Notes Macro Ch1

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Do not cite without permission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
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
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
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
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

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
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%

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

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

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

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
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)

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
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)

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)

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

Notes Macro Ch1

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Macro Notes G.

University of Illinois at Chicago

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

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

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

Example #1 (year ago):

P2017Q1 112.868 P2016Q1 110.635

P2017Q1 P2016Q1 112.868 110.635

Example #2 (quarter ago, annual rate):

P2017Q1 112.868 P2016Q 4 112.238

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

Deflation (Falling Prices) Disinflation (Falling Inflation)

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

GDP growth rate:

Nominal GDP Real GDP Inflation

real growth nominal growth

U.S. GDP (billions of dollars) .

Example #1 (year ago):

nominal 19007.3 18281.6

real 16842.4 16525.0

2017Q1 4.0% 1.9% 2.1%

Example #2 (quarter ago, annual rate):

nominal 19007.3 18869.4

real 16842.4 16813.3

2017Q1 2.9% 0.7% 2.2%

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

Unemployment Rate ( u ): Unemployment as a percentage of

the Labor Force

Example (in thousands):

LF2017M 04 160213 E 2017M 04 153156

Labor Force Not in LF

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

Economic Downturns: Economic Expansions:

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

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

Also, Net Exports (NX) = EX IM

Trade Surplus: Trade Deficit:

Example (billions of 2009 $):

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

TB2016 $563 : a trade deficit

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

Budget Surplus: Budget Deficit:

Example (Federal Government, billions):

G2016 $4163 .1 T2016 $3506 .1

G T $657 0 : a budget deficit

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

activity (usually measured by real GDP)

Two main features: