Micro and Macro Economics

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Introduction
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Micro and Macro Economics

• http//www.youtube.com/watch?vVVp8UGjECt4
• Important terms in Macroeconomics?

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What is Macroeconomics?
Macroeconomics is the study of issues that
affect the economy as a whole. Examples are the
effects of inflation, and unemployment on
economic growth and economic well-being.
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Divisions of Macroeconomics

• The science of macroeconomics is positive
  economics the study of economic facts and
  theories and how they work.
• Policy practice of macroeconomics is concerned
  with policies to achieve goals.

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Normative Macroeconomic Goals

• High growth
• Avoiding large swings in economic output
• Low unemployment
• Low inflation
• Low income inequality
• No poverty

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Why These Goals?

• High growth
• Avoiding large swings in economic output
• Low unemployment
• Low inflation
• Income distribution
• Poverty

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Normative Economic Goals

• Economic policy is dependent on normative
  economic goals.
• Political processes determine which goals have
  the highest priority.
• Once priority has been established,
  macroeconomics deals with the ways to achieve
  those goals

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Goals OutputU.S. Real Gross Domestic Product
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U.S. Recession?
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GDP
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Genuine Progress Indicator

• It adds in the economic contributions of
  household and volunteer work, but subtracts
  factors such as crime, pollution, and family
  breakdown

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The World Values Survey
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Working Hours
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Goals Unemployment

• The unemployment rate is the percentage of the
  labor force looking for work, but unable to find
  it.

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U.S. Unemployment

• Each one-point increase in the unemployment rate
  is associated with
• 920 more suicides
• 650 more homicides
• 4000 more people admitted to state mental
  institutions
• 3300 more people sent to state prisons
• 37,000 more deaths
• Increases in domestic violence and homelessness

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Goals Inflation

• Inflation is the continual increase in the
  average price of goods and services.
• Inflation usually increases as actual output
  rises above potential output and usually
  decreases if output falls below potential output.
• Policymakers may face a trade-off between high
  inflation and low unemployment.

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U.S. Inflation
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Inflation The Great Moderation(median for
developing- and GDP weighted mean for high-income)
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InflationinZimbabwe
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Poverty?
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U.S. Poverty
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Wage Inequality?
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Measuring Inequality I(ratio of 90th to 10th
percentile)
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Measuring Inequality II(Gini Coefficient)
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U.S. Wage Inequality
Since the early 1980s, the relative wages of
workers with a low education level have fallen
the relative wages of workers with a high
education level have risen.
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The Budget Balance

• The budget balance is the difference between tax
  revenues collected by the government and
  expenditures made by the government.
• If taxes are greater than expenditures there is a
  budget surplus.
• If expenditures are greater than taxes, there is
  a budget deficit.
• The budget balance is affected by both changes in
  the economy and fiscal policy.

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U.S. Government Budget
What is the current U.S. governments
surplus/deficit?
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U.S. Government Deficit
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The U.S. Budget Deficit, Since 1945 (Ratio to
Output, in percent).
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U.S. Trade Balance
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Policies Used to Achieve Goals

• Demand-side policies
• Supply-side policies

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Demand-Side Policies

• Monetary Policy
• Changes in the money supply implemented by the
  Federal Reserve
• Fiscal Policy
• Changes in government spending and/or taxes
  implemented by Congress and the president

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Supply-Side Policies

• Supply-Side Policies are designed to increase
  potential output by encouraging
• Productivity and innovation by the labor force
• Investment in capital
• Advances in technology

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Models in Economics

• Models are simplified representations of
  relationships within an economy.
• Models are used to predict economic outcomes in
  different situations.
• Models have three ingredients
• Assumptions
• Exogenous variables determined outside the model
• Endogenous variables determined inside the model

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Models II
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Using a Model to Predict
OPEC decreases the supply of oil to the United
States. What happens to the price of gasoline?
Supply
A decrease in supply shifts the supply curve to
the left and increases price and
decreases quantity.
Price of Gasoline
P2
P1
Demand
Q2
Q1
Quantity of Gasoline