1) Macroeconomics investigates relationships between different economic sectors and the effects of changes in variables like consumption, investment, government spending, and net exports. Its goals are full employment, price stability, and economic growth.
2) Inflation is defined as a sustained rise in the general price level. It redistributes purchasing power arbitrarily and distorts price signals. The real interest rate is the nominal rate minus the inflation rate.
3) Economic growth is measured by the annual percentage change in real GDP. Strong growth generates employment while avoiding inflation.
2. the Three (3) Goals of
MACROECONOMIC POLICY
Price Stability
Economic Growth
Full Employment
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3. INFLATION
A sustained increase in the general
price level as measured by the
consumer price index (CPI) or the
implicit price deflator (IPD)
A continuing rise in the general
level of prices of goods and
services. The purchasing power
of the monetary unit ~ such as
the ($) dollar ~ declines when
inflation is present.
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4. with respect to: INFLATION
A Consumer Price Index (the “CPI”) measures changes in the
price level of consumer goods and services purchased by
households. The CPI is a statistical estimate constructed using
the prices of a sample of representative items whose prices are
collected periodically. The annual percentage change in a CPI is
used as a measure of inflation.
The GDP deflator (implicit price deflator for GDP) is a measure of
the level of prices of all new, domestically produced, final goods
and services in an economy. In most systems of national
accounts the GDP deflator measures the ratio of nominal (or
current-price) GDP to the real (or chain volume) measure of GDP.
Dividing the nominal GDP by the GDP deflator and multiplying it
by 100 would then give the figure for real GDP, hence deflating
the nominal GDP into a real GDP measure. Consider the price
deflator as the ratio of the current year price of a good to the
same good’s price in some defined base year.
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5. Unanticipated INFLATION Hurts
Lenders and Helps Borrowers
Why interest? The interest rate is the
price the borrower pays for the use of
the money. Lenders have to be
compensated for foregoing current
consumption.
The real rate of interest
– The nominal or market rate minus
– The rate of inflation
example: If the nominal rate is 5% and
the rate of inflation is 6%, then the real
rate of interest is ___%
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6. Unanticipated INFLATION Hurts
Lenders and Helps Borrowers
Why interest? The interest rate is the
price the borrower pays for the use of the
money. Lenders have to be compensated
for foregoing current consumption.
The real rate of interest
– The nominal or market rate minus
– The rate of inflation
example: If the nominal rate is 5% and
the rate of inflation is 6%, the real rate of
interest is -1%
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9. why Lenders are Hurt
the Lender $20.00
the Borrower
$20.00
the Purchase
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10. why Lenders are Hurt
with Interest Rate = 5%
$21.00
Inflation rate = 9%
$21.80
Real Interest rate = -4% 10
11. how INFLATION Affects Others
Distorts price signals
Those living on fixed incomes
Businesses with fixed contracts
Property owners with fixed leases
Businesses who can raise prices
COLAs (Cost Of Living Adjustments)
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12. How Does INFLATION or
DEFLATION Affect You?
If your purchasing power increases
as a result of inflation or deflation
then you are a winner.
If your purchasing power falls or
decreases as a result of inflation or
deflation then you lose.
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13. Full Employment
The Labor Force
individuals aged from age 16 to
age 65 ~ able to work and willing
to work ~ working or actively
seeking work
Determining the unemployment
rate ~ via the Household Survey
= Number of People Unemployed
Labor Force
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14. what about the Change ( ∆ ) in
Nonfarm Payroll Employment
as an “Establishment Survey”
it’s a “Better” but not a “Good”
indicator
…asks the Question(?) ~ What is the
difference between the number of
employees you had last month and
the number of employees you have
this month?
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15. with respect to measuring Economic Growth
Nominal GDP doesn’t tell you
anything ~ the Nominal GDP statistic
must be “deflated”
you can use the IPD statistic to
change Nominal GDP to Real GDP
REAL GDP = Nominal GDP * (100)
IPD
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16. with respect to Economic Growth
To engage the process of
[+]
measuring the rate of economic
growth use the formula:
∆ GDP(r) = Real GDP2 - Real GDP1
Real GDP1
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19. MacroEconomics will measure:
Total Expenditures (“E”)
E = C + I + G + (X-M)
C = Personal Consumption
I = Business Investment (spending)
G = Total Government Spending
(X-M) = Net Exports
(exports minus imports)
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20. to recap: Main Points ( I )
MacroEconomics investigates relationships
between different sectors of the economy
and the affect of changes via different
variables on those sectors.
Macroeconomics is the study of market
aggregates such as gross domestic product,
the unemployment rate and the consumer
price index.
Three (3) basic goals for any economic
system are: (i) full employment, (ii) price
stability and (iii) economic growth
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21. to recap: Main Points (II)
Inflation is defined as an increase in the
overall price level
Inflation arbitrarily redistributes purchasing
power and distorts price signals
The real rate of interest (r%) is the market
(nominal) interest rate (i%) minus the rate
of inflation (∆p).
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22. to recap: Main Points (III)
Two measures of the strength of the labor
market are the unemployment rate and the
change in nonfarm payroll employment
Economic growth is measured by the rate of
change of Real GDP for a specific time period
(usually a year)
Economic growth should be strong enough to
generate employment but not so strong as to
cause inflation (how does this happen?)
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23. to recap: Main Points (IV)
The circular flow illustrates the
interdependence of different sectors of the
economy
Total expenditures are composed of funds
expended on consumption, investment,
government and net exports
E = C + I + G + (X-M)
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24. to recap: Main Points (V)
Consumption is the largest single spending
category (roughly 2/3 of total spending) in GDP
and is affected mainly by income levels
Investment is the least stable spending category
and is determined mainly by the relationship
between the cost of borrowing and the expected
return on investment
Government spending is fairly predictable due to
its contractual nature and built in stabilizers
(Economic Stability refers to an absence of excessive fluctuations in the
macroeconomy. An economy with fairly constant output growth and low
and stable inflation would be considered economically stable)
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