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					         Macroeconomics:

Study of the determinants of
  Output, Employment and
       the Price Level
Put less formally, macroeconomics is about
 understanding the causes of prosperity and
                   poverty.
   National Income Accounting
• Purpose: measure the performance of the
  economy for purposes of public policy
• Created in the aftermath of the Great
  Depression
• GDP: most important measure of the
  economy’s performance
      Gross Domestic Product
• GDP is the most important measure of
  economic output
• GDP is defined as the total value of all final
  goods and services produced by the
  domestic economy in one year
            Measuring GDP

Expenditure Approach:   Income Approach:
GDP = C + I + G + X -   GDP = Wages + Profits
  M                       + Rents + Interest +
                          Indirect Business
                          Taxes
        Types of Expenditures
• Consumption:         • Government
  – durable goods      • Net Exports
  – nondurable goods     – exports
  – services             – imports
• Investment
  – inventories
  – producer goods
  – new construction
  Consumption as a Percentage of
             GDP
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
      1930   35   40   45   50   55   60   65   70   75   80   85   90   95
                            0.5
                                  0.55
                                         0.6
                                                       0.65
                                                              0.7
                    1959
                    1960
                    1961
                    1962




                                                                    Sum of C/Y
                    1963
                    1964
                    1965
                    1966
                    1967
                    1968
                    1969
                    1970
                    1971
                    1972
                    1973
                    1974
                    1975
                    1976
                    1977
                    1978
                    1979
                    1980
                    1981
                    1982
                                                                                   Total




                    1983




Year or quarter
                    1984
                    1985
                    1986
                    1987
                    1988
                   1989
                   1990
                   1991
                   1992
                    1993
                    1994
                    1995
                    1996
                    1997
                    1998
                    1999
                    2000
                    2001
                                                                                 Consumption as a




                    2002
                  2003: I
                                                                                 Percentage of GDP

                                               Total
        Investment as a Percentage of
                    GDP
20%



15%



10%



5%



0%
      1930   35   40   45   50   55   60   65   70   75   80   85   90   95
                            0
                                0.05
                                       0.1
                                                     0.15
                                                            0.2
                    1959                                            0.25
                    1960
                    1961
                    1962
                                                                       Sum of I/Y



                    1963
                    1964
                    1965
                    1966
                    1967
                    1968
                    1969
                    1970
                    1971
                    1972
                    1973
                    1974
                    1975
                    1976
                    1977
                    1978
                    1979
                    1980
                    1981
                    1982
                                                                                    Total




                    1983




Year or quarter
                    1984
                    1985
                    1986
                    1987
                    1988
                   1989
                   1990
                   1991
                   1992
                    1993
                    1994
                    1995
                    1996
                    1997
                    1998
                    1999
                    2000
                    2001
                    2002
                  2003: I
                                                                   Investment as a


                                             Total
                                                                  Percentage of GDP
Government Spending as
 a Percentage of GDP
     Sum of Outlays
                                                             Total




50


45


40


35


30


25                                                                                                                 Total


20


15


10


5


0
1934      1939    1944   1949   1954   1959   1964    1969      1974   1979   1984   1989   1994   1999   2004 1

                                               Fiscal year or period
              Government Expenditures
                      Government Expenditures as a Portion of the Budget

100%
                                                  Other

80%
                                                                               Social Security


60%                                                                            Income Security
                International
                   Affiars                                                                   Medicare
                                                                                               Health
40%
                                 Defense


20%
                                                                                    Net Interest

 0%
       1940


               1945


                         1950


                                1955


                                           1960


                                                  1965


                                                          1970


                                                                 1975


                                                                        1980


                                                                                      1985


                                                                                                 1990


                                                                                                        1995
                Government Revenues
100%




80%




60%                                                                                        Other
                                                                                           Social
                                                                                           Individual
40%                                                                                        Corporation




