Origins and Issues of Macro 01/21/2014
Origins and Issues of Macroeconomics
Modern macroeconomics emerged prior to and during the Great Depression
Before it was all micro
People wanted the government to improve the economy and help those faces with severe problems
John Maynard Keynes, in 1936, published The General Theory of Employment, Interest,
Most government official went to him
Short Term vs. Long Term Goals
Keynes focused on the short term primarily
Government had the ability to spend more money to keep unemployment down
He felt the depression and some previous economic slowdowns were caused by insufficient private
So, government should increase spending if private demand was insufficient to keep the economy growing.
Long term consequences were viewed as something that would be dealt with when the current situation
“In the long run, we’re all dead” – Keynes
Classical economists before Keynes argued short term action by government would cause long term
Where is the balance between borrowing and paying off
Can create long term problems.
#1 Goal for the Economy
How do we achieve the goal?
Increase resources or the output we get from them. So. More labor/natural resources (agriculture) or capital (manmade that helps us be more productive)
Increases productivity due to technology and innovation.
Stabilize prices and low unemployment (46% is ideal)
Some people are better off being paid to be out of the company so they can be more productive.
Economic Growth is the expansion of the economy’s incomes and value of production.
Measures by real gross domestic product (Real GDP)
The value of the total production of all the nation’s farms, factories, shops and offices in consistent prices of
a SINGLE YEAR. This equals the income generated.
This is a flow measure not a total accumulation. In other words it does not measure wealth or wellbeing
only production and income.
(wealthy people invest their wealth to gain money)
Market Value of all final goods produced within a country (region) during a given time period.
The value of this output will approximately equal to income.
Does not include items not sold in a market or that are illegal.
I.E. Prostitution, drug sales, household work, home heating with solar collector.
Four Major Components (income is very hard to total so these components make up GDP)
Consumer spending (furniture, food, gas, clothes and medical expenses, and housing)
Business investment ( creation of computers, factories, apartment buildings and airplanes and selling them)
16% Government purchases (tanks, ships, roads and school)
New Exports or exports minus imports: exports (wheat, corn machinery, services, scientific instruments):
Imports (cars, consumer electronics and parts, oil, computer ships
45 % (buying more than we sell)
Some Macro Facts
4.1% in 3 quarter in ’13 (in is high and hard to maintain)
3.1% in 3 quarter in ‘12
6.6% in January ‘14
6.7% in December ‘13
7.8% in December ‘12
Inflation (CPI – consumer price index)
1.5% in 2013
0.3% for December ‘13
Production Possibilities Determinants
The alternative combinations of goods and services that could be produced given the time period with all
available resources and technology.
Production Possibilities Curve
Continue to opportunity costs Origins and Issues Continued 01/21/2014
1. Real GDP growth rate required to reduce unemployment…. Is 2.5%
2. Target for unemployment rate?.... 46%
3. Target for inflation?….. 13%
Opportunity cost is the opportunity lost because something else was done.
We always want the lowest opportunity cost. When we do one thing, we are not doing the other. Have to
decide which one we want.
Decisions or opportunities include benefits and costs. We must consider to make good decisions.
Coming to Mizzou has both benefits and costs and opportunity costs (benefits and costs of next best
Since we are better off when choosing the option with lowest opportunity cost, it should be our decision