23

An Introduction to Macroeconomics

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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Performance and Policy

• Real GDP – measures the value of final goods and services within a nation’s borders during a year

• Nominal GDP - $ value of goods and services produced in a nation’s borders using their current price during year of production

LO1 23-2

Unemployment

• You must be willing and able to work – actively looking for a job

• The current unemployment rate in the US is 5.8 % - in Texas the rate is 5.2

Inflation

• Inflation is an increase in overall level of prices

• September 2014 inflation rate has been calculated to be 1.7%

• Inflation reduces the family’s purchasing power of savings – basically $1 of goods would cost $1.02 in September

Modern Economic Growth

• Standard of living measured by output per person – GDP Per Person (per capita)

• No growth in living standards prior to Industrial Revolution due to the fact that as the economy grew, so did the population

LO3 23-6

Modern Economic Growth

• Output per person rises

• Not experienced by all countries but a growth rate of 2% annually doubles the average citizens income every 35 years and again 35 years after that. (Rule of 70)

Global Perspective

LO3 23-8

•All currencies are changed into US dollars•GDP is divided by population•Purchasing power parity adjusts for price differences between countries

Savings and Investment• Saving = current consumption is less than

current output

• Investment = resources are devoted to increasing future output

• Financial investment – assets, stocks bonds, etc.

• Economic investment is creation/expansion of business enterprise**Key***Investment is limited by the amount of saving

LO4 23-9

Uncertainty, Expectations, and Shocks

• The future is uncertain and this changes behavior - expectations affect investment

• Shocks - What happens is not what you expected

• Demand shocks – unexpected change in demand for g or s – economists believe these cause short run fluctuations in GDP

• Supply shocks – unexpected change in supply of g and s

LO5 23-10

Uncertainty, Expectations, and Shocks

• Demand shocks and flexible prices

• Price falls if demand is low

• Sales are unchanged

• Production levels and unemployment levels would be constant – only the price changes

LO5 23-11

Demand Shocks

Cars Per Week

Pri

ce

DMDL

DH

900

$40,000

$37,000

$35,000

Flexible Prices

LO5 23-12

Demand shocks and sticky prices

• Prices are inflexible

• Adjusting production is very expensive because companies operate at lowest cost and produce constantly at optimum output

• Maintain inventory – store extra product but can cause a revenue issue if maintained too long

• Sales fall, unemployment rises, production falls

Demand Shocks

Cars Per Week

DMDL

DH

700 900 1150

$37,000

Fixed Prices

Pri

ce

LO5 23-14

Sticky Prices• Many prices are sticky in the short run

– this leads to fluctuations in GDP and employment over the course of a business cycle

• Consumers prefer stable prices and producers know this

• Firms want to avoid price wars

• Coke and Pepsi

LO5 23-15

Long Run Flexibility of Price

• All prices are flexible in the long run

• Firms adjust to the unexpected and there are permanent changes in demand