20%




 0%
       1940


              1945


                     1950


                            1955


                                   1960


                                          1965


                                                 1970


                                                        1975


                                                               1980


                                                                      1985


                                                                             1990


                                                                                    1995
                          0
                              0.02
                                     0.04
                                            0.06
                                                                             0.08
                                                                                    0.1
                                                                                          0.12
                                                                                                 0.14
                  1959
                  1960
                  1961
                  1962
                  1963
                  1964
                  1965
                  1966
                  1967
                  1968
                  1969
                  1970
                  1971
                  1972
                  1973
                  1974
                  1975
                  1976
                  1977
                  1978
                  1979
                  1980
                  1981




Year or quarter
                  1982
                  1983
                  1984
                  1985
                  1986
                  1987
                  1988
                                                                                                        Drop Page Fields Here




                  1989
                  1990
                                                                                                                                as a Percentage of GDP




                  1991
                  1992
                  1993
                  1994
                  1995
                                                                                                                                                         Exports and Imports




                  1996
                  1997
                  1998
                  1999
                   2000
                  2001
                                                                             Data
                                                              Sum of X/GDP
                                               Sum of m/GDP
 Net International
Investment Position
                                                              Total


   0
        Sum of 1995 Sum of 1994 Sum of 1996 Sum of 1997 Sum of 1998 Sum of 1999 Sum of 2000 Sum of 2001 Sum of 2002
                                                                                                            p
                                             With direct investment at market value
 -500




-1000




-1500                                                                                                                 Total




-2000




-2500




-3000

                                                    Type of investment Data
             Types of Income
•   Compensation
•   Corporate Profits
•   Proprietor Profits
•   Interest
•   Rents
      Employee Compensation as a
      Percentage of National Income
  1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
  0
      30   35   40   45   50   55   60   65   70   75   80   85   90   95
                                    Years
             Corporate Profits,
      Proprietorships, and Interest as a
       Percentage of National Income
25%

20%                   Pr opr i et or shi ps

15%

10%
                          Copor at e Pr of i t s
5%                                                            I nt er est

0%
      30   35   40   45       50      55      60   65   70   75     80      85   90   95
-5%
GDP over time
                       Nominal and Real GDP

                      8,000.0
                                                                      Nominal GDP
                      7,000.0
                                                                      Real GDP

                      6,000.0


                      5,000.0
Billions of Dollars




                      4,000.0


                      3,000.0


                      2,000.0


                      1,000.0


                          0.0
                                1959

                                       1961

                                              1963

                                                     1965

                                                            1967

                                                                   1969

                                                                          1971

                                                                                 1973

                                                                                        1975

                                                                                               1977

                                                                                                      1979

                                                                                                             1981

                                                                                                                    1983

                                                                                                                           1985

                                                                                                                                  1987

                                                                                                                                         1989

                                                                                                                                                1991

                                                                                                                                                       1993

                                                                                                                                                              1995
                                               Real GDP
                      $6,000.00
Billions of dollars




                      $5,000.00
                      $4,000.00
                      $3,000.00
                      $2,000.00
                      $1,000.00
                          $0.00
                                  1930

                                         35

                                              40

                                                   45

                                                        50

                                                             55

                                                                  60

                                                                       65

                                                                            70

                                                                                 75

                                                                                      80

                                                                                           85

                                                                                                90
                  -4.00%
                           -2.00%
                                            0.00%
                                                            2.00%
                                                                                        4.00%
                                                                                                6.00%
                                                                                                        8.00%
                                    1959
                                    1960
                                    1961
                                    1962
                                    1963



                                                                                                                Business cycle
                                    1964
                                    1965
                                    1966
                                    1967
                                    1968
                                    1969
                                    1970
                                    1971
                                    1972
                                    1973
                                    1974
                                    1975
                                    1976
                                    1977
                                    1978
                                    1979
                                    1980
                                    1981
                                    1982




Year or quarter
                                    1983
                                    1984
                                    1985
                                                                                                                                 Total




