1

The Bird’s-Eye View of the Economy

Chapter 4

2

Macroeconomics is the study of the aggregate moods of the economy.

First major macroeconomist:

John Maynard KeynesThe General Theory of

Employment, Interest and Money (1936)

3

In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm

is long past the ocean is flat again.--John Maynard Keynes

4

The Major Economic Issues

• Economic Growth

• Productivity

• Recessions and Expansions

• Unemployment

• Inflation

• Economic Interdependence of Nations

5

1. Economic Growth

2. Productivity

3. Recessions and Expansions

4. Unemployment

5. Inflation

6. Economic Interdependence of Nations

6

Growth

Real output growth in the U.S. has been 2.5 to 3.5 percent per year since the late 19th century.

7

• Economic Growth• Productivity• Recessions and

Expansions• Unemployment • Inflation• Economic

Interdependence of Nations

Total output divided by total number of hours worked.

8

The economy’s short run changes.

Trend versus cycle.

• Economic Growth• Productivity• Recessions and

Expansions• Unemployment • Inflation• Economic

Interdependence of Nations

9

Expansion ExpansionRecession

The Phases of the Business Cycle

Boom

Secular growth trend

DownturnUpturn

Trough

Peak

0Jan.-Mar

Tot

al O

utpu

t

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

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10

U. S. Business Cycles

20

10

0

–10

–20

‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000

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Civil War

Recoveryof 1895

World War I

Panicof 1893 Panic

of 1907Great

Depression

Korean War Vietnam War

World War II

11

• Economic Growth• Productivity• Recessions and

Expansions• Unemployment • Inflation• Economic

Interdependence of Nations

12

13

Calculating the Unemployment Rate

• The unemployment rate – the number of unemployed individuals divided by the number of people in the civilian labor force then multiplied by 100.

14

How Accurate Is the Official Unemployment Rate?

• The unemployment rate includes as unemployed, people who say they are looking for a job who are really not.

• Many are “working off the books, others are vacationing.

• But does not include discouraged workers who have left the labor force.

15

• Economic Growth• Productivity• Recessions and

Expansions• Unemployment • Inflation• Economic

Interdependence of Nations

16

Inflation Since 1900

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3020101900 40 50 60 70 80 90 2000

–10

–5

0

5

10

15

20

25

17

Real and Nominal Concepts

• Nominal output is the total amount of goods and services measured at current prices.

• Real output is the total amount of goods and services produced, adjusted for price level changes.

18

• Economic Growth• Productivity• Recessions and

Expansions• Unemployment • Inflation• Economic

Interdependence of Nations

19

Types of Economic Policy

• Fiscal

• Monetary

• Structural

20

Positive versus Normative Statement

• Positive

How things are.

• Normative

How things should be.