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Economic Principles 2
Lecture 1:
Introduction to Macroeconomics
Preliminaries
Staff:
Chris Dawson (Course teacher); room F4; cgd@aber.ac.uk
Deborah Holdaway
Lectures and Classes:
Texts:
Parkin, M., Powell, M. Matthews, K. (2008). Economics, (7
th
Edition), Addison Wesley.
Sloman, J. (2006). Economics (6
th
Edition), Prentice Hall.
Lipsey, R.G. and Chrystal, K.A. (2004). Economics, (10th
Edition), Oxford: Oxford University Press.
Others: Krugman and Wells, Mankiw, Parkin
Microeconomics
Microeconomics is the study of how individual
households and firms make decisions and how
they interact with one another in markets.
Macroeconomics
Macroeconomics is the study of the economy
as a whole.
Its goal is to explain the economic changes that
affect many households, firms, and markets at
once.
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Some central ideas
Economic Growth
Jobs and Unemployment
Inflation
Government Deficits
Macroeconomic Policy Challenges and
Tools
Economic Growth
Economic growth is the expansion of the
economys production possibilities an
outward shifting PPF.
We measure economic growth by the
increase in real GDP.
Real GDP (real gross domestic product) is the
value of the total production of all the nations
farms, factories, shops, and offices, measured
in the prices of a single year.
Pearson Education 2008
Economic Growth
UK Economic Growth
Figure 1.1 shows real
GDP from 1960 to
2006.
The figure highlights:
- Growth of potential GDP
- Fluctuations of real GDP
around potential GDP
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Pearson Education 2008
Economic Growth
Quick Task
Why might
a) Real GDP = Potential GDP
b) Real GDP < Potential GDP
c) Real GDP > Potential GDP
Pearson Education 2008
Economic Growth
Every business cycle has two phases:
1. Recession
2. Expansion
and two turning points:
1. A peak
2. A trough
The next slide illustrates these features of the
business cycle.
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Pearson Education 2008
Economic Growth
Economic Growth
Is economic growth always good?
- Living standards
However:
- Income redistribution
- Opportunity cost
- Social and Personal cost
- Technological change
Pearson Education 2008
Jobs and Unemployment
Unemployment
Not everyone who wants a job can find one.
ILO-defined unemployment in August to October was 2.49
million (7.9%)
During a recession, the number is larger. For example, in 1990-
1992 recession, almost 3 million people were looking for jobs.
The unemployment rate is the number of unemployed people
expressed as a percentage of all the people who have jobs or
are looking for one.
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Pearson Education 2008
Jobs and Unemployment
The unemployment rate is not a perfect measure of the
underutilization of labour for two reasons.
The unemployment rate:
1. Excludes people who are so discouraged that they
have given up looking for jobs.
2. Measures unemployed people rather than
unemployed labour hours. So it does not tells us about
the number of part-time workers who want full-time
jobs.
Pearson Education 2008
Jobs and Unemployment
Pearson Education 2008
Jobs and Unemployment
Why Unemployment Is a Problem
Unemployment is a serious economic, social and personal
problem for two main reasons:
1. Lost production and incomes
2. Lost human capital
The loss of a job brings an immediate loss of income and
production a temporary problem.
A prolonged spell of unemployment can bring permanent
damage through the loss of human capital.
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Pearson Education 2008
Inflation
We measure the level of prices the price level as the
average of the prices that people pay for all the goods and
services that they buy.
The Retail Prices Index the RPI is a common measure of the
price level.
We measure the inflation rate as the annual percentage change
in the price level.
Inflation arises when the price level is rising persistently.
If the price level is falling, inflation is negative and we have
deflation.
Pearson Education 2008
Inflation
Inflation in
the UK:
Pearson Education 2008
Inflation
Hyperinflation
The most serious type of inflation is hyperinflation an
inflation rate that exceeds 50 per cent a month.
Why Inflation Is a Problem
- Losses to savers
- Losses to people with fixed incomes
- Losses to tax payers
- Confusing price signals
- The real wage
- Social disruption
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Government Deficits
If a government collects more in taxes than it
spends, it has a government budget surplus.
If a government spends more than it collects in
taxes, it has a government budget deficit.
International Government
Deficits
If a nation imports more than it exports, it has
an international deficit.
If a nation exports more than it imports, it has
an international surplus.
The balance on the current account equals UK
exports minus UK imports but also takes into
account interest payments paid to and
received from the rest of the world.
Pearson Education 2008
Government Deficits
A government or a nation that cannot
cover its expenditure must borrow (or sell
its assets).
A government that borrows to increase
consumption might be heading for trouble
later.
But a government that borrows to buy
assets that earn a profit might be making a
sound investment.
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Pearson Education 2008
Macroeconomic Policy Challenges
and Tools
Classical and Keynesian Views
Economists views fall into two broad schools:
Classical view: The economy behaves best if the
government leaves people free to pursue their own
self-interest. Attempts by the government to improve
macroeconomic performance will not succeed.
Keynesian view: The economy behaves badly if left
alone and that government action is needed to
achieve and maintain full employment.
Pearson Education 2008
Macroeconomic Policy Challenges
and Tools
Five widely agreed policy challenges for
macroeconomics are to:
1. Boost economic growth
2. Keep inflation low
3. Stabilize the business cycle
4. Reduce unemployment
5. Reduce government and international deficits
Pearson Education 2008
Macroeconomic Policy Challenges
and Tools
Two broad groups of macroeconomic policy tools are:
Fiscal policy making changes in tax rates and
government spending
Monetary policy changing interest rates and
changing the amount of money in the economy
Governments conducts fiscal policy.
The Bank of England and the European Central Bank
conduct monetary policy.
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Application to future topics
These key ideas recur in many ways
throughout this semesters course;
although they may not be referred to
directly
Quick Quiz
Economic growth can be described as
A) An increase in the inflation rate
B) An increase in employment in the
manufacturing sector
C) An outward shift in the economy's
production possibilities frontier
D) An undesirable goal because it is
accompanied by severe inflation
Quick Quiz
Potential GDP is
A) Another name for real GDP
B) Always different from real GDP
C) The level of GDP not adjusted for price
changes
D) Achieved when all factors of production are
fully employed
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Quick Quiz
The unemployment rate generally
_____ during recessions and ___
during expansions
A) Rises, falls
B) Rises, rises
C) Falls, rises
D) Falls, falls
Quick Quiz
If the inflation rate is negative, the
price level in the economy
A) Falling
B) Rising Slowly
C) Constant
D) Rising Rapidly
Quick Quiz
Changes in which of the following is
included as part of fiscal policy?
A) The quantity of money
B) The level of interest rates
C) Monetary policy
D) Taxes
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Economic Principles 2
Lecture 1:
Introduction to Macroeconomics