Overview
This lecture introduces macroeconomics, focusing on how economists measure and assess the health of an entire economy through key indicators like GDP, unemployment, and inflation.
What is Macroeconomics?
- Macroeconomics studies the entire economy, including overall output, unemployment, inflation, interest rates, and government policies.
- It became a distinct field after the Great Depression due to the need for systematic economic measurement and policymaking.
Economic Goals and Indicators
- Policymakers aim for economic growth, low unemployment, and stable prices.
- The three main indicators are Gross Domestic Product (GDP), unemployment rate, and inflation rate.
Gross Domestic Product (GDP)
- GDP is the value of all final goods and services produced within a country in a specific time period.
- Used items, financial assets, illegal activities, and home production are not included in GDP.
- Real GDP adjusts for inflation and gives a better sense of economic health than nominal (unadjusted) GDP.
- GDP trends indicate economic growth or recession; two consecutive quarters of falling Real GDP define a recession.
Unemployment
- The unemployment rate = (number unemployed ÷ labor force) × 100.
- Labor force includes those working or actively seeking work, but not children, non-workers, or discouraged workers.
- The rate excludes underemployed and discouraged workers, thus may understate problems.
- Three types of unemployment: frictional (between jobs), structural (skills not needed), and cyclical (due to recession).
- Full employment means only frictional and structural unemployment remain, called the natural rate (about 4–6% in the US).
- GDP growth and unemployment are inversely related.
Inflation and Price Stability
- Inflation is the rate of increase in prices, measured by the change in a "market basket" of goods.
- High inflation reduces money’s purchasing power and increases costs for businesses and consumers.
- Deflation (decreasing prices) discourages spending and can worsen recessions.
- Economists aim to keep prices stable to avoid both rapid inflation and deflation.
The Business Cycle
- The economy naturally expands and contracts in cycles of booms (expansions) and busts (recessions).
- GDP, unemployment, and inflation are used to track the business cycle.
- The four components of GDP are consumer spending, investment (business spending), government spending, and net exports.
Role of Government
- Governments can influence the economy by spending more or cutting taxes during recessions.
- This can stimulate the economy, but may lead to increased national debt.
Key Terms & Definitions
- Macroeconomics — study of the entire economy and large-scale economic indicators.
- Gross Domestic Product (GDP) — total value of all final goods and services produced within a country's borders in a given period.
- Real GDP — GDP adjusted for inflation.
- Recession — two consecutive quarters of falling Real GDP.
- Unemployment Rate — percentage of the labor force that is jobless and actively seeking work.
- Frictional Unemployment — unemployment between jobs or entering the labor force.
- Structural Unemployment — unemployment due to lack of demand for certain skills.
- Cyclical Unemployment — unemployment related to economic downturns.
- Natural Rate of Unemployment — unemployment from frictional and structural factors when the economy is healthy.
- Inflation — general increase in prices over time.
- Deflation — general decrease in prices.
- Business Cycle — regular expansion and contraction of economic activity.
Action Items / Next Steps
- Review how economists calculate GDP, unemployment, and inflation.
- Prepare for next lecture on detailed GDP calculation and economic models.