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Mpp#016+macro economics.introduction.(24)

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Mpp#016+macro economics.introduction.(24)

  1. 1. MACROECONOMICS The Big Picture 1
  2. 2. the Three (3) Goals ofMACROECONOMIC POLICY Price Stability Economic Growth Full Employment 2
  3. 3. INFLATIONA sustained increase in the general price level as measured by theconsumer 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. 3
  4. 4. with respect to: INFLATIONA Consumer Price Index (the “CPI”) measures changes in theprice level of consumer goods and services purchased byhouseholds. The CPI is a statistical estimate constructed usingthe prices of a sample of representative items whose prices arecollected periodically. The annual percentage change in a CPI isused as a measure of inflation.The GDP deflator (implicit price deflator for GDP) is a measure ofthe level of prices of all new, domestically produced, final goodsand services in an economy. In most systems of nationalaccounts the GDP deflator measures the ratio of nominal (orcurrent-price) GDP to the real (or chain volume) measure of GDP.Dividing the nominal GDP by the GDP deflator and multiplying itby 100 would then give the figure for real GDP, hence deflatingthe nominal GDP into a real GDP measure. Consider the pricedeflator as the ratio of the current year price of a good to thesame good’s price in some defined base year. 4
  5. 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 ___% 5
  6. 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% 6
  7. 7. INFLATIONis a Perverse Robin Hood Helps – Borrowers – Some businesses – Homeowners 7
  8. 8. INFLATIONis a Perverse Robin Hood Hurts – Lenders – Home owners – Fixed income earners 8
  9. 9. why Lenders are Hurtthe Lender $20.00 the Borrower $20.00 the Purchase 9
  10. 10. why Lenders are Hurtwith Interest Rate = 5% $21.00 Inflation rate = 9% $21.80Real Interest rate = -4% 10
  11. 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) 11
  12. 12. How Does INFLATION orDEFLATION 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. 12
  13. 13. Full EmploymentThe Labor Force individuals aged from age 16 to age 65 ~ able to work and willing to work ~ working or actively seeking workDetermining the unemploymentrate ~ via the Household Survey= Number of People Unemployed Labor Force 13
  14. 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? 14
  15. 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 15
  16. 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 16
  17. 17. THE CIRCULAR FLOWMACROECONOMICRELATIONS 17
  18. 18. AN “EXPANDED” CIRCULAR FLOWFunding andConsiderationFor GOODS &SERVICES 18
  19. 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) 19
  20. 20. to recap: Main Points ( I )MacroEconomics investigates relationshipsbetween different sectors of the economyand the affect of changes via differentvariables on those sectors.Macroeconomics is the study of marketaggregates such as gross domestic product,the unemployment rate and the consumerprice index.Three (3) basic goals for any economicsystem are: (i) full employment, (ii) pricestability and (iii) economic growth 20
  21. 21. to recap: Main Points (II)Inflation is defined as an increase in theoverall price levelInflation arbitrarily redistributes purchasingpower and distorts price signalsThe real rate of interest (r%) is the market(nominal) interest rate (i%) minus the rateof inflation (∆p). 21
  22. 22. to recap: Main Points (III)Two measures of the strength of the labormarket are the unemployment rate and thechange in nonfarm payroll employmentEconomic growth is measured by the rate ofchange of Real GDP for a specific time period(usually a year)Economic growth should be strong enough togenerate employment but not so strong as tocause inflation (how does this happen?) 22
  23. 23. to recap: Main Points (IV)The circular flow illustrates theinterdependence of different sectors of theeconomyTotal expenditures are composed of fundsexpended on consumption, investment,government and net exportsE = C + I + G + (X-M) 23
  24. 24. to recap: Main Points (V)Consumption is the largest single spendingcategory (roughly 2/3 of total spending) in GDPand is affected mainly by income levelsInvestment is the least stable spending categoryand is determined mainly by the relationshipbetween the cost of borrowing and the expectedreturn on investmentGovernment spending is fairly predictable due toits contractual nature and built in stabilizers(Economic Stability refers to an absence of excessive fluctuations in themacroeconomy. An economy with fairly constant output growth and lowand stable inflation would be considered economically stable) 24

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