3 (2) Macro Big Picture
3 (2) Macro Big Picture
3 (2) Macro Big Picture
21
Macroeconomics:
The
Big
Picture
• What
a
business
cycle
is
and
why
policy
makers
seek
to
diminish
the
severity
of
business
cycles
• Other
WHAT
YOU
§ How
long-‐run
economic
growth
WILL
LEARN
determines
a
country’s
standard
of
living
§ The
meaning
of
infla=on
and
defla=on
IN
THIS
and
why
price
stability
is
preferred
CHAPTER
§ The
importance
of
open
economy
macroeconomics
and
how
economies
interact
through
trade
deficits
and
trade
surpluses
ECONOMICS
IN
ACTION
FENDING
OFF
DEPRESSION
• In
2008,
the
world
economy
experienced
a
severe
financial
crisis
that
was
all
too
reminiscent
of
the
early
days
of
the
Great
Depression.
• In
the
spring
of
2009,
the
economic
historians
Barry
Eichengreen
and
Kevin
O’Rourke,
reviewing
the
available
data,
pointed
out
that
“globally,
we
are
tracking
or
even
doing
worse
than
the
Great
Depression.”
• But
the
worst
did
not
come
to
pass.
Why?
• At
least
part
of
the
answer
is
that
policy
makers
responded
very
differently.
• During
the
Great
Depression,
it
was
widely
argued
that
the
slump
should
simply
be
allowed
to
run
its
course.
ECONOMICS
IN
ACTION
Fending
off
Depression
• In
the
early
1930s,
some
countries’
monetary
authoriTes
actually
raised
interest
rates
in
the
face
of
the
slump,
while
governments
cut
spending
and
raised
taxes—acTons
that
deepened
the
recession.
• In
the
aVermath
of
the
2008
crisis,
by
contrast,
interest
rates
were
slashed,
and
a
number
of
countries,
the
United
States
included,
used
temporary
increases
in
spending
and
reducTons
in
taxes
in
an
aYempt
to
sustain
spending.
CONTROVERSY!
The
Business
Cycle
• The
business
cycle
is
the
short-‐run
alternaTon
between
economic
downturns
and
economic
upturns.
• A
depression
is
a
very
deep
and
prolonged
downturn.
• Recessions
are
periods
of
economic
downturns
when
output
and
employment
are
falling.
• Expansions,
someTmes
called
recoveries,
are
periods
of
economic
upturns
when
output
and
employment
are
rising.
The
Business
Cycle
• The
point
at
which
the
economy
turns
from
expansion
to
recession
is
a
business-‐cycle
peak.
• The
point
at
which
the
economy
turns
from
recession
to
expansion
is
a
business-‐cycle
trough.
The
Business
Cycle
The
Business
Cycle
Real
A
business
cycle
GDP
peak
Recession
Depression
peak
trough
Prosperity
Recovery Expansion
Time
ContracTon
Expansion
(year)
23/08/15
8
The
Business
Cycle
Growth,
Interrupted,
1988-‐2010
The
Business
Cycle
Comparing
Recessions
• The
1929–1933
recession
hit
the
economy
vastly
harder
than
any
of
the
post–World
War
II
recessions.
• The
1981–1982
recession
did
eventually
reduce
industrial
producTon
by
about
10%,
although
producTon
then
staged
a
rapid
recovery.
• In
2001,
the
decline
in
industrial
producTon
was
very
modest.
• By
Great
Depression
standards,
or
even
those
of
the
1980s,
the
2001
recession
was
very
mild.
Other.1
• In
1905,
we
find
that
life
for
many
Americans
was
startlingly
primiTve
by
today’s
standards.
• Americans
have
become
able
to
afford
many
more
material
goods
over
Tme
thanks
to
long-‐run
economic
growth.
Long
Run
Growth
in
U.S.
Long
Run
Growth
in
U.S.
FOR
INQUIRING
MINDS
OPEN
ECONOMY
MACROECONOMICS
Interna=onal
Imbalances
$2,500
2,000
1,500
1,000
500
4. When
the
prices
of
most
goods
and
services
are
rising,
so
that
the
overall
level
of
prices
is
going
up,
the
economy
experiences
infla=on.
When
the
overall
level
of
prices
is
going
down,
the
economy
is
experiencing
defla=on.
In
the
short
run,
inflaTon
and
deflaTon
are
closely
related
to
the
business
cycle.
In
the
long
run,
prices
tend
to
reflect
changes
in
the
overall
quanTty
of
money.
Because
inflaTon
and
deflaTon
can
cause
problems,
economists
and
policy
makers
generally
aim
for
price
stability.
Summary
5. Although
comparaTve
advantage
explains
why
open
economies
export
some
things
and
import
others,
macroeconomic
analysis
is
needed
to
explain
why
countries
run
trade
surpluses
or
trade
deficits.
The
determinants
of
the
overall
balance
between
exports
and
imports
lie
in
decisions
about
savings
and
investment
spending.
Key
Terms