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Macro Notes G.

Karras 2017

MACROECONOMICS

Georgios Karras*

University of Illinois at Chicago

Lecture Draft
Do not cite without permission

* Professor of Economics; Mailing Address: Department of Economics, University of Illinois at


Chicago, 601 S. Morgan St., Chicago, IL 60607-7121; e-mail: gkarras@uic.edu.
Macro Notes G.Karras 2017, p.2

1 MACROECONOMIC ISSUES

1.1. Inflation

The Price Level ( P ): the average level of prices of goods and

services

Inflation Rate ( ): the growth rate of the Price Level

Pt Pt 1
t
Pt 1
Macro Notes G.Karras 2017, p.3

Example #1 (year ago):

P2017Q1 112.868 P2016Q1 110.635

P2017Q1 P2016Q1 112.868 110.635


2017Q1 0.020 2.0%
P2016Q1 110.635

Example #2 (quarter ago, annual rate):

P2017Q1 112.868 P2016Q 4 112.238

112.868 112.238
2017Q1 4 0.022 2.2%
112.238
Macro Notes G.Karras 2017, p.4

Increasing Prices Inflation: Pt Pt Pt 1 t 0

Decreasing Prices Deflation: Pt Pt Pt 1 t 0

Steady Prices Price Stability: Pt Pt 1 t 0

Note:

Deflation (Falling Prices) Disinflation (Falling Inflation)

Pt t
Macro Notes G.Karras 2017, p.5
Macro Notes G.Karras 2017, p.6

1.2. GDP: Gross Domestic Product ( Y )

Real GDP: the volume of goods and services produced by the

economy within a year [Quantities]

Nominal GDP: the monetary value of goods and services

produced by the economy within a year [Quantities x Prices]

Nominal GDP Real GDP P

Nominal GDP
Real GDP
P
Macro Notes G.Karras 2017, p.7

GDP growth rate:

GDPt GDPt 1
GDP growth ratet
GDPt 1

In Growth Terms:

Nominal GDP Real GDP Inflation




growth rate growth rate
rate

real growth nominal growth


Macro Notes G.Karras 2017, p.8

U.S. GDP (billions of dollars) .


Nominal Real (2009 $) .
2016Q1 18281.6 16525.0
2016Q4 18869.4 16813.3
2017Q1 19007.3 16842.4

Example #1 (year ago):

nominal 19007.3 18281.6


0.040 4.0%
growth 2017Q1 18281.8

real 16842.4 16525.0


0.019 1.9%
growth 2017Q1 16525.0
Macro Notes G.Karras 2017, p.9

2017Q1 4.0% 1.9% 2.1%

Example #2 (quarter ago, annual rate):

nominal 19007.3 18869.4


4 2.9%
growth 2017Q1 18869.4

real 16842.4 16813.3


4 0.7%
growth 2017Q1 16813.3

2017Q1 2.9% 0.7% 2.2%


Macro Notes G.Karras 2017, p.10

1.3. Unemployment

The Labor Force ( LF ): economically active population: people

over 16 who have a job or are looking for one

Employed ( E ): people over 16 who have a job

Unemployed ( U ): people over 16 who do not have a job but are

looking for one

LF E U U LF E
Macro Notes G.Karras 2017, p.11
Macro Notes G.Karras 2017, p.12

Unemployment Rate ( u ): Unemployment as a percentage of

the Labor Force

U LF E E
u u 1
LF LF LF

Example (in thousands):

LF2017M 04 160213 E 2017M 04 153156


Ut
7057
LFt Et 160213 153156
ut 0.044 4.4%
LFt 160213
Macro Notes G.Karras 2017, p.13
Macro Notes G.Karras 2017, p.14
Macro Notes G.Karras 2017, p.15

Labor Force Not in LF

22% Discouraged
27%
Unemployed Job loss workers
2.5%

Job find
Employed

1.3%
3% retirement

5.5%

Total population
Macro Notes G.Karras 2017, p.16

Note: In fact, Unemployment Rate > 0%. Why?

1. Frictional Unemployment Time to match workers to jobs

2. Structural Unemployment Technological Improvement

Natural Unemployment: Frictional + Structural Unemployment

Cyclical Unemployment: Actual Natural Unemployment

u u N uC uC u u N

Economic Downturns: Economic Expansions:

uC 0 u u N uC 0 u u N
Macro Notes G.Karras 2017, p.17

From: Hamilton, Harris, Hatzius, and West, NBER, August 2015


Macro Notes G.Karras 2017, p.18

1.4. Deficits

4.1 Trade Balance ( TB ): Exports ( EX ) Imports ( IM )

Also, Net Exports (NX) = EX IM

Trade Surplus: Trade Deficit:

EX IM TB 0 IM EX TB 0

Example (billions of 2009 $):

EX 2016 $2128 .2 IM 2016 $2691 .2

TB2016 $563 : a trade deficit


Macro Notes G.Karras 2017, p.19
Macro Notes G.Karras 2017, p.20

4.2 Government Budget: Govt Revenue ( T ) Govt Spending ( G )

Budget Surplus: Budget Deficit:

T G T G 0 G T T G 0

Example (Federal Government, billions):

G2016 $4163 .1 T2016 $3506 .1

G T $657 0 : a budget deficit


Macro Notes G.Karras 2017, p.21
Macro Notes G.Karras 2017, p.22

1.5. The Business Cycle: Recurrent ups and downs in economic

activity (usually measured by real GDP)


Real GDP

peaks

trend

troughs

time
expansion downturn expansion downturn
Macro Notes G.Karras 2017, p.23

Two main features:

1. the trend (long-run feature; economic growth factors)

2. the cycle (short-run feature; deviations from the trend)

Basic terminology:

Peak: a local maximum Trough: a local minimum

Expansion: period from trough to peak

Downturn: period from peak to trough

Recession (standard defn): downturn lasting 2 quarters or more

Depression: unusually long or deep recession (US: 1929-1933)


Macro Notes G.Karras 2017, p.24

Billions of 2005 $
Real GDP

peaks

13364

12810
11335

11297

8060

7950

troughs
90:2 91:1 00:4 01:1 07:4 09:2 time

contraction expansion
Macro Notes G.Karras 2017, p.25
Macro Notes G.Karras 2017, p.26
Macro Notes G.Karras 2017, p.27

Additional Terminology:

Procyclical: Variables that tend to move together with GDP over

the cycle (Ex.: employment, tax revenue)

Countercyclical: Variables that tend to move in opposite direction

from GDP during the cycle (Ex.: unemployment, budget deficit)

Acyclical: Variables that have no systematic cyclical relationship

with GDP (Ex.: real wages)


Macro Notes G.Karras 2017, p.28

1.6. Macroeconomic Policy

Fiscal Policy: Government Spending (G ), Taxes ( T )

Monetary Policy: Money Supply (M ); interest rates ( i )

Other: bank regulation; trade policy; exchange rates

Main goals:

1. Promote growth: make the trend steeper (long-run goal)

2. Stabilization: smooth the business cycle (short-run goal)


Macro Notes G.Karras 2017, p.29

Real GDP
good policies

no intervention
bad policies

time

Two opposing views:

1. Activism: Keynesian Policies Frequent Intervention

2. Rules: Neoclassical / Monetarist Policies No Intervention


Macro Notes G.Karras 2017