1. Ch-5-Basic Concepts and Circular flow.ppt

CHAPTER
5
Introduction
to
Macroeconomics
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 1 of 24
5
Macroeconomic Concerns
Output Growth
Unemployment
Inflation and Deflation
The Components of the
Macroeconomy
The Circular Flow Diagram
The Three Market Arenas
The Role of the Government in the
Macroeconomy
A Brief History of Macroeconomics
The U.S. Economy Since 1970
CHAPTER
OUTLINE
Introduction to
Macroeconomic
s
PART II CONCEPTS AND PROBLEMS
IN MACROECONOMICS

CHAPTER
5
Introduction
to
Macroeconomics
Introduction to Macroeconomics
Microeconomics Examines the functioning of
individual industries and the behavior of individual
decision-making units—firms and households.
Macroeconomics Deals with the economy as a
whole. Macroeconomics focuses on the
determinants of total national income, deals with
aggregates such as aggregate consumption and
investment, and looks at the overall level of prices
instead of individual prices.
Aggregate behavior The behavior of all
households and firms together.
sticky prices Prices that do not always adjust
rapidly to maintain equality between quantity
supplied and quantity demanded.

CHAPTER
5
Introduction
to
Macroeconomics
Three of the major concerns of macroeconomics are
Output growth
Unemployment

CHAPTER
5
Introduction
to
Macroeconomics
Output Growth
Business cycle The cycle of short-term ups and downs in the
economy.
Aggregate output The total quantity of goods and services
produced in an economy in a given period.
Recession A period during which aggregate output declines.
Conventionally, a period in which aggregate output declines for
two consecutive quarters.
Depression A prolonged and deep recession.

CHAPTER
5
Introduction
to
Macroeconomics
Output Growth
Expansion or Boom The period in the business cycle from a trough
up to a peak during which output and employment grow.
Contraction, Recession, or Slump The period in the business cycle
from a peak down to a trough during which output and employment fall.

CHAPTER
5
Introduction
to
Macroeconomics
Output Growth
 FIGURE 5.1 A Typical Business Cycle
In this business cycle, the
economy is expanding as it
moves through point A from the
trough to the peak.
When the economy moves from
a peak down to a trough, through
point B, the economy is in
recession.

CHAPTER
5
Introduction
to
Macroeconomics
Output Growth
 FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2007
The periods of the Great Depression and World Wars I and II show the largest fluctuations in
aggregate output.

CHAPTER
5
Introduction
to
Macroeconomics
Unemployment
Unemployment Rate The percentage of the labor force that is
unemployed.
Inflation An increase in the overall price level.
Hyperinflation A period of very rapid increases in the overall
price level.
Deflation A decrease in the overall price level.

CHAPTER
5
Introduction
to
Macroeconomics
The Components of the Macroeconomy
Macroeconomics focuses on four groups. To see the big picture, it is
helpful to divide the participants in the economy into four broad groups:
(1) households,
(2) firms,
(3) the government, and
(4) the rest of the world.

CHAPTER
5
Introduction
to
Macroeconomics
Circular Flow A diagram showing the income received and payments
made by each sector of the economy.
Transfer Payments Cash payments made by the government to people
who do not supply goods, services, or labor in exchange for these
payments. They include Social Security benefits, veterans’ benefits, and
welfare payments.

CHAPTER
5
Introduction
to
Macroeconomics
 FIGURE 5.3 The Circular Flow
of Payments
Households receive income from
firms and the government,
purchase goods and services from
firms, and pay taxes to the
government. They also purchase
foreign-made goods and services
(imports). Firms receive payments
from households and the
government for goods and services;
they pay wages, dividends, interest,
and rents to households and taxes
to the government. The
government receives taxes from
firms and households, pays firms
and households for goods and
services—including wages to
government workers—and pays
interest and transfers to
households. Finally, people in
other countries purchase goods
and services produced domestically
(exports).
Note: Although not shown in this
diagram, firms and governments
also purchase imports.

CHAPTER
5
Introduction
to
Macroeconomics
Another way of looking at the ways households, firms, the government,
and the rest of the world relate to each other is to consider the markets
in which they interact.
We divide the markets into three broad arenas:
(1) The goods-and-services market,
(2) The labor market, and
(3) The money (financial) market.

CHAPTER
5
Introduction
to
Macroeconomics
Goods-and-Services Market
Firms supply to the goods-and-services market. Households, the
government, and firms demand from this market.
Labor Market
In this market, households supply labor and firms and the government
demand labor.

CHAPTER
5
Introduction
to
Macroeconomics
Money Market
Households supply funds to this market in the expectation of earning
income in the form of dividends on stocks and interest on bonds.
Firms, the government, and the rest of the world also engage in
borrowing and lending which is coordinated by financial institutions.

CHAPTER
5
Introduction
to
Macroeconomics
Money Market
Treasury bonds, notes, and bills Promissory notes issued by the federal
government when it borrows money.
Corporate Bonds Promissory notes issued by firms when they borrow
money.
shares of stock Financial instruments that give to the holder a share in
the firm’s ownership and therefore the right to share in the firm’s profits.
Dividends The portion of a firm’s profits that the firm pays out each
period to its shareholders.

CHAPTER
5
Introduction
to
Macroeconomics
The Role of the Government in the Macroeconomy
Fiscal Policy Government policies concerning taxes and spending.
Monetary Policy The tools used by the Federal Reserve to control the
quantity of money, which in turn affects interest rates.

CHAPTER
5
Introduction
to
Macroeconomics
Great Depression The period of severe economic contraction and high
unemployment that began in 1929 and continued throughout the 1930s.
Fine-tuning The phrase used by Walter Heller to refer to the
government’s role in regulating inflation and unemployment.
Stagflation A situation of both high inflation and high unemployment.

CHAPTER
5
Introduction
to
Macroeconomics
Macroeconomics in
Literature
The Great Gatsby
The Grapes of Wrath
The underlying phenomena that
economists study are the stuff of
novels as well as graphs and
equations.

CHAPTER
5
Introduction
to
Macroeconomics
The U.S Economy Since 1970
 FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2007 IV
Aggregate output in the United States since 1970 has risen overall, but there have been four
recessionary periods: 1974 I–1975 IV, 1980 II–1983 I, 1990 III–1991 I, and 2001 I–2001 III.

CHAPTER
5
Introduction
to
Macroeconomics
 FIGURE 5.5 Unemployment Rate, 1970 I–2007 IV
The U.S. unemployment rate since 1970 shows wide variations. The four recessionary reference
periods show increases in the unemployment rate.

CHAPTER
5
Introduction
to
Macroeconomics
 FIGURE 5.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average),
1970 I–2007 IV
Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and 1979 I–1981 IV. Inflation
between 1983 and 1992 was moderate. Since 1992, it has been fairly low.

CHAPTER
5
Introduction
to
Macroeconomics
John Maynard
Keynes
Much of the framework of
modern macroeconomics comes
from the works of John Maynard
Keynes, whose General Theory
of Employment, Interest and
Money was published in 1936.

CHAPTER
5
Introduction
to
Macroeconomics
aggregate behavior
aggregate output
business cycle
circular flow
contraction, recession, or slump
corporate bonds
deflation
depression
dividends
expansion or boom
fine-tuning
fiscal policy
Great Depression
hyperinflation
inflation
macroeconomics
microeconomics
monetary policy
recession
shares of stock
stagflation
sticky prices
transfer payments
Treasury bonds, notes, and
bills
unemployment rate
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