflict between employer and
employees over the inadequate facilities and undersatisfaction leading to
voluntary quit from the job
 Unemployment

Structural unemployment The portion of unemployment that is due to

changes in the structure of the economy that result in a significant loss of
jobs in certain industries; the number of jobs available in some labor
markets is insufficient to provide a job for everyone who wants one

Structural unemployment is a form of unemployment caused by a

mismatch between the skills that workers in the economy can offer, and the
skills demanded of workers by employers (also known as the skills gap);
usually a result of technological progress; employers can neither find
enough workers nor can workers find jobs for which they are qualified.
Minimum Wage Laws

Wages may be kept above equilibrium level

Minimum-wage laws
Unions
Efficiency wages
If the wage is kept above the equilibrium level
Result: unemployment

- Role of Unions
 Efficiency Wage Theory
Workers’ health
Better paid workers - Eat a more nutritious diet; healthier and more
productive

Workers’ turnover
Firm - can reduce turnover among its workers by paying them a high wage

Workers’ quality
Firm pays a high wage - attracts a better pool of workers; increases the
quality of its workforce

Workers’ effort
High wages – make workers more eager to keep their jobs; give workers an
incentive to put forward their best effort
 Unemployment
Cyclical unemployment is when workers lose their jobs because
of downturns in the business cycle; is the increase in unemployment
that occurs during recessions and depressions.

When there is a general downturn in business activity, cyclical

unemployment increases.

Unemployment that is above frictional plus structural unemployment.

Natural rate of unemployment The unemployment rate that occurs

as a normal part of the functioning of the economy. Sometimes taken
as the sum of frictional unemployment rate and structural
unemployment rate.
Unemployment •Increased depression and other mental health
has many adverse problems
effects. These
include: •Increased crime rates
Unemployment By
Country 2021 •Overall lower economic productivity and
(worldpopulationr consumption
eview.com)
•Lower rates of volunteerism

•Erosion of skills
 Jobs and Unemployment
Why Unemployment Is a Problem

▪ Unemployment is a serious economic, social, and personal problem for

two main reasons:
- Lost production and incomes
- Lost human capital

▪ The loss of a job brings an immediate loss of income and production—a

temporary problem.

▪ A high unemployment rate means economy is not achieving its full

economic potential

▪ A prolonged spell of unemployment can bring permanent damage

through the loss of human capital. 34
 Inflation and Deflation
Macroeconomic Concerns
Inflation and Deflation

▪ Inflation is an increase in the overall price level.

▪ Hyperinflation is a period of very rapid increases in the overall price
level.
▪ Deflation is a decrease in the overall price level. Prolonged periods of
deflation can be just as damaging for the economy as sustained
inflation.
▪ Stagflation occurs when the overall price level rises rapidly (inflation)
during periods of recession or high and persistent unemployment
(stagnation).
Inflation
The Consumer Price Index

Consumer price index (CPI) A price index computed each month

by the National Statistics Office using a bundle that is meant to
represent the “market basket” purchased monthly by the typical urban
consumer.

The CPI market basket shows how a typical consumer divides his or
her money among various goods and services.
Most of a consumer’s money goes toward housing, transportation,
and food and beverages.
Inflation
The Consumer Price Index

▲ FIGURE 22.1 The CPI Market Basket

Inflation - Public Enemy Number One?
The Costs of Inflation

During inflations, most prices—including input prices like wages—

tend to rise together, and input prices determine both the incomes
of workers and the incomes of owners of capital and land.

So inflation by itself does not necessarily reduce ones purchasing

power.
 Employment and the Business Employment Cycle
and the
When firms produce more output, they hireBusiness
more workers—
Cycle
when they produce less output, they tend to lay off workers
We would thus expect real GDP and employment to be closely
related, and indeed they are
Business cycles
Fluctuations in real GDP around its long-term growth trend
Expansion
A period of increasing real GDP
Contraction
A period of declining real GDP

39
 The Components of the Macroeconomy
Understanding how the macroeconomy works can be challenging
because a great deal is going on at one time. Everything seems to
affect everything else.

