1、0 CHAPTER 1 The Science of Macroeconomics In this chapter, you will learn: about the issues macroeconomists study the tools macroeconomists use some important concepts in macroeconomic analysis 2 CHAPTER 1 The Science of Macroeconomics Important issues in macroeconomics What causes recessions? What
2、is “government stimulus” and why might it help? How can problems in the housing market spread to the rest of the economy? What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers? Macroeconomics, the study of the economy as a whole, addresses many topic
3、al issues, e.g.: 3 CHAPTER 1 The Science of Macroeconomics Important issues in macroeconomics Why does the cost of living keep rising? Why are so many countries poor? What policies might help them grow out of poverty? What is the trade deficit? How does it affect the countrys well-being? Macroeconom
4、ics, the study of the economy as a whole, addresses many topical issues, e.g.: U.S. Real GDP per capita (2000 dollars) long-run upward trend Great Depression World War II First oil price shock Second oil price shock 9/11/2001 U.S. Inflation Rate (% per year) U.S. Unemployment Rate (% of labor force)
5、 Social problems like homelessness, domestic violence, crime, and poverty are linked to the economy. For example Why learn macroeconomics? 1. The macroeconomy affects societys well-being. percent of labor force crimes per 100,000 population U.S. Unemployment and Property Crime Rates Unemployment (le
6、ft scale) Property crimes (right scale) Why learn macroeconomics? 2. The macroeconomy affects your well-being. -3 -2 -1 0 1 2 3 4 5 196519701975198019851990199520002005 -7 -5 -3 -1 1 3 5 unemployment rate inflation-adjusted mean wage (right scale) change from 12 mos earlier percent change from 12 mo
7、s earlier In most years, wage growth falls when unemployment is rising. Why learn macroeconomics? 3. The macroeconomy affects election outcomes. Unemployment include two exogenous variables in each equation. 2. Draw a supply-demand graph for wireless phones. 3. Use your graph to show how a change in
8、 one of your exogenous variables affects the models endogenous variables. 21 CHAPTER 1 The Science of Macroeconomics The use of multiple models No one model can address all the issues we care about. E.g., our supply-demand model of the car market can tell us how a fall in aggregate income affects pr
9、ice models with sticky prices describe the economy in the short run. Macroeconomic events and performance arise from many microeconomic transactions, so macroeconomics uses many of the tools of microeconomics. MACROECONOMICS 2010 Worth Publishers, all rights reserved S E V E N T H E D I T I O N Powe
10、rPoint Slides by Ron Cronovich N. Gregory Mankiw C H A P T E R The Science of Macroeconomics 2 30 CHAPTER 1 The Science of Macroeconomics In this chapter, you will learn: the meaning and measurement of the most important macroeconomic statistics: Gross Domestic Product (GDP) The Consumer Price Index
11、 (CPI) The unemployment rate 31 CHAPTER 1 The Science of Macroeconomics Gross Domestic Product: Expenditure and Income Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located factors of production. Expenditure equals income be
12、cause every dollar spent by a buyer becomes income to the seller. 32 CHAPTER 1 The Science of Macroeconomics The Circular Flow Households Firms Goods Labor Expenditure ($) Income ($) 33 CHAPTER 1 The Science of Macroeconomics Value added Value added: The value of output minus the value of the interm
13、ediate goods used to produce that output 34 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Identifying value-added A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a lo
14、af of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute value added at each stage of production and GDP 35 CHAPTER 1 The Science of Macroeconomics Final goods, value added, and GDP GDP = value of final goods produced = sum of value added at all stages of production. T
15、he value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting. 36 CHAPTER 1 The Science of Macroeconomics The expenditure components of GDP consumption, C investment, I government spending, G net exports, N
16、X An important identity: Y = C + I + G + NX aggregate expenditure value of total output 37 CHAPTER 1 The Science of Macroeconomics Consumption (C) durable goods last a long time e.g., cars, home appliances nondurable goods last a short time e.g., food, clothing services work done for consumers e.g.,
