chapter 1 -- the macro goal variables
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Chapter 1 -- The Macro Goal Variables. Measures of Economy’s “Health” Definitions, Realistic Goals, and Recent (US) Performance. #1 -- Real Gross Domestic Product (Real GDP). - PowerPoint PPT PresentationTRANSCRIPT
Chapter 1 -- The Macro Goal Variables
Measures of Economy’s “Health”Definitions, Realistic Goals, and
Recent (US) Performance
#1 -- Real Gross Domestic Product (Real GDP)
Real GDP (Y) -- The total production of final goods and services over a period of time, expressed in constant prices of a base year.
Why Real GDP (GDP in constant dollars), instead of Nominal GDP (GDP in current dollars)?
Real GDP -- Realistic Goal
Realistic Goal for Real GDP -- to be as high as possible without accelerating inflation (overstimulated economy).
Can state this goal in a more formal way.
The Natural Level of Real GDP (Potential Real GDP)
The Natural Level of Real GDP (YN) -- that level of real GDP in which inflation has no tendency to accelerate or decelerate.
Comparing Real GDP to the Natural Level of Real GDP
Y < YN -- sluggish economy with decelerating inflation (inflation rate) Y > YN -- economy with accelerating inflation Y = YN -- economy with constant inflation rate
Characteristics of YN
UnobservableGrows at 2.5% per year for the USAffected by -- labor productivity -- the price of energy -- the capital stock -- the labor force
Getting and Keeping Y at YN: The “Two Cars”If Y = YN, then seek annual real GDP
growth = 2.5%.If Y < YN, then seek annual real GDP
growth > 2.5%, for awhile.If Y > YN, then seek annual real GDP
growth < 2.5%, for awhile.
Special Case -- The Recession
Goal Variable #2 -- The Inflation RateInflation Rate -- the growth or
percentage change in the overall price level.
First, measure the price level (P). -- Consumer Price Index (CPI) -- GDP DeflatorInflation Rate = Percentage Change in P
Realistic Goal -- Inflation
Ideal Goal: Inflation Rate = 0%.
Realistic Goal (US): |Inflation Rate| < 3%.
An Inflation Problem Versus Accelerating InflationInflation Problem -- |Inflation Rate| < 3%.Accelerating Inflation -- Inflation RateConsider -- Inflation Rates of 1981 versus 1985
(Y = YN) 1981 Inflation Rate = 9.0% 1985 Inflation Rate = 2.5%
Goal Variable #3 -- The Unemployment Rate (u) u = (# of people unemployed) (total labor force)
Does not measure -- discouraged workers -- part-time versus full-time employment -- people with multiple jobs
Types of Unemployment
Frictional Unemployment -- Unemployment due to normal labor market frictions.
Structural Unemployment -- Unemployment due to a mismatch of available workers and jobs.
Cyclical Unemployment -- Unemployment due to a generally slow economy.
Realistic Goal -- Unemployment Rate
Realistic Goal -- zero cyclical unemployment
Natural Rate of Unemployment (uN) -- The unemployment rate in which inflation has no tendency to accelerate or decelerate.
Realistic Goal: u = uN
Interpretation: u versus uN
u = uN Inflation Rate Unchanged (Desired State of Economy)u > uN Inflation Rate (Sluggish Economy)u < uN Inflation Rate
(Overstimulated Economy)
Real GDP and the Unemployment Rate
u = uN Y = YN, (Desired State of Economy)u > uN Y < YN, (Sluggish Economy)u < uN Y > YN, (Overstimulated Economy)
Goal Variable #4 -- The Federal Budget
Budget = Tax Revenues - Government Expenditure (over a given period)
Budget = Tax Revenues - (Government purchases of goods and services + Transfer Payments + Interest on the National Debt)
Budget Definitions
Budget < 0 -- Budget DeficitBudget > 0 -- Budget SurplusBudget = 0 -- Balanced Budget
Realistic Goal -- The Federal Budget
Realistic Goal -- Balanced Budget when Y = YN.
Sluggish economies tend toward deficits.
Hierarchy of economic problems.
Goal Variable #5 -- The Balance of Trade
Balance of Trade (BOT) -- approximated by net exports.
BOT = Exports - Imports
BOT < 0 -- Balance of Trade DeficitBOT > 0 -- Balance of Trade SurplusBOT = 0 -- Balanced Trade Position
Realistic Goal -- Balance of Trade
Realistic Goal -- BOT close to zero.
Diagnosing the “Patient” --
The Current US Economy and Prospects For the Near Future