Chapter 5 (macro)

Chapter 5: Macroeconomics: The Big Picture

Measuring the Size of an Economy

• Real Gross Domestic Product (Real GDP):

  • Definition: A measure of the value of all newly produced goods and services in a country during a specified period, adjusted for price changes.

    • Significance: Most comprehensive measure of economic performance.

  • (Long-term) Economic Growth: Upward trend in real GDP, indicating expansion.

  • (Short-term)Economic Fluctuations: Swings in real GDP causing deviations from long-term trends.

    • also called business cycles

Economic Growth

• consider average production per person or, real GDP per capita to get a better measure of how people benefit from increases in real GDP

• real GDP per capita is (real GDP per capita/by the number of people in the economy)

• when real GDP per capita is increasing, then the standard of living is improving

Economic Fluctuations: Temporary Setbacks and Recoveries

• Business Cycles: Refers to the ups and downs in GDP typical in economies.

• Phases of Business Cycles:

  • Peak: Highest point before decline.

  • Recession: Economic activity decline lasting at least 6 months.

  • Trough: Lowest point in GDP at the recession's end.

  • Expansion: Rise in output and employment post-trough.

  • Recovery: Early phase of expansion following recession.

  • Depression: A severe and prolonged recession.

Historical Context of Recessions

• NBER Business Cycle Dating Committee: Officially identifies recessions and expansions based on economic activity.

• Example: 2007 recession lasted until June 2009.

• COVID-19 recession officially declared from February 2020 to April 2020, shortest on record but extremely severe.

• Recap of past recessions:

  • Shortest: July 1990 to March 1991 and March 2001 to November 2001.

  • Longest: Great Depression (August 1929 to March 1933), with a real GDP drop of 32.6%.

Unemployment, Inflation, and Interest Rates

Unemployment Rate

• Definition: Percentage of labor force that is unemployed.

• Labor Force: Workers either employed or actively seeking work.

• Job seekers unable to find jobs are classified as unemployed.

Trends in Unemployment

• Notable increase of 2.5 percentage points during 2008.

• April 2020 saw unemployment rise by over 10 percentage points to 14.7%, the highest in over 50 years.

Inflation

• Inflation Rate: Percentage increase in overall price level over a specific period.

• Disinflation: Decline in inflation rate.

• Deflation: Negative inflation rate (decrease in price level).

Interest Rates

• Interest Rate: Amount earned per dollar loaned per year, typically expressed as a percentage.

  • Real Interest Rate: Nominal rate adjusted for inflation.

  • Nominal Interest Rate: Rate not adjusted for inflation.

• Types of Interest Rates:

  • Mortgage interest rate, savings deposit interest rate, treasury bill rate, federal funds rate.

• During the 2008/09 recession, the federal funds rate fell to near 0%, remained there for 5 years, and dropped again during the COVID-19 pandemic.

The Theory of Long-Term Economic Growth

• Potential GDP: Long-term growth trend for real GDP, determined by available capital, labor, and technology;

• Real GDP fluctuates around potential GDP.

• Production Function: Describes output as a function of labor, capital, and technology.

• Economic growth driven by:

  • Increased labor hours.

  • Improved capital resources.

  • Advances in technology.

Government Policy and Economic Growth

• Supply-Side Policies: Aim to increase long-term growth through:

  • Fiscal Policy: Government taxing, spending, borrowing.

  • Monetary Policy: Managing money supply and inflation control policies.

Theory of Economic Fluctuations

• Focus on demand fluctuations for goods and services causing economic variations.

• Aggregate Demand: Total demand for goods and services influenced by consumers, businesses, and government.

• Declines in real GDP below potential GDP during recessions linked to drops in aggregate demand.

Summary of Macroeconomics

• Macroeconomics studies growth and fluctuations of the economy.

• Economic growth stems from labor, capital, technological progress.

• Effective economic policies can boost capital investment and technology improvements leading to growth.

• Recognizes cycles of economic activity with described theory combining economic growth and fluctuation theories.