Introduction To Macroeconomics: © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair

CHAPTER
17
Introduction to Macroeconomics
Prepared by: Fernando Quijano and Yvonn Quijano
2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
C H A P T E R 17: Introduction to Macroeconomics
Good macroeconomic environment?

- Low unemployment - Low inflation - Low budget deficit (G-T) - Low foreign trade deficit (X-M) - High profits - High incomes - ...
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Microeconomics examines the

functioning of individual industries and behavior of individual decision-making units (business firms (maximize profits) and households (maximize utility)).
studies hh income, individual prices, demand for labor, computer sales, price movements b/w pepsi and cola, price floors for farmers,...
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Macroeconomics deals with the economy

as a whole (aggregate behavior).
studies the behavior of economic aggregates such as aggregate income (total national output), economic growth, consumption, investment, and the overall level of prices (inflation), recession, unemployment,..
(Aggregate (sum) behavior refers to the behavior of all households and firms together)
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Micro and macro are two distict fields. But, they are closely intertwined b/c changes in the overall economy arise from the decisions of millions of individuals. tree (micro) & forest (macro) Microeconomic Decisions Macroeconomic behavior
(macroeconomic behavior is the sum of all microeconomic decisions) Ex: tax rise in auto industry
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Microeconomist:
studies the impact of foreign competition on US auto industry (the impact of ...TOYOTA recall on the security precautions by BMW; ... iPhone5 by Apple on Microsoft sales)
Macroeconomist:
studies the effects of borrowing by Greece government; the changes in the rate of unemployment in TR; policies to raise economic growth in EU,...
Microeconomists generally conclude that markets work well (prices are flexible adjusting to keep equi. b/w Qs &Qd). Macroeconomists, however, observe that some important prices often seem sticky. (Sticky prices are prices that do not always adjust rapidly to maintain the equality between quantity supplied and quantity demanded)
The Roots of Macroeconomics

The Great Depression was a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s. (1929: stock market crash in US) in 1929: 1.5 million were unemployed in 1933: 13 million were unemployed over 14% until 1940
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Classical economists applied microeconomic models, or market clearing models, to economy-wide problems. Excess supply of labor....wages decline...unemp will not persist. However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the impetus for the development of macroeconomics.

In 1936, John Maynard Keynes published his famous book, The General Theory of Employment, Interest, and Money. Keynes believed governments could intervene in the economy and affect the level of output and employment. During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession.
Recent Macroeconomic History

Fine-tuning (ince ayar) was the phrase used by Walter Heller to refer to the governments role in regulating inflation and unemployment (act to stabilize macroeconomy)
The use of Keynesian policy to fine-tune the economy in the 1960s, led to disillusionment in the 1970s and early 1980s (1974-75 and 198082: severe recessions and high rates of inflation)
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Recent Macroeconomic History

1970s: Stagflation
It occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).
2007 - ... : Global Financial & Economic Crisis (recession (durgunluk), high unemployment, high public debt)
Macroeconomic Concerns
Three of the major concerns of macroeconomics are:

1. Inflation 2. Output growth 3. Unemployment
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1. Inflation and Deflation

Inflation is an increase in the overall price level.
Govern. policy: low inflation

Hyperinflation is a period of very rapid increases in the overall price level (skyrocketing prices: monthly rate of inflation: 300 %). Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation.
Deflation is a decrease in the overall price level (Japan).

Prolonged periods of deflation can be just as damaging for the economy as sustained inflation (is deflation bad?)
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CHAPTER
17
Hiper enflasyonun son rnei, Zimbabwede yaand. lkenin para birimi woe, Kasm 2008de zirve yaparken, enflasyon yzde 79 milyar seviyesiyle rekor krd. lkede fiyatlar, yaklak her 24 saatte ikiye katlanyordu.
Almanya: Ekim 1923te yaklak olarak yzde 29 bin 500 seviyesine yaklaan enflasyon oran, gnlk Prepared by: Fernando 20.9luk bir orana denk geliyordu ve lkede Yvonn Quijano fiyatlar and Quijano her 3.7 gnde ikiye katlanyordu.
2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
2. Output Growth: Short Run and Long Run

The business cycle is the cycle of shortterm ups and downs in the economy. The main measure of how an economy is doing is aggregate output:
Aggregate output is the
total quantity of goods and services produced in an economy in a given period.
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2. Output Growth: Short Run and Long Run

A recession is a period during which aggregate output declines. Two consecutive quarters of decrease in output signal a recession. A prolonged and deep recession becomes a depression (US in 1930s) Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.
3. Unemployment
The unemployment rate (U) is the percentage of the labor force that is unemployed U = (number of unemployed / labor force) *100 The unemployment rate is a key indicator of the economys health & closely related to aggregate output. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium. Why do labor markets not clear when other markets do?
Government in the Macroeconomy

There are three kinds of policy that the government has used to influence the macroeconomy:
1. Fiscal policy
2. Monetary policy
3. Growth or supply-side
policies
2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 19 of 31
Government in the Macroeconomy

Fiscal policy refers to government policies concerning taxes (T) and spending/expenditures (G). (collect taxes & spend on highways, schools,..) Monetary policy consists of tools used by the Federal Reserve (central bank) to control the quantity of money in the economy which affects inflation, interest rates, level of output, unemployment rate,... Growth policies are government policies that focus on stimulating aggregate supply instead of aggregate demand (ex: lowering business tax rates)
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The Components of the Macroeconomy

The circular flow diagram shows the income received and payments made by each sector (hh, firms, government, ROW- 4 economic actors) of the economy.

