1-1 How Macroeconomics Affects Our Everyday Lives Macroeconomics : Definition: the study of the major economic totals, or aggregates. The “Big Three” concepts of macroeconomics: Unemployment Rate, Inflation and Productivity growth. The basic task of macroeconomics is to study the cause of good or bad performance of three concepts, why each matters to individuals, and what (if anything) the government can do to improve the macroeconomic performance. Unemployment Rate: Definition: the number of persons unemployed (jobless individuals who are actively looking for work or are on temporary layoff) divided by the total of those employed and unemployed. No job no income. when the unemployment rate is high, crime, mental illness, and suicide also increase. Inflation Rate: Definition: the percentage rate of increase in the economy’s average level of prices. Inflation throws a monkey wrench into individual decision making, creating pervasive uncertainty. productivity Growth: Definition: The average output produced per hour. “productivity” is the average output per hour of work that a nation produces in total goods and services. The faster average productivity grows, the easier it is for each member of society to improve his or her standard of living. An economy, with no productivity growth, has been called the “zero-sum society.” 1-2 Defining Macroeconomics Differ Macroeconomics from Microeconomics Definitions: Macroeconomics deal with totals, or aggregates*, of the economy. Macroeconomics deal with the different parts of the economy, such like the explanation of the wage or salary of one type of worker in relation to another. *An aggregate is the total amount of an economic magnitude for the economy as a whole. 1-3 Actual and Natural Real GDP Definition of GDP: Gross domestic product is the value of all currently produced goods and services sole on the market during the particular time interval. The relations between GDP and the “Big three” concepts: GDP↑Unemployment Rate↓ GDP↑Inflation Rate↑ GDP↑Productivity Rate↑ Actual real GDP Definition: the value of total output corrected for any changes in prices, Natural real GDP Definition: designates the level of real GDP at which the inflation rate is constant, with no tendency to accelerate or decelerate. As ARGDP>NRGDP, the inflation rate speeds up. As NRGDP>ARGDP, the inflation rate slows down. Only when actual real GDP is equal to natural real GDP is the inflation rate constant. Unemployment: Actual and Natural As ARGDP>NRGDP, the unemployment rate falls. As NRGDP>ARGDP, the unemployment rate raises. The natural of unemployment designates the level of unemployment at which the inflation rate is constant, with no tendency to accelerate or decelerate. Productivity growth and real GDP Productivity is defined as actual real GDP per hour; data on actual real GDP are required to calculate productivity. 1-4 Macroeconomics in the Short Run and Long Run Short Run A period lasting from one year to five years. Unemployed Rate and Inflation Rate. The ups and downs are usually called “economic fluctuations” or business cycles. Business Cycles consist of expansions occurring at about the same time in many economic activities, followed by similarly general recessions and recoveries that merge into the expansion phase of the next cycle. Peak Trough Recession Expansion The main goal: To minimize the fluctuations in real GDP and to eliminate the “real GDP gap.” The Real GDP Gap, sometimes called the output gap, is the percentage difference between actual and natural real GDP. Long Run One decade to several decades. Productivity Growth or Economy Growth. Economy Growth is the topic area macroeconomics that studies the causes of sustained the growth in real GDP over periods of a decade or more. Speed-Nation: A country with very fast growth in real GDP. Ex. China and India. Stag-Nation: A country experiences very slow growth in real GDP. Ex. Germany, Italy, and Japan. 1-6 Macroeconomics at the Extremes Unemployment in the Great Depression, 1929-40 Real GDP collapsed between 1929 and 1933.Unemployment Rate reach 25%.It was most serious in the United States and Germany which led directly to Hilter’s takeover of power and indirectly caused the World War Two. The Germany Hyperinflation of 1922-23 A hyperinflation can defined as an inflation raging at a rate of 50% or more per month. The Versailles Peace Treaty, which ended World War One and required payments of massive reparations by Germany to Britain and France. It was both the rapid increase in the supply of money and the ever-declining demand for money that combined to fuel the hyperinflation. Fast and Slow Growth in Asia Real GDP per capita in Philippines is $2,034 and in South Korea is $1,690.Between1960 and 2008, real GDP per capita grew at 5.7 percent per year in South Korea compared to only 1.4 percent in the Philippines. In 2008, real GDP values of only $4,195 for the Philippines and $26,894 for South Korea. 1-7 Taming Business Cycles: Stabilization Policy A Stabilization Policy is any policy that seeks to influence the level of aggregate demand. Target Variables are aggregates whose values society cares about. It contains the three concepts. Policy Instruments, which are elements that government policymaker can manipulate directly to influence target variables, can be used in an attempt to achieve needed changes and it fall into three broad categories: Monetary Policy, which tries to influence target variables by changing the money supply or interest rate or both, Fiscal Policy, which tries to influence target variables by manipulating government expenditures and tax rates, and Miscellaneous Group, which includes policies to equip workers with skills they need to qualify for jobs. 1-8 The “Internationalization” of Macroeconomics A Closed Economy has no trade in goods, services, or financial assets with any other nation, such as the U.S. in the 1940s and 1950s. However, the U.S. has increasingly become an Open Economy. An Open Economy exports goods and services to other nations, imports from them, and has financial flows to and from foreign nations. In 1980-90 and 2001-08, the depressing effect of government deficits on private domestic investment was partly offset by capital inflows from abroad. There are additional impacts of monetary and fiscal policy to consider. --

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