Goals of Macroeconomic Policy, Manegerial Economics - Economics - Lecture Slides, Slides of Managerial Economics

Download Goals of Macroeconomic Policy, Manegerial Economics - Economics - Lecture Slides and more Slides Managerial Economics in PDF only on Docsity! The Goals of Macroeconomic Policy When men are employed, they are best contented. BENJAMIN FRANKLIN Inflation is repudiation. CALVIN COOLIDGE Docsity.com Goals of Macroeconomic Policy • Economic growth – ingredients – Aggregate supply – Aggregate demand • Inputs – Labor, machinery, other resources – Used to produce outputs • Output – Goods and services – Produced in economy •2 Docsity.com Productivity Growth: From Little Acorns… • Small differences in growth rates – Enormous difference – long run • 109 years; 1870 – 1979 – Compound annual growth • U.S. – 2.3% • U.K. – 1.8% • Japan – 3% •5 Docsity.com Productivity Growth: From Little Acorns… • Labor productivity – Amount of output – One worker produces • In an hour (or a week, or a year) of labor – Output = GDP • Labor productivity = GDP per hour of work •6 Docsity.com Productivity Growth • Productivity growth – Almost everything in long run • Rising productivity – Raising standard of living – long run • Long periods of time – Small differences • Rates of productivity growth • Compound over time – Enormous difference to society’s prosperity 7 Docsity.com Potential GDP & Production Function • Estimate potential GDP – Available inputs • Produce output – Available technology • Production function – Volume of output – Produced – Given inputs – Given available technology •10 Docsity.com The economy’s production function Figure 1 11 0 Labor input (hours) R ea l G D P (a) Effect of better technology (b) Effect of more capital L0 Y0 K M Y1 A 0 Labor input (hours) R ea l G D P L0 Y0 K0 K1 Y1 A B Docsity.com Potential GDP & Production Function • Along production function – Constant • Capital • Technology • Production function – shifts upward – Improved technology – More capital •12 Docsity.com Recent growth rates of real GDP in the united states Table 1 15 Years Growth Rate per Year 1995-1997 1997-1999 1999-2001 2001-2003 2003-2005 2005-2007 1995-2007 4.1% 4.3 2.2 2.1 3.4 2.5 3.1 Docsity.com 2. The Goal of Low Unemployment • Unemployment rate – Number of unemployed people – As percentage of labor force • If GDP grows slower than potential – Unemployment rate – rises • If GDP grows faster than potential – Unemployment rate – falls •16 Docsity.com The economic costs of high unemployment Table 2 17 Year Civilian Unemployment Rate Capacity Utilization Rate Real GDP Lost Due to Idle Resources 1958 1961 1975 1982 1992 2003 6.8% 6.7 8.5 9.7 7.5 6.0 75% 77.3 73.4 71.3 79.4 73.4 4.8% 4.1 5.4 8.1 2.6 2.2 Docsity.com Human Costs of High Unemployment • Unemployment rates – Lower • Married men • Whites • Well-educated people – Higher • Teenagers • Nonwhites • Blue-collar workers •20 Docsity.com Unemployment rates for selected groups, 2007 Figure 3 21 Docsity.com Counting the Unemployed • Employed – People currently working • Full time or part time • Unemployed – People not currently working • Temporarily laid-off, expected to return • Actively looking for a job (4 weeks) • Not in labor force – Nor looking for work •22 Docsity.com Full Employment • Full employment – Everyone willing & able to work • Can find a job – Unemployment rate • Positive •25 Docsity.com Unemployment Insurance • Unemployment insurance – Government program – Replaces some wages lost • Eligible workers who lose their jobs • Benefits – Unemployed – Economy • Greater spending •26 Docsity.com Unemployment Insurance • Payroll taxes & Unemployment benefits – Spread cost of unemployment – Doesn’t eliminate basic economic cost • Higher unemployment benefits – Disincentive to look for job •27 Docsity.com Rates of change of wages and prices in the United States since 1948 Figure 4 30 Docsity.com Inflation: Myth and Reality • Inflation – Increase in “average price” • Relative price of item – In terms of price of other item • Inflation – Not to blame – Some goods become more expensive • Relative to others •31 Docsity.com Pure inflation Table 3 32 Item Last Year’s Price This Year’s Price Increase Candy bar Movie ticket Automobile $0.50 6.00 9,000 $0.55 6.60 9,900 10% 10 10 Docsity.com Real vs. Nominal Interest Rates • Expected inflation • Unexpected inflation • Real rate of interest – Percentage increase in purchasing power • Borrower pays to lender • For borrowing – Lenders • Increased ability - purchase goods & services •35 Docsity.com Real vs. Nominal Interest Rates • Nominal rate of interest – Percentage • Borrower – pays back • Exceeds money borrowed – No adjustment for decline in purchasing power • From inflation •36 Docsity.com Real vs. Nominal Interest Rates • Nominal interest rate = = Real interest rate + + Expected inflation rate • If inflation – accurately predicted – No income redistribution – Expected rate of inflation = = Actual rate of inflation •37 Docsity.com Costs of Low vs. High Inflation • Steady inflation – More predictable • Than variable inflation – Smaller social & economic costs • Average level of inflation – Steady inflation at 6% per year • More damaging than • Steady inflation at 3% per year • Hyperinflation •40 Docsity.com Costs of Low vs. High Inflation • Low inflation – Doesn’t necessarily lead to high inflation • Inflation – Sometimes speeds up – Sometimes slows down • Runaway inflations – When government prints incredible amounts of money • Finance wartime expenditure •41 Docsity.com How statisticians measure inflation • Index number – Cost of market basket of goods • Relative to its cost in “base” period 42 100×= year base in basket market of Cost year given in basket market of Cost year given in CPI Docsity.com Results of Student Expenditure Survey, 1983 Table 5 45 Item Average Price Average Quantity Purchased per Month Average Expenditure per Month Hamburger Jeans Movie ticket Total $0.80 24.00 5.00 70 1 4 $56 24 20 $100 Docsity.com Prices in 2007 Table 6 46 Item Price Increase over 1983 Hamburger Jeans Movie ticket Total $1.20 30.00 7.00 50% 25 40 Docsity.com Cost of 1983 student budget in 2007 prices Table 7 47 70 Hamburgers at $1.20 1 pair of jeans at $30 4 movie tickets at $7 Total $84 30 28 $142 Docsity.com