Everyones expenditure is someone elses receipt. Every transaction must have two sides.
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Transfer payments are payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. Ex. social security benefits, scholarships, interest payments on government debt.
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The Three Market Arenas

Households, firms, the government, and ROW (the rest of the world) all interact in three different market arenas:
1. Goods and services market 2. Labor market 3. Money (financial) market
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Households and the government purchase goods and services (demand) from firms in the goods and services market, and firms supply to the goods and services market.
In the labor market, firms and government purchase (demand) labor from households (supply). The total supply of labor in the economy depends on the sum of decisions made by households.

In the money market sometimes called the financial market households purchase stocks (hisse senedi) and bonds (tahvil) from firms.
Households supply funds to this market in the
expectation of earning income, and also demand (borrow) funds from this market.
Firms, government, and the rest of the world
also engage in borrowing and lending (demand & supply of funds), coordinated by financial institutions.
Financial Instruments
Shares of stock are financial instruments that give to the holder a share in the firms ownership and therefore the right to share in the firms profits.
Dividends (kar pay, temett) are the portion
of a corporations profits that the firm pays out each period to its shareholders (as a cash or stock).
Retained earnings (datlmam kazan):
profits of corporations not paid to hhs in the form of dividends.

Financial Instruments
Treasury bonds, notes, and bills are promissory notes issued by the federal government when it borrows money (for different time periods). Corporate bonds are promissory notes issued by corporations when they borrow money.
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The Methodology of Macroeconomics

Connections to microeconomics:
Macroeconomic behavior is the sum
of all the microeconomic decisions made by individual households and firms. We cannot understand the former without some knowledge of the factors that influence the latter.
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Aggregate Supply and Aggregate Demand

Aggregate demand is the total demand for goods and services in an economy.
Aggregate supply is the total supply of goods and services in an economy.

AD and AS are more complex than simple
market supply and demand curves.

Expansion and Contraction: The Business Cycle

An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.
A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.
A business cycle shows a positive trend (a peak of a new bus. cycle is higher than the peak of the previous) A business cycle is symmetrical (length of expansion = lenght of contraction)
Most of them are not! Expansion may be slow and gradual; Contraction may be fast and sharp.
The Business Cycle and 4 Macroeconomic Objectives

National output
Full-capacity 4 macroeconomic output (a) objectives: Actual output (b)
time
a-b: output gap
if b is greater than a: economic boom, positive output gap (ex: China), import resources if a is greater than b: recession, negative output gap
1. sustainable economic growth 2. employment 3. stable and low inflation 4. equi. of foreign trade
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US Economy: Real GDP, 1900-2002

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Unemployment Rate, 1970 I-2003 II

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Percentage Change in the GDP Deflator (Four-Quarter Average), 1970 I-2003 II
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Introduction To Macroeconomics: © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair

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CHAPTER

Prepared by: Fernando Quijano and Yvonn Quijano

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

C H A P T E R 17: Introduction to Macroeconomics

Good macroeconomic environment?

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

C H A P T E R 17: Introduction to Macroeconomics

Microeconomics examines the

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

C H A P T E R 17: Introduction to Macroeconomics

Macroeconomics deals with the economy

2004 Prentice Hall Business Publishing

C H A P T E R 17: Introduction to Macroeconomics

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

2004 Prentice Hall Business Publishing

C H A P T E R 17: Introduction to Macroeconomics

2004 Prentice Hall Business Publishing

The Roots of Macroeconomics

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

The Roots of Macroeconomics

2004 Prentice Hall Business Publishing

The Roots of Macroeconomics

2004 Prentice Hall Business Publishing

Recent Macroeconomic History

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Recent Macroeconomic History

2004 Prentice Hall Business Publishing

Three of the major concerns of macroeconomics are:

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

1. Inflation and Deflation

Inflation is an increase in the overall price level.

Govern. policy: low inflation

Deflation is a decrease in the overall price level (Japan).

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

C H A P T E R 17: Introduction to Macroeconomics

2. Output Growth: Short Run and Long Run

total quantity of goods and services produced in an economy in a given period.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

C H A P T E R 17: Introduction to Macroeconomics

2. Output Growth: Short Run and Long Run

2004 Prentice Hall Business Publishing

2004 Prentice Hall Business Publishing

Government in the Macroeconomy

Government in the Macroeconomy