Macroeconomics:

The Big Picture

 Branches of Economics

• Microeconomics: How individual

people make decisions, how those
decisions interact.

• Macroeconomics: Concerned with

the performance and structure of the
economy as a whole.
 Macroeconomic Questions
• The importance of the business cycle and why
policy-makers seek to diminish the severity of
business cycles
• What long-run growth is and how it determines
a country’s standard of living
• The meaning of inflation and deflation and why
price stability is preferred
• What is special about the macroeconomics of an
open economy. i.e. international trade
 Macroecon vs. Microecon
MICROECONOMIC QUESTION
Go to business school or
take a job?
What determines the salary
offered by Citibank to Cherie
Camajo, a new Columbia
MBA?
What determines the cost to
a university or college of
offering a new course?
MACROECONOMIC QUESTION
Employment in the
economy as a whole?
What determines the
overall salary levels paid to
workers in a given year?
What determines the
overall level of prices in the
economy as a whole?
 Macroecon vs. Microecon
MICROECONOMIC QUESTION
What determines the cost to
a university or college of
offering a new course?
What government policies
should be adopted to make
it easier for low-income
students to attend college?
MACROECONOMIC QUESTION
What determines the
overall level of prices in the
economy as a whole?
What government policies
should be adopted to
promote full employment
and growth in the economy
as a whole?
 Microeconomics
Microeconomics: Focuses on how decisions are made by
individuals and firms and the consequences of those
decisions.

Ex.: How much it would cost for a university or college

to offer a new course.

Having determined the cost, the school can then decide

whether or not to offer the course by weighing the
costs and benefits.
 Macroeconomics
Macroeconomics: Examines the aggregate behavior of
the economy (i.e. how the actions of all the individuals
and firms in the economy interact to produce a particular
level of economic performance as a whole).

Ex.: Overall level of prices in the economy (how high or

how low they are relative to prices last year) rather
than the price of a particular good or service.
Macro Economy > Sum of Individuals
Short-Run: A few years – less than 10 years

Behavior of the whole macroeconomy is greater

than the sum of individual actions and market
outcomes. Example: “Paradox of Thrift”
•Expect Hard Times
•Save More, Spend Less
•Less Spending, Less Profit
•Less Profit, More Unemployment
•People May End Worse Off
 Government Intervention
1.Most economists agree that in most cases
government intervention in markets at the
Microeconomic level usually leaves society
worse off.
(Exception is in cases of Market Failure)

2. Macroeconomics is widely viewed as justifying

government intervention to manage adverse
events in the economy such as recessions.
• monetary policy
• fiscal policy
 Higher Standards of Living

Macroeconomics is concerned with what

factors improve standards of living! i.e.
Productivity

What factors lead to a higher long-run

growth rate?

Are there government policies capable of

increasing the long-run growth rate?
 Economic Aggregates

Economic Aggregates: Economic measures that

summarize data across many different markets
for goods, services, workers, and assets.

Aggregate Output / GDP

Unemployment
Inflation/Prices
Savings/ Investments
Productive Capital
 The Business Cycle
•The business cycle is the short-run alternation between
economic downturns and economic upturns.

•Recessions are periods of economic downturns when

output and employment are falling.

•A depression is a very deep and prolonged downturn.

•Expansions, sometimes called recoveries, are periods of

economic upturns when output and employment are
rising.
 The Great Depression

The Great Depression precipitated a thorough rethinking of

macroeconomics which gave rise to modern macroeconomics.
The Unemployment Rate and
Recessions Since 1948
 Defining Recessions and Expansions
In many countries, economists adopt the rule
that a recession is a period of at least 6
months, or two quarters, during which
aggregate output falls.
 sometimes too strict

Shortest Recession: 8 months (2001)

Average Recession: 5 years 7 months
Longest Recession: 10 years 8 months
 National Bureau of Economic Research
In the U.S. the task of determining when a recession
begins and ends is assigned to an “independent” panel of
experts at the (NBER).

This panel looks at a number of economic indicators, with

the main focus on employment and production, but
ultimately the panel makes a judgment call.
 sometimes controversial

Are we currently in a recession?

Economy grew at a 4%
(inflation adjusted annual rate last quarter)
 The Business Cycle
What happens during a business cycle, and what can
be done about it?

•Effects of recessions/expansions on
UNEMPLOYMENT

•Effects on aggregate OUTPUT

•Possible role of government POLICY

 Employment and Unemployment
•Employment is the number of people working in the
economy.

•Unemployment is the number of people who are

actively looking for work but aren’t currently
employed.

•The labor force is equal to the sum of employment

and unemployment.
 Employment and Unemployment
Discouraged workers are non-working people who
are capable of working but are not actively looking
for a job.

Underemployment: The number of people who

work during a recession but receive lower wages
than they would during an expansion due to smaller
number of hours worked, lower-paying jobs, or both.
Underemployment
 Employment and Unemployment

Unemployment Rate: Ratio of the number of

people unemployed to the total number of
people in the labor force, either currently working
or looking for jobs.
 Calculating Unemployment

Number of People Employed = 120,500

Number of People Unemployed = 4,050

Calculate:
The number of people in the labor force?
4,050 + 120,500 = 124,550

The unemployment rate?

( 4,050 / 124,550 ) x 100 = 3.25%
 The Impact of the Cycle

In general, the unemployment rate rises

during recessions and falls during expansions.

It moves in the direction opposite to

aggregate output, which falls during
recessions and rises during expansions.
 Growth in Aggregate Output, 1948–2004

Real GDP is a measure of aggregate output, the output

of the economy as a whole adjusted for inflation.
Growth in Aggregate Output, 1948–2004
2007:
$13,700
 Aggregate Price Level
A NOMINAL measure is a measure that has
not been adjusted for changes in prices.
A REAL measure is a measure that has been
adjusted for changes in prices over time. i.e.
Adjusted for Inflation.
The aggregate price level is the overall level of
prices in the economy.
Consumer price index from 1913 to 2004
2007:
207.917
 Inflation and Deflation

A rising aggregate price level is inflation.

A falling aggregate price level is deflation.
The inflation rate is the annual percent
change in the aggregate price level.
The economy has price stability when the
aggregate price level is changing only slowly.
Inflation and deflation since 1929

Aug ’06 – Aug ‘07:

2.0%
 The Open Economy

A closed economy is an economy that does

not trade goods, services, and assets.

Open-economy macroeconomics is the study

of those aspects of macroeconomics that are
affected by movements of goods, services,
and assets across national boundaries.
 Exchange Rates

Exchange Rate: The price of one currency in

terms of another currency.
Example: 117 Yen per dollar
Exchange rates can affect the aggregate price
level.
In the U.S. we import a lot of cheaper
foreign goods which keeps prices low.
U.S. Dollar and the Euro

Current Exchange Rate: $1.41

U.S. Dollar and the Japanese Yen

Current Exchange Rate:

116.83 Yen per Dollar
Dollar Depreciation – Japanese Goods
Becoming Relatively More Expensive
 Exchange Rates cont’d

Exchange rates can also affect aggregate

output through their effect on the trade
balance.

Trade balance: the difference between the

value of the goods and services a country
sells to other countries and the value of the
goods and services it buys in return.
 Affect on Imports Exports

If a country’s currency depreciates relative

to a foreign country…
That country’s goods become relatively
cheaper abroad which increases their
exports.
If a country’s currency appreciates relative to a
foreign country….
That country’s goods become relatively more
expensive which decreases exports .
 Capital Flows

Capital Flows:
International movements of financial assets.

Investing is not limited by international boundaries.

U.S. finances it’s deficit by borrowing large amounts

of money through the sale of bonds. Many foreign
countries purchase these bonds.
 Sample Questions

What does it mean when we say the

Canadian dollar is weak?
Answer: The value of the Canadian dollar is low
relative to another country’s currency.

How would a weak Canadian dollar affect

consumers in the United States? Canadians?
Makes it cheaper for Americans to buy Canadian
goods, and more expensive for Canadians to buy
American goods.