The Bird’s-Eye View of the Economy

Learning Objectives

• Discuss the broad issues that macroeconomists study and the types of data they use and interpret.
• Identify the three major types of macroeconomic policy and discuss the difference between positive and normative analyses of macroeconomic policy.
• Understand the difference between microeconomics and macroeconomics and how aggregation is used.

Introduction: The Great Depression

• The Great Depression (U.S.)
  • Factories cut production by 31%.
  • Number of people without jobs nearly tripled by 1933; unemployment rate hit 25%.
  • Stocks lost a third of their value in 3 weeks.
• The Great Depression (Germany)
  • Nearly a third of all workers were without jobs.
  • Banking system collapsed.
• The cause question and the response
  • The stock market? Capitalism? Poor economic planning?
  • The response: Macroeconomic policies – Government actions designed to affect the performance of the economy as a whole.

The Major Macroeconomics Issues

• Standard of Living
  • The degree to which people have access to goods and services that make their lives 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 and Growth in the U.S.

• Output of the U.S. Economy, 1929-2022
  • In 2022 output of the U.S. economy was: ext{Output}{2022} = 18 imes ext{Output}{1929}
  • In 2022 output was: ext{Output}_{2022} ext{ is about } 5 imes ext{ the 1965 level}

Output per Person and per Worker

• Output per person / per worker in 2022
  • Output per worker in 2022 was more than 5 imes the 1929 level.
  • (Note: The slide summarizes that output per worker increased substantially since 1929.)

The Major Macroeconomic Issues: Societal Indicators

• In the U.S. (technology and connectivity)
  • 97% of Americans own a cell phone.
  • 92% of households own a computer.
  • 85% of households have internet access.
• Education and credentials
  • About 91% of the adult population has a high school diploma.
  • 38% of the adult population has a college degree.

Productivity and Living Standards

• Productivity in 2022
  • The average U.S. worker could produce five times more than in the 1930s.
  • Average labor productivity: ext{Average Labor Productivity}_{2022} = ?
• Productivity trends in U.S. output per employed worker
  • 1950–1973: growth > 2% per year.
  • 1974–1995: growth around 1% per year.
  • 1996–2007: growth between 1% and 2% per year.

Productivity and Living Standards: U.S. vs. China (2021)

• United States vs. China (2021)
  • United States:
  • Output: 23{,}315 ext{ billion dollars}
  • Population: 332 ext{ million}
  • Employed: 152 ext{ million}
  • Output per person: 70{,}226
  • Average labor productivity: 153{,}388
  • China:
  • Output: 17{,}734 ext{ billion dollars}
  • Population: 1{,}412 ext{ million}
  • Employed: 746 ext{ million}
  • Output per person: 12{,}559
  • Average labor productivity: 23{,}772

The U.S. Unemployment Rate, 1929-2022

• Definition: The unemployment rate = the percent of the labor force that is out of work.
• Observations:
  • Rises during recessions.
  • Always greater than zero.

Increases in Unemployment During Recessions

• Unemployment rate at beginning of recession vs. peak, and the increase
  • Nov. 1973: Beginning 4.8% → May 1975 peak 9.0% → Increase +4.2 pp
  • Jan. 1980: Beginning 6.3% → Nov./Dec. 1982 peak 10.8% → Increase +4.5 pp
  • July 1990: Beginning 5.5% → June 1992 peak 7.8% → Increase +2.3 pp
  • Jan. 2001: Beginning 4.1% → June 2003 peak 6.3% → Increase +2.2 pp
  • Dec. 2007: Beginning 5.0% → Oct. 2009 peak 10.0% → Increase +5.0 pp
  • Feb. 2020: Beginning 3.5% → Apr. 2020 peak 14.7% → Increase +11.2 pp

International Comparisons and Trends in Unemployment

• Unemployment rates differ by country
  • European unemployment is roughly double the U.S. rate.
  • In the 1950s and 1960s, European unemployment was generally lower than in the U.S.

The U.S. Inflation Rate, 1929-2022

• Inflation: prices in general are rising over time; varies across time and countries
  • High in the 1970s and low in the 1990s; spiked to 8% in 2022.
  • International comparison: in the 1990s, around 3% in the U.S.; around 400% in Ukraine (illustrative point on cross-country differences).

Economic Interdependence of Nations (Trade and Flows)

• National economies are becoming increasingly interdependent
  • In 2022 the U.S.: exports 12% of all goods/services produced; imports 16% of goods/services used by Americans.

Exports and Imports as a Share of U.S. Output (GDP)

• Exports and imports relative to GDP over time
  • The slide shows a historical trend of exports and imports as shares of GDP; both move with global integration.

The Major Macroeconomic Issues (Summary List)

• 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 or the Federal Reserve System (Fed) in the U.S.
  • The central bank has the power to inject more money into the economy or remove it.
  • Core question: How much money should there be?

• Fiscal Policy

  • Decisions that determine the government’s budget, including the amount and composition of government expenditures and revenues.
  • Core question: How much should the government spend, and on what?

• Structural Policy

  • Government policies aimed at changing the underlying structure, or institutions, of the nation’s economy.
  • Core question: What should the economy look like?

Positive vs Normative Analyses of Macroeconomic Policy

• Positive Analysis
  • Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable.
• Normative Analysis
  • Addresses the question of whether a policy should be used; normative analysis inevitably involves the values of the person doing the analysis.

Aggregation

• Aggregation definition
  • The adding up of the individual economic variables to obtain economy-wide totals.
  • Used to take a “bird’s-eye view” of the economy.
• Aggregate measurements
  • Aggregate measurements in dollar values allow economists to compare broad categories of goods and services (e.g., exports and imports).
  • Aggregation often obscures the fine detail of an economic situation.
• Aggregate statistics we rely on
  • Crime rates
  • Unemployment rates
  • Output per worker
  • (These are used to assess how the economy is performing from a broad perspective.)