17、 dry cleaning, air travel definition: The value of all goods and services bought by households. Includes: 38 CHAPTER 1 The Science of Macroeconomics U.S. consumption, 2008 42.6 20.8 7.2 70.5% 6,069.6 2,965.1 1,023.2 $ 10,057.9 Services Nondurables Durables Consumption % of GDP $ billions 39 CHAPTER
18、1 The Science of Macroeconomics Investment (I) Spending on goods bought for future use (i.e., capital goods) Includes: Business fixed investment Spending on plant and equipment Residential fixed investment Spending by consumers and landlords on housing units Inventory investment The change in the va
19、lue of all firms inventories 40 CHAPTER 1 The Science of Macroeconomics U.S. Investment, 2008 0.3 3.4 10.9 14.0% 47.0 487.7 1,552.8 $1,993.5 Inventory Residential Business fixed Investment % of GDP $ billions 41 CHAPTER 1 The Science of Macroeconomics Investment vs. Capital Note: Investment is spend
20、ing on new capital. Example (assumes no depreciation): 1/1/2009: economy has $500b worth of capital during 2009: investment = $60b 1/1/2010: economy will have $560b worth of capital 42 CHAPTER 1 The Science of Macroeconomics Stocks vs. Flows A flow is a quantity measured per unit of time. E.g., “U.S
21、. investment was $2.5 trillion during 2009.” Flow Stock A stock is a quantity measured at a point in time. E.g., “The U.S. capital stock was $26 trillion on January 1, 2009.” 43 CHAPTER 1 The Science of Macroeconomics Stocks vs. Flows - examples the govt budget deficit the govt debt # of new college
22、 graduates this year # of people with college degrees a persons annual saving a persons wealth flow stock 44 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Stock or Flow? the balance on your credit card statement how much you study economics outside of class the size of your compact disc colle
23、ction the inflation rate the unemployment rate 45 CHAPTER 1 The Science of Macroeconomics Government spending (G) G includes all government spending on goods and services. G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and servic
24、es. 46 CHAPTER 1 The Science of Macroeconomics U.S. Government Spending, 2008 - Federal 20.2% $2,882.4 Govt spending - State compute cost of basket 3. CPI in any month equals Cost of basket in that month Cost of basket in base period 100 69 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Comput
25、e the CPI Basket: 20 pizzas, 10 compact discs prices: pizza CDs 2002 $10 $15 2003 $11 $15 2004 $12 $16 2005 $13 $15 For each year, compute the cost of the basket the CPI (use 2002 as the base year) the inflation rate from the preceding year 70 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Ans
26、wers to CPI exercise Cost of Inflation basket CPI rate 2002 $350 100.0 n.a. 2003 370 105.7 5.7% 2004 400 114.3 8.1% 2005 410 117.1 2.5% 71 CHAPTER 1 The Science of Macroeconomics The composition of the CPIs “basket” 15.1% 42.4% 3.8% 17.4% 6.2% 5.6% 3.0% 3.1% 3.5% Food and bev. Housing Apparel Transp
27、ortation Medical care Recreation Education Communication Other goods and services 74 CHAPTER 1 The Science of Macroeconomics Why the CPI may overstate inflation Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers ability to substitute toward goods whose relative prices have
28、 fallen. Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights. Unmeasured changes in quality: Quality improvements increase the value of the dolla
29、r, but are often not fully measured. 75 CHAPTER 1 The Science of Macroeconomics The size of the CPIs bias In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year. So the BLS made adjustments to reduce the bias. Now, the CPIs bias is probably un
30、der 1% per year. 77 CHAPTER 1 The Science of Macroeconomics CPI vs. GDP Deflator Prices of capital goods: included in GDP deflator (if produced domestically) excluded from CPI Prices of imported consumer goods: included in CPI excluded from GDP deflator The basket of goods: CPI: fixed GDP deflator:
31、changes every year 78 CHAPTER 1 The Science of Macroeconomics Two measures of inflation in the U.S. 0% 5% 10% 15% 19601965197019751980198519901995200020052010 Percentage change from 12 months earlier CPI GDP deflator 79 CHAPTER 1 The Science of Macroeconomics Categories of the population employed wo
32、rking at a paid job unemployed not employed but looking for a job labor force the amount of labor available for producing goods and services; all employed plus unemployed persons not in the labor force not employed, not looking for work 80 CHAPTER 1 The Science of Macroeconomics Two important labor