                                    1986
                                    1987
                                    1988
                                    1989
                                    1990
                                    1991
                                                                                                                                         Drop Page Fields Here




                                    1992
                                    1993
                                    1994
                                    1995
                                                                                                                                                                    Business Cycle




                                    1996
                                    1997
                                    1998
                                    1999
                                    2000
                                    2001
                                    2002:
                                                    Total
                                                              Drop Series Fields Here
                                                                                                                                                            Percentage Change in GDP: The
              Employment
• Unemployment rate--unemployed/labor
  force
• unemployed
  – between 16 and 65
  – involuntarily unemployed
  – noninstitutionalized
• labor force--employed + unemployed
Unemployment Rate
                          Unemployment Rate
                    30%
                    20%
                    10%
                    0%
                      1930 35 40 45 50 55 60 65 70 75 80 85 90 95
                         Gr eat W I I Kor ean
                                   W                  Oi
                                              Vi et nam l Fed
                         Depr essi on War             Embar goI nduced
                                                              Recessi on
                        0
                            2
                                4
                                                              6
                                                                                                         8
                                                                                                             10
                                                                                                                  12
                1955
                1956
                1957
                1958
                1959
                1960
                1961
                1962
                1963
                1964
                1965
                1966
                1967
                1968
                1969
                1970
                1971
                1972
                1973
                1974
                1975
                1976
                1977
                1978
                1979
                1980




Year or month
                1981
                1982
                1983
                1984
                1985
                1986
                1987
                1988
                1989
                                                                                                                       Drop Page Fields Here




                1990
                1991
                1992
                1993
                1994
                 1995
                 1996
                1997
                1998
                1999
                2000
                2001
                2002
                                                                                                  Data


                                                     Sum of Males
                                    Sum of Females
                                                                    Sum of All civilian workers
            Labor Force Participation Rate
                       Number employed/Working age population

68.0

66.0

64.0

62.0

60.0

58.0

56.0

54.0
  54

        56

             58

                   60

                        62

                              64

                                   66

                                         68

                                               70

                                                    72

                                                          74

                                                               76

                                                                     78

                                                                          80

                                                                                82

                                                                                      84

                                                                                           86

                                                                                                 88

                                                                                                      90

                                                                                                            92

                                                                                                                 94

                                                                                                                       96
19

       19

            19

                  19

                       19

                             19

                                  19

                                        19

                                              19

                                                   19

                                                         19

                                                              19

                                                                    19

                                                                         19

                                                                               19

                                                                                     19

                                                                                          19

                                                                                                19

                                                                                                     19

                                                                                                           19

                                                                                                                19

                                                                                                                      19
       Types of Unemployment
•   Frictional unemployment
•   structural unemployment
•   seasonal unemployment
•   cyclical unemployment
          Costs and Benefits of
            Unemployment
• Costs                       • Benefits (dubious)
  – Costs of supporting the      – disciplines the labor
    unemployed                     force
  – loss of output               – checks wage increases
  – crime, suicide, etc.           (Marx’s point)
  – psychological costs          – reduces inflationary
                                   pressures
            The Price Level
• Price level--average level of prices of a
  market basket of goods
• CPI--measures changes in prices of
  consumer goods
• PPI-- measures changes in prices of
  producer goods
• GDP Price Deflator--measures changes in
  prices of goods making up GDP
              Price Level
120
100
 80
 60
 40
 20
  0
  1930   40   50   60   70   80   90
Inflation (Percentage change in the Price Level)
            40%
Inflation




            20%
  Rate




             0%
            -20% 31 36 41 46 51 56 61 66 71 76 81 86 91 96

                                   Years
  Costs and Benefits of Inflation
• Costs                     • Benefits
  – hurts creditors           – alleviates the burden of
  – hurts those on fixed        debt
    incomes                   – raises profits, and
  – increases uncertainty       therefore may help the
  – costs of marking up         economy
    prices

				
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