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DR. PETROS KOSMASLECTURER
VARNA FREE UNIVERSITY
ACADEMIC YEAR 2010 - 2011
LECTURE 8
MICROECONOMICS AND MACROECONOMICS
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Macroeconomic Questions
Why does output fluctuate?
What determines economic growth?
Why do we have unemployment, and why is unemployment a problem?
Why do we have inflation, and why is inflation a problem?
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Which governmental policy affects output, growth, unemployment, and inflation?
How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?
How do domestic economic activities affect other counties and our trade?
Macroeconomic Questions
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Forms of Cultural Imperialism
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Macroeconomic Goals
Full Employment
Price Stability
Economic Growth
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Definitions of Employed, Unemployedand Unemployment Rate
Employed = everyone currently working, including part time workers
Unemployed = people looking for work or temporarily laid off from work
Unemployment Rate = unemployed labor force
Labor force = employed + unemployed
Labor force participation rate = labor forcepopulation aged 16 and
olderECO-1067
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Other Employment Concepts
Natural Rate of Unemployment
Full Employment
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Phases of the Business Cycle
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First look at:Output and its rate of growthInflation rate Unemployment rateInternational trade
What is macroeconomics?
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Gross Domestic Product (GDP) Value of all final goods and services produced
within a country in a given time periodReal GDP
The volume of goods and services produced within a country (i.e. GDP adjusted for inflation, GDP in terms of goods)
Economic Growth: Percentage rate of increase of real GDP
Measuring Economic Growth
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Measuring Inflation
Percentage change in the price levelGDP deflatorConsumer Price Index (CPI)
In the Eurozone: Harmonized Index of Consumer Prices (HICP)
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Measuring Unemployment
Labor force = employed + unemployed
Unemployment rate=Unemployment/Labor Force
Unemployed: does not have a job and has been looking for one in the past 4 weeks
The long term unemployment rate is the share of unemployed persons since 12 months or more in the total number of active persons in the labor market.
European Labor Force Survey (LFS)Discouraged workersLabor force participation varies across countries and
timeECO-1067
Measuring trade with other countries
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Growth, Unemployment and Inflation in the Euro area and the US since 1970
1970-2006
1996-2006
2006
2007
2008
2009 forecast
Output Growth rate
EU
2.3% 2.0% 2.7% 2.6%
0.7%
-4.2%
US
3.1% 3.4% 3.3% 2.1%
0.4%
-2.7%
Unemployment rate
EU
7.4% 8.7% 7.6% 7.5%
7.6%
9.9%
US
6.2% 5% 4.6% 4.6%
5.8%
9.3%
Inflation rate EU
5.4% 1.8% 1.7% 2.1%
3.3%
0.3%
US
4% 2% 2.9% 2.9%
3.8%
-0.4%
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Government Policies
Short-term/Medium term policies Monetary and fiscal policies Affects output, prices, interest rates employment
Long term policies Affect productive capacity
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Monetary Policy
Independent Central BanksChange in money supply affects interest rates and ultimately demand for goods and equilibrium output
Eurosystem (ESCB)European Central BankNational Central Banks
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Tasks of the ECB
Sets interest ratesManages foreign exchange operationsHolds and manages some official reserves of
euro area countriesPromotes smooth operation of payment systems
NCBs Lend to national financial institutions Ensure settlement of cashless domestic and trans-
border payments Collect national statistics
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Fiscal policies
Government spending and taxes
Affect economy’s output and price level
Stability and Growth Pact National government
deficit no larger than 3% of GDP debt-to-GDP ratio of 60%
Reduces inflationary pressures (and free-riding) Main purpose of fiscal policy should be stabilization
But fiscal policy is main tool left to governments where monetary policy is constrained Evidence that most fiscal policy is pro-cyclical Automatic stabilizer
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Other Public Policies
Investing in productivity (technology policy)
Improving human capital (education) Improving physical capital (infrastructure) External relations (e.g. war expenditures
in Iraq)
In the EU, these public policies mostly not integrated
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Euro: Optimal Currency Area?
Common currency:Benefits: elimination of foreign exchange
transactions lead to reduction in costs (0.5% of GDP), increased competition
The euro is as stable as the best-performing currencies previously used in the euro area countries
Costs: loss of monetary policy
Optimal currency area (Robert Mundell): Countries have to experience similar shocks If not: countries must have high factor (labor)
mobilityECO-1067