33、force concepts unemployment rate percentage of the labor force that is unemployed labor force participation rate the fraction of the adult population that “participates” in the labor force 81 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Computing labor statistics U.S. adult population by gro
34、up, May 2009 Number employed = 140.57 million Number unemployed = 14.51 million Adult population = 235.45 million Use the above data to calculate the labor force the number of people not in the labor force the labor force participation rate the unemployment rate 82 CHAPTER 1 The Science of Macroecon
35、omics NOW YOU TRY: Answers data: E = 140.57, U = 14.51, POP = 235.45 labor force L = E +U = 140.57 + 14.51 = 155.08 not in labor force NILF = POP L = 235.45 155.08 = 80.37 unemployment rate U/L x 100% = (14.51/155.08) x 100% = 9.4% labor force participation rate L/POP x 100% = (155.08/ 235.45) x 100
36、% = 65.9% 85 CHAPTER 1 The Science of Macroeconomics The establishment survey The BLS obtains a second measure of employment by surveying businesses, asking how many workers are on their payrolls. Neither measure is perfect, and they occasionally diverge due to: treatment of self-employed persons ne
37、w firms not counted in establishment survey technical issues involving population inferences from sample data 86 CHAPTER 1 The Science of Macroeconomics Two measures of employment growth -4% -2% 0% 2% 4% 6% 8% 196019701980199020002010 household survey establishment survey Percentage change from 12 m
38、onths earlier 87 CHAPTER 1 The Science of Macroeconomics Chapter Summary Gross Domestic Product (GDP) measures both total income and total expenditure on the economys output of goods real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect
39、nominal GDP. GDP is the sum of consumption, investment, government purchases, and net exports. 88 CHAPTER 1 The Science of Macroeconomics Chapter Summary The overall level of prices can be measured by either: the Consumer Price Index (CPI), the price of a fixed basket of goods purchased by the typic
40、al consumer, or the GDP deflator, the ratio of nominal to real GDP The unemployment rate is the fraction of the labor force that is not employed. MACROECONOMICS 2010 Worth Publishers, all rights reserved S E V E N T H E D I T I O N PowerPoint Slides by Ron Cronovich N. Gregory Mankiw C H A P T E R N
41、ational Income: Where it Comes From and Where it Goes 3 90 CHAPTER 1 The Science of Macroeconomics In this chapter, you will learn: what determines the economys total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand f
42、or goods and services how equilibrium in the goods market is achieved 91 CHAPTER 1 The Science of Macroeconomics Outline of model A closed economy, market-clearing model Supply side factor markets (supply, demand, price) determination of output/income Demand side determinants of C, I, and G Equilibr
43、ium goods market loanable funds market 92 CHAPTER 1 The Science of Macroeconomics Factors of production K = capital: tools, machines, and structures used in production L = labor: the physical and mental efforts of workers 93 CHAPTER 1 The Science of Macroeconomics The production function: Y = F(K,L)
44、 shows how much output (Y ) the economy can produce from K units of capital and L units of labor reflects the economys level of technology exhibits constant returns to scale 94 CHAPTER 1 The Science of Macroeconomics Returns to scale: A review Initially Y1 = F (K1 , L1 ) Scale all inputs by the same
45、 factor z: K2 = zK1 and L2 = zL1 (e.g., if z = 1.2, then all inputs are increased by 20%) What happens to output, Y2 = F (K2, L2 )? If constant returns to scale, Y2 = zY1 If increasing returns to scale, Y2 zY1 If decreasing returns to scale, Y2 0 96 CHAPTER 1 The Science of Macroeconomics Returns to
46、 scale: Example 2 (, )F K LKL (,)F zK zLzKzL zKzL (, )z F K L decreasing returns to scale for any z 1 zKL 97 CHAPTER 1 The Science of Macroeconomics Returns to scale: Example 3 ( , )F K LKL 22 (,)()()F zK zLzKzL 22 ( , )z F K L 2 increasing returns to scale for any z 1 zKL 222 98 CHAPTER 1 The Scien
47、ce of Macroeconomics NOW YOU TRY: Returns to Scale (, )F K LKL ( , ) K F K L L 2 Determine whether each of these production functions has constant, decreasing, or increasing returns to scale: (a) (b) 99 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Answers, part (a) ( , ) K F K L L 2 () (,) z
48、K F zK zL zL 2 z K zL 22 K z L 2 (, )zF K L constant returns to scale for any z 0 100 CHAPTER 1 The Science of Macroeconomics NOW YOU TRY: Answers, part (b) (, )F K LKL (,)F zK zLzKzL ()z KL (, )zF K L constant returns to scale for any z 0 101 CHAPTER 1 The Science of Macroeconomics Assumptions 1.Technology is fix
