(Ch 4) Macroeconomics: The Bird’s-Eye View of the Economy
Introduction
The Great Depression (as context for macro policy):
United States: factories cut production by 31% and unemployment soared to 25% by 1933; stock market losses were severe, with stocks losing about one-third of their value in 3 weeks.
Germany: roughly one-third of all workers were unemployed and the banking system collapsed.
Question of causes: stock market collapse, capitalism, or poor economic planning are discussed as possible factors, but the takeaway is that macroeconomic policies were developed in response to diagnose and address the performance of the economy as a whole.
The response: Macroeconomic policies are government actions designed to affect the overall performance of the economy.
The Major Macroeconomics Issues
Standard of Living: the degree to which people have access to goods and services that make life easier, healthier, safer, and more enjoyable.
Economic Growth: a process of steady increases in the quantity and quality of the goods and services the economy can produce.
Output of the U.S. Economy, 1929-2022
In 2022, output of the U.S. economy was:
18 times the 1929 level, and
almost 5 times the 1965 level.
Implication: long-run growth has dramatically expanded aggregate output over the century.
Output per Person and per Worker in the U.S. Economy, 1929-2022
In 2022, output per worker was more than 5 times the 1929 level.
Concept to remember: output per person and output per worker capture how much is produced on a per-capita or per-worker basis, reflecting improvements in efficiency and living standards.
The Major Macroeconomic Issues (U.S. Metrics)
Technology and connectivity:
97% of Americans own a cell phone.
92% of households own a computer.
85% of households have internet access.
Education:
About 91% of the adult population has a high school diploma.
38% of the adult population has a college degree.
Productivity
In 2022, the average U.S. worker could produce five times more than in the 1930s.
Average labor productivity: data not provided in the transcript excerpt.
Productivity – U.S. Trends in Output per Employed Worker
1950-1973: productivity grew > 2% per year.
1974-1995: productivity growth near 1% per year.
1996-2007: productivity growth between 1% and 2% per year.
Productivity and Living Standards in China and the United States (2021)
United States
Output: $23{,}315$ billion (U.S. dollars)
Population: 332 million
Employed: 152 million
Output per person: $70{,}226$
Average labor productivity: $153{,}388$
China
Output: $17{,}734$ billion (U.S. dollars)
Population: 1{,}412 million
Employed: 746 million
Output per person: $12{,}559$
Average labor productivity: $23{,}772$
The U.S. Unemployment Rate, 1929-2022
Unemployment rate: the percentage of the labor force that is out of work.
Observations:
Rises during recessions.
Always greater than zero.
Definition: if U is unemployed and L is the labor force, then the unemployment rate is
u = \frac{U}{L}
Increases In Unemployment During Recessions
Unemployment rate at beginning of recession (%) -> Peak unemployment rate (%) -> Increase in unemployment rate (%)
Nov 1973: 4.8% -> May 1975: 9.0% -> +4.2
Jan 1980: 6.3% -> Nov/Dec 1982: 10.8% -> +4.5
Jul 1990: 5.5% -> Jun 1992: 7.8% -> +2.3
Jan 2001: 4.1% -> Jun 2003: 6.3% -> +2.2
Dec 2007: 5.0% -> Oct 2009: 10.0% -> +5.0
Feb 2020: 3.5% -> Apr 2020: 14.7% -> +11.2
Unemployment Rates Across Countries
Unemployment rates differ across countries: European unemployment is about double the U.S. rate.
In the 1950s and 1960s, European unemployment was generally lower than that in the U.S.
The U.S. Inflation Rate, 1929-2022
Inflation reflects a general rise in prices over time; it varies over time, being high in the 1970s, low in the 1990s, and spiking to around 8% in 2022.
Across countries, inflation also varies: in the 1990s the U.S. experienced around 3% inflation while Ukraine faced much higher rates (e.g., around 400%).
Concept: inflation rate typically measures the percentage change in a price index over a period.
The Major Macroeconomic Issues (Interdependence of National Economies)
National economies are becoming increasingly interdependent:
In 2022 the U.S. exported 12% of all goods and services produced.
In 2022 the U.S. imported 16% of the goods and services used by Americans.
The International Flows create political and economic issues
The impact of trade on jobs:
Examples include steel and textile industries affected by outsourcing and import competition.
Trade agreements shape which countries win or lose jobs in various sectors.
Trade imbalances:
Trade deficit: exports < imports.
Trade surplus: exports > imports.
Exports and Imports as a Share of U.S. Output (GDP)
Exports and imports as shares of GDP (percent): the chart shows exports and imports relative to GDP over time (1929-2022).
Key takeaway: the shares of exports and imports vary over time; both exist as components of GDP and reflect openness to trade.
The Major Macroeconomic Issues (Summary)
Major topics include:
Economic growth and living standards
Productivity
Recessions and expansions
Unemployment
Inflation
Economic interdependence among nations
Macroeconomic Policy
Monetary Policy
Determination of the nation’s money supply.
Controlled by the central bank, in the U.S. by the Federal Reserve System (the Fed).
The central bank has the power to inject more money into the economy or remove money from circulation.
Core question: How much money should there be? M (money supply) decisions influence inflation, output, and employment.
Fiscal Policy
Decisions about the government’s budget: government expenditures and government revenues (taxes).
Key question: How much should the government spend, and on what should it spend?
Structural Policy
Government policies aimed at changing the underlying structure or institutions of the economy.
Key question: What should the economy look like in the long run?
Positive versus Normative Analyses of Macroeconomic Policy
Positive Analysis: Addresses the economic consequences of a policy or event without judging desirability.
Normative Analysis: Addresses whether a policy should be used; inherently involves the values of the analyst.
Aggregation
Aggregation: The adding up of the individual economic variables to obtain economy-wide totals.
Purpose: Used to take a "bird’s-eye view" of the economy.
Aggregation (Aggregate Measurements and Limitations)
Aggregate measurements in dollar values allow economists to compare broad categories (e.g., exports vs imports).
Aggregation often obscures fine detail of an individual economic situation.
Aggregation (Bird’s-Eye View Statistics)
We rely on many aggregate statistics to assess the economy, such as:
Crime rates
Unemployment rates
Output per worker