Principles of Economics I
(Macroeconomics)

A. Much of modern macroeconomics was developed during the Great Depression in the 1930s.

1. Severe unemployment was the major economic problem of that decade. Trying to cure this problem gave macroeconomics a focus on the short run.

B. During the 1970s, significant long-term problems of economic growth and inflation emerged.

2. As a result, the focus of macroeconomics has shifted so that it now emphasizes both short-term economic fluctuations and long-term economic growth.

A. Economic growth is the increase in the economy’s ability to produce goods and services.

B. Economic growth is measured by the increase in real gross domestic product, (real GDP).

1. Real GDP is the nation’s total production linked back to prices from one year.

C. Viewing the changes in real GDP over the past 35 years reveals that it tends to grow persistently but that fluctuations occur around the growth path.

1. Potential GDP is the real GDP that the nation produces when all its resources — labor, capital, land, and entrepreneurial ability — are fully employed.

a) The long-term rate of economic growth is measured by growth in potential GDP.

b) Potential GDP grew more rapidly in the 1960s than in the 1970s and early 1980s. The slow growth during the 1970s and early 1980s reflected the productivity growth slowdown. The growth rate of potential GDP may have increased during the 1980s and 1990s, but it is too early to tell.

2. Real GDP fluctuates around potential GDP in a business cycle. Business cycles have two turning points — peak and trough — and two phases — recession and expansion.

a) A peak is the upper turning point, the end of an expansion and the beginning of a recession.

b) A trough is the lower turning point, the end of a recession and the start of an expansion.

c) A recession is defined as the period during which real GDP decreases for at least two successive quarters.

d) An expansion is the period during which real GDP increases.

3. Recessions in recent years have been much less severe than the Great Depression.

D. Comparing the growth in real GDP per person between 1960 and 1996 for the United States, Japan, and Germany reveals three features:

1. The nations experienced similar slowdowns in productivity growth in the 1970s and 1980s.

2. Business cycles in the three nations tend to occur at the same time.

3. Potential GDP grew at different rates, with that of Japan growing most rapidly and that of the United States most slowly.

E. Average annual growth rates of real GDP per person varies among nations. In contemporary times, the most rapid rates have been achieved by Asian countries and the slowest rates by nations in Central Europe and Russia.

F Economic growth expands people’s consumption possibilities. Costs include foregone current consumption, potentially more rapid depletion of exhaustible natural resources and/or more pollution, and more rapid rates of job creation and destruction.

A. In 1996, 127 million people in the United States had jobs. On average, each year 1.8 million jobs are created.

B. A worker is unemployed if he or she does not have a job but is available and willing to work and has made some effort to find work within the past four weeks.

1. The labor force is the sum of employed and unemployed workers.

2. The unemployment rate is the percentage of workers in the labor force who are unemployed.

C. The unemployment rate may be an inaccurate measure of unemployment for two reasons:

1. Discouraged workers, who have given up searching for a job because they are convinced they cannot find one, are not counted as unemployed.

2. Part-time workers, who desire full-time work but cannot find it, are not counted as unemployed.

D. The unemployment rate reached a peak during the Great Depression in the early 1930s. It has been high, but not nearly as high, during recessions in recent years.

E. The unemployment rate has been higher in the United States than in Japan, but higher still in Canada. Business cycle fluctuations in unemployment occurred at similar times in the United States and Canada, but were somewhat out of phase when compared to Western Europe.

F. Unemployment is a problem because it represents lost production and income, and because prolonged unemployment can cause lost human capital, which seriously hurts the person’s future job prospects.