Chapter 10 (What is Macroeconomics?)
a single household’s decisions: what jobs to take, how to spend income;
a single firms decisions: output, pricing
examples: How many people have jobs? Are incomes rising or falling in general? Is the situation improving or worsening?
Federal government’s responsibility “to promote maximum employment, production, and purchasing power”;
Pursue economic stability
However, as our economy changes and progresses, certain jobs are destroyed.
frictional(occurs naturally)
cyclical
Joseph Schumpeter: “creative destruction”;
New industries are created, and old ones are destroyed;
Examples:
Borders (bookstore) bankrupt in 2011.
Job losses in the book industry. Why?
U.S. steel industry:
1980: 500,000 laborers
2010: 150,000 laborers
More automated equipment, safer and more efficient
Manufacturing (working in factories)
Service (working in offices, online)
Today: United States = “service economy”
Government can help with training programs or relocation subsidies
Destroyed automated looms that could be operated cheaply to produce clothing
People don’t instantly take a new job, and they might not want to take the first available job
Firms don’t always hire the first applicant
Example:
Recent college grads
Spouse of a person who moves for a new job
Can also be affected by government regulations that make it difficult to hire or fire
Helps macroeconomy by stopping economic problems from spreading to other industries
Unintended consequence: reduces incentives to quickly find another job. It may increase the amount of time people are unemployed
Due to an unhealthy economy, so not “natural”
The “worst” kind of unemployment
Occurs for an unknown length of time
2008 recession: 18 months, 10% unemployment rate
A healthy economy produces a large amount of valuable output.
If output falls for a certain period, there’s something wrong in the economy.
Nations that don’t produce much high-value output are relatively poor
Idea: the output you produce is sold, and you receive income for what you sell.
Sum of output from all economic activity
Functions as a “barometer” for the economy
Output becomes income
Output = GDP = Income
1. Estimate and compare living standards
2. Measure economic growth over time
Doesn’t adjust for population size of country
Average living standards in a nation
Economic growth: measured as the percentage change in real, per capita GDP from one period to another.
Not just one good (like gasoline or sugar)
But most or all goods and services
When inflation rises, purchasing power falls.
Problem for consumers: when income doesn’t increase as often or as much as prices do
Inflation is caused by expansions in the nation’s money supply that outpace the level of production.
It takes more money to buy the same amount of goods and services.
Money then becomes less valuable relative to the amount of goods and services.
A. Alfred the VCR repairman is unemployed because there are very few people that still own VCRs.
B. Bernie the construction worker is unemployed because no one is building houses right now.
C. Carl the restaurant chef is unemployed because he and his wife recently moved to a new city.
Structural unemployment is unemployment caused by changes in the industrial makeup (structure) of the economy. We no longer have VCRs, so we don’t need VCR repairmen.
A. Alfred the VCR repairman is unemployed because there are very few people that still own VCRs.
B. Bernie the construction worker is unemployed because no one is building houses right now.
C. Carl the restaurant chef is unemployed because he and his wife recently moved to a new city.
This is “natural” since Carl won’t find a job instantly. He may look for a while.
A. It hurts the unemployed by giving them benefits.
B. It may increase the length of unemployment since it decreases the cost of being unemployed.
C. It angers hard-working people.
D. It lasts as long as you want it to, so you can get paid and never have to work.
Once again, it’s about incentives. With unemployment insurance, you still get paid (even though you are not working). You may still want to get a job, but the fact that you’re still receiving money may make you not try as hard to get that next job.
A. a nation’s exports.
B a nation’s debt.
C. a nation’s income.
D. a nation’s consumption.
Output = GDP = Income
A. Real GDP is adjusted for inflation, and nominal GDP is just measured in current prices.
B. Real GDP includes goods and services, and nominal GDP only includes goods.
C. Real GDP averages income over time, and nominal GDP is just for this year.
“Real” means inflation-adjusted. Real GDP is found by adjusting nominal GDP for inflation.
A. The price of gasoline goes up.
B. The price of gasoline goes up but is offset by the price of smartphones going down.
C. The price of gasoline, smartphones, and pretty much everything else goes up.
Inflation is an increase in the general price level (for most or all goods and services), not an increase in just one (or a few) goods or services.
Adam Smith
David Ricardo
John Stuart Mill
Stresses the importance of aggregate supply and generally believes that the economy can adjust back to full employment equilibrium on its own
Because of this, government should not interfere.
-Laissez-faire
If government wants to improve the economy, it should encourage more business.
-Stimulate supply or production
Increasing the supply of money causes inflation and has no lasting positive impact.
But, the economy did not “self-correct.”
There was no national policy to address the economic problems of the Great Depression.
The belief that there was no role for the government began to erode.
Stresses the importance of aggregate demand and generally believes that the economy needs help in moving back to full employment equilibrium