Key Macroeconomic Variables

Agenda
Key Endogenous Variables Key Exogenous Policy Variables

Macroeconomic Goals
Macroeconomic goals are determined by governments as representatives of society. Final Goals:
High Growth, Smooth Growth, Low Unemployment, and Low Inflation.
1

Goals may be incompatible with one another. 2

Major Macroeconomic Variables

Economic output
Short-run business fluctuations Long-run economic growth

Key Macroeconomic Variables

Interest rates Government budget balances and finance International trade balances and finance Productivity

Unemployment and Employment Inflation

3

Economic Output
Billions of 2000 Dollars

Real Gross Domestic Product

12,000

Real Output or GDP: A measure of the economys total output of goods and services, Y.

10,000

8,000

6,000

4,000

2,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Real Gross Domestic Product

12

Economic Output
Key Questions?
What accounts for its rising long-term trend? Why has it been so volatile over time? What can be done to dampen the volatility? Why has volatility apparently been reduced since 1984?

Year-on-Year Percent Change

-4 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Potential Economic Output

Potential (or Natural) Output or GDP: The maximum sustainable output of goods and services, Y*. Standard against which economy is measured.
Policy recommendations are highly dependent on estimates of potential output.

The Output Ratio

Output Ratio: Ratio of actual-to-potential GDP, .

Output Ratio: Ratio of actual-to-potential GDP, .

9 10

Real Gross Domestic Product

Actual versus Potential
12,000

The Output Ratio

Output Ratio: Ratio of actual-to-potential GDP, .
= [ ( Y Y*) / Y* ] * 100

10,000

Billions of 2000 Dollars

8,000

6,000

4,000

Series5 Recessions Potential GDP Actual GDP

2,000 1960 1965 1970 1975 1980 1985 1990 1995 2000

11

2005

12

Output Ratio
6

Unemployment Rate
The percentage of people who are not working but who are actively seeking employment, U.

Percent: Actual to Potential GDP

-2

-4

-6

-8

-10 1960

1965

1970

1975

1980

1985

1990

1995

2000

13

2005

14

Unemployment Rate
12

Unemployment Rate
Key Questions?
Why has it been so high and so variable at times? Why was it rising between 1970 and 1983? Why has it been falling since then? What can be done to dampen its volatility? What are the economic and social consequences of high and volatile unemployment?
1965 1970 1975 1980 1985 1990 1995 2000 2005

10

Percent
6 4 2 1960

15

16

Natural Rate of Unemployment

The unemployment rate that is consistent with the economy being at potential GDP, U*.
Percent

Unemployment Rates
Actual Unemployment Rate 12 Natural Unemployment Rate

10

Neither desirable nor immutable

The unemployment rate that is consistent with stable inflation.

NAIRU: Non-Accelerating Inflation Rate of Unemployment
17

0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

18

Payroll Employment

Employment
Employment: The total number of people who are working, N.
Millions

150

125

100

75

19

50 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

20

Full Employment
The level of employment that is consistent with the economy being at potential GDP and the natural rate of unemployment, N*.

Inflation
The rate of change in the price of a basket of goods and/or services, .
= ( Pt Pt-1 ) / Pt-1
where P is the general price level.

21

22

Inflation Rate
16

Inflation
Key Questions?
Why has it been so high and so variable at times? Why was it rising between 1965 and 1983? Why has it been falling since then? What can be done to dampen its volatility? What are the economic and social consequences of high and volatile inflation?
1965 1970 1975 1980 1985 1990 1995 2000 2005

Year-on-Year Percent Change

12

0 1960

23

24

Interest Rates, 10-Year US Treasury

Interest Rates
Percent per Annum

20

Real
15

The (realized) annualized rate of return on a financial investment.

Nominal: Includes inflation, r. Real: Excludes inflation, R.

Nominal

10

Influenced by changes in output and changes in monetary policy.

25

-5 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

26

Interest Rates
Key Questions?
Why have they been so high and so variable at times? Why were real interest rates negative in the 1970s? Why were real interest rates so high in the 1980s? Why have real interest rates being falling since the early 1980s? What are the economic consequences of high and volatile interest rates?
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Government Budget Balance

The difference between government receipts and outlays, BB = T G.
If receipts > outlays, a budget surplus, BB > 0. If receipts < outlays, a budget deficit, BB < 0.

Influenced by changes in output and changes in fiscal policy.

28

Federal Government Budget Balance

2

Government Budget Balance

Key Questions?
Why did the governments budget fall into persistent deficit between 1980 and 1995? Why did the governments budget soared into surplus between 1995 and 2001? Why did the governments budget fall into deep deficit between 2002 and 2004? What are the economic consequences of large persistent budget deficits (or surpluses)?
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Percent of GDP

-1

-2

-3

-4 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

29

Current Account Balance

International Trade Balance

Percent of GDP

The difference between exports & imports, NX = X M.

If exports > imports, a trade surplus, NX > 0. If exports < imports, a trade deficit, NX < 0.

-1

-3

Influenced by changes in output and changes in trade policy.

31

-5

-7 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

32

International Trade Balance

Key Questions?
Why has the trade deficit been so large and so persistent since 1975? What are the economic consequences of large persistent budget deficits (or surpluses)?

Labor Productivity
A measure of output per worker.
Equals real GDP/Number of Workers, Y/N.

Can be very volatile in the short-run but longer-term trends are most important.

33

34

Nonfarm Business Productivity

3

2.73 2.56

Productivity
Key Questions?
Why was productivity growth so slow between 1973 and 1995? Why has productivity growth accelerated so sharply since 1995? What are the economic and social consequences of slow (fast) productivity growth?

Percent per Annum

1.49

0 1951-73 1973-95 1995-06

35

36

Key Exogenous Variables

Key Exogenous Variables
Fiscal Policy Monetary Policy Other Government Policies

Demand Side Policy Variables

Fiscal Policy:
Discretionary government spending, G Tax rates, t

Monetary Policy:
Money supply, M Interest rates (federal funds rate), r or r

Demand-side vs. Supply-side Policy Variables

Demand-side policy is generally short-run. Supply-side policy is generally long-run.
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Other Government Policies:

International Trade & Exchange Rates Regulatory
38

Supply Side Policy Variables

Fiscal Policy:
Tax reform Tax incentives Spending reform

Other Government Policies:

International Trade Privatization/Nationalization Regulatory
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