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Principles of economics openstax chapter19

College
Principles
ofPhysics
Economics
# Chapter Title
Chapter 19Chapter
The Macroeconomic
Perspective
PowerPoint Image Slideshow


The great depression, 1929-33

At times, such as when many people are in need of government assistance, it is easy to tell how the economy is doing.
This photograph shows people lined up during the Great Depression, waiting for relief checks. At other times, when
some are doing well and others are not, it is more difficult to ascertain how the economy of a country is doing.


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John Maynard Keynes


Much of the framework of modern
macroeconomics comes from the works of
John Maynard Keynes, whose The General
Theory of Employment, Interest and Money
was published in 1936, which emphasized
short-term stability.
“In the long-run, we are all dead.”


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MACROECONOMIC GOALS

Three of the major goals of macroeconomics are

Sustained Economic Growth (about 3% per year)

Low Unemployment (4-5% annually)

Low Inflation (0-3% annually)


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MACROECONOMIC POLICIES

Fiscal Policy: Government policies of changing income taxes and public
spending.

Monetary Policy: The tools used by the Federal Reserve System to control
the quantity of money, which in turn, affects interest rates.


Macroeconomic FRAMEWORK

This chart shows what macroeconomics is about. The box on the left indicates macroeconomic
goals.
The middle box lists the framework economists use to analyze macroeconomic changes.
The box on the right indicates the two tools the federal government uses to influence the macro

economy.


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MACROECONOMIC ACTIVITY

The Circular Flow Diagram: A diagram
showing the income received and
payments made by each sector of the
economy.


Gross Domestic Product

GDP measures the market value of final goods and services produced within national
boundaries, regardless who produced them.
GDP = C + I + G + (EX – IM)


Components of GDP


Goods & Services Excluded from GDP Calculation



Used goods: already included when produced



Intermediate goods: already counted in final sale; avoid double-counting of same
items



Barter transactions: have no market value



Do-it-yourself activities: hard to compute



Paper transactions: do not add to production



Illegal goods and services: are not supposed to be produced

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GROSS DOMESTIC PRODUCT (GDP)


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NOMINAL VS. REAL GDP

Nominal GDP: GDP measured at existing (current-year) prices

Real GDP: GDP measured at constant (base-year) prices

GDP Deflator: A measure of the general price level = (Nominal GDP / Real GDP) * 100

Economic Growth Rate = Percentage change of Real GDP

Inflation Rate = Percentage change of Implicit GDP Deflator

Per Capita GDP = Real GDP / Population


Nominal GDP

Nominal GDP values have risen exponentially from 1960 through 2010.


Gdp deflator

Much like nominal GDP, the GDP deflator has risen exponentially from 1960 through 2010.


Nominal GDP vs. real gdp


Real gdp

U.S. Real GDP in 2012 was about $13 trillion. After adjusting to remove the effects of inflation, this
represents a roughly 20-fold increase in the economy’s production of goods and services since
the start of the twentieth century.


GDP is not a Measure of Social Welfare
Society is better off when crime decreases; however, a decrease in crime is not reflected in GDP. But, money
spend on crime reduction is included in GDP.

- Violent crimes falling 10% this year



- Five extra police officers are hired at $80,000 each per year

An increase in leisure time is an improvement in social welfare; but it is not reflected in GDP. Money spent on
having more leisure is included in GDP.

- Working three days a week



- Club membership and expenses to playing golf two days a week

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LIMITATION OF GDP


LIMITATION OF GDP
GDP is not a Measure of Social Welfare

Non-market transactions and do-it-yourself activities are not counted in GDP even though they amount to
real production.

- Stay home moms to raise children



- Enrolling children at private day-care centers

Externalities of production and consumption are not included in GDP.

- Air pollution, water contamination



- Paying for smog checks

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