To see the big picture, it is helpful to divide the participants in the

economy into four broad groups:

(1) Households.
(2) Firms.
(3) The government.
(4) The rest of the world.
 The
The Components of the Macroeconomy
Components of
the
Macroeconomy
The circular flow diagram shows the
income received and payments made by
each sector of the economy.
 Two-sectors Circular Flow
Wages, rent,
Income interest, profit
Factor
Market
Labor, land, Inputs for
capital, production
entrepreneurship

Financial
Households Sector Business/
Saving Investment Firms

Goods & Goods &

Services bought Services sold
Product
Market
Spending Revenue
 Three-sectors Circular Flow
Factor
Market Wages, rent, interest, profit

Direct taxes Direct/Indirect taxes

Households Government Business/

Firms

Govt. expenditure (G) Govt. expenditure (G)

Financial
Market Saving = Investment (S=I)
Product
Market Consumption Spending (C)
 Four-sectors Circular Flow
Remittances External Receipts from exports
Sector
Export of services Payments for imports

Wages, rent, interest, profit

Direct taxes Direct/Indirect taxes

Business/
Households Government Firms

Govt. expenditure (G) Govt. expenditure (G)

Saving = Investment (S=I)

Consumption Spending (C)

 The Components of the Macroeconomy
The Circular Flow Diagram
 FIGURE 20.3 The Circular Flow of Payments

Households receive income from firms and the

government, purchase goods and services from
firms, and pay taxes to the government.
They also purchase foreign-made goods and
services (imports).
Firms receive payments from households and the
government for goods and services; they pay
wages, dividends, interest, and rents to households
and taxes to the government.
The government receives taxes from firms and
households, pays firms and households for goods
and services—including wages to government
workers—and pays interest and transfers to
households.
Finally, people in other countries purchase goods
and services produced domestically (exports).
Note: Although not shown in this diagram, firms
and governments also purchase imports.
The Three Market Arenas The Three
Households, firms, the government, and the rest of theMarket Arenas
world all interact
in the goods-and-services, labor, and money markets.
 The Components of the Macroeconomy
The Three Market Arenas

Goods-and-Services Market
Firms supply to the goods-and-services market.
Households, the government, and firms demand from this
market.
Labor Market
In this market, households supply labor and firms and the
government demand labor.
 The Three Market Arenas The Three
Market Arenas
▪ Households and the government purchase goods and
services (demand) from firms in the goods-and services
market, and firms supply to the goods and services
market.
▪ In the labor market, firms and government purchase
(demand) labor from households (supply).
▪ The total supply of labor in the economy depends on the
sum of decisions made by households.
The Three Market Arenas The Three
Market Arenas
▪ In the money market—sometimes called the financial
market—households purchase stocks and bonds from
firms.
▪ Households supply funds to this market in the expectation
of earning income, and also demand (borrow) funds from
this market.
▪ Firms, government, and the rest of the world also engage in
borrowing and lending, coordinated by financial institutions.
 The Components of the Macroeconomy
The Three Market Arenas
Money Market
Treasury bonds, notes, and bills Promissory notes issued by the
federal government when it borrows money.

Corporate bonds Promissory notes issued by firms when they

borrow money.
Shares of stock Financial instruments that give to the holder a
share in the firm’s ownership and therefore the right to share in the
firm’s profits.
. Dividends The portion of a firm’s profits that the firm pays out
each period to its shareholders
 Government in
Government in the Macroeconomy
the
Macroeconomy
There are three kinds of policy that the government
has used to influence the macroeconomy:
1. Fiscal policy
2. Monetary policy
3. Growth or supply-side policies
Government in the Macroeconomy Government in
the
▪ Fiscal policy refers to government policies Macroeconomy
concerning
taxes and expenditures.

▪ Monetary policy consists of tools used by the Federal

Reserve to control the money supply.

▪ Growth policies are government policies that focus on

stimulating aggregate supply instead of aggregate
demand.
The main objectives of government economic Thepolicy
main
objectives of
The key elements of the Government's strategy are:
government
1. Delivering macroeconomic stability (a veryeconomic
broad policy pp
Vital knowledge

macroeconomic aim)

2. Meeting the productivity challenge (an important supply-side

target)

3. Increasing employment opportunity for all (a labour market

objective)

4. Ensuring fairness for families and communities (commitment to

equity)

5. Protecting the environment (green economics has a

macroeconomic dimension)