DR. PETROS KOSMASLECTURER

VARNA FREE UNIVERSITY

ACADEMIC YEAR 2010 - 2011

LECTURE 8

MICROECONOMICS AND MACROECONOMICS

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Macroeconomic Questions

Why does output fluctuate?

What determines economic growth?

Why do we have unemployment, and why is unemployment a problem?

Why do we have inflation, and why is inflation a problem?

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Which governmental policy affects output, growth, unemployment, and inflation?

How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?

How do domestic economic activities affect other counties and our trade?

 

Macroeconomic Questions

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Forms of Cultural Imperialism 

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Macroeconomic Goals

Full Employment

Price Stability

Economic Growth

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Definitions of Employed, Unemployedand Unemployment Rate

Employed = everyone currently working, including part time workers

Unemployed = people looking for work or temporarily laid off from work

Unemployment Rate = unemployed labor force

Labor force = employed + unemployed

Labor force participation rate = labor forcepopulation aged 16 and

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Types of Unemployment

Frictional Unemployment

Structural Unemployment

Cyclical Unemployment

Other Employment Concepts

Natural Rate of Unemployment

Full Employment

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Phases of the Business Cycle

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First look at:Output and its rate of growthInflation rate Unemployment rateInternational trade

What is macroeconomics?

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Gross Domestic Product (GDP) Value of all final goods and services produced

within a country in a given time periodReal GDP

The volume of goods and services produced within a country (i.e. GDP adjusted for inflation, GDP in terms of goods)

Economic Growth: Percentage rate of increase of real GDP

Measuring Economic Growth

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Measuring Inflation

Percentage change in the price levelGDP deflatorConsumer Price Index (CPI)

In the Eurozone: Harmonized Index of Consumer Prices (HICP)

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Measuring Unemployment

Labor force = employed + unemployed

Unemployment rate=Unemployment/Labor Force

Unemployed: does not have a job and has been looking for one in the past 4 weeks

The long term unemployment rate is the share of unemployed persons since 12 months or more in the total number of active persons in the labor market.

European Labor Force Survey (LFS)Discouraged workersLabor force participation varies across countries and

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Measuring trade with other countries

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Growth, Unemployment and Inflation in the Euro area and the US since 1970

1970-2006

1996-2006

2006

2007

2008

2009 forecast

Output Growth rate

EU

2.3% 2.0% 2.7% 2.6%

0.7%

-4.2%

US

3.1% 3.4% 3.3% 2.1%

0.4%

-2.7%

Unemployment rate

EU

7.4% 8.7% 7.6% 7.5%

7.6%

9.9%

US

6.2% 5% 4.6% 4.6%

5.8%

9.3%

Inflation rate EU

5.4% 1.8% 1.7% 2.1%

3.3%

0.3%

US

4% 2% 2.9% 2.9%

3.8%

-0.4%

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Government Policies

Short-term/Medium term policies Monetary and fiscal policies Affects output, prices, interest rates employment

Long term policies Affect productive capacity

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Monetary Policy

Independent Central BanksChange in money supply affects interest rates and ultimately demand for goods and equilibrium output

Eurosystem (ESCB)European Central BankNational Central Banks

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Tasks of the ECB

Sets interest ratesManages foreign exchange operationsHolds and manages some official reserves of

euro area countriesPromotes smooth operation of payment systems

NCBs Lend to national financial institutions Ensure settlement of cashless domestic and trans-

border payments Collect national statistics

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Fiscal policies

Government spending and taxes

Affect economy’s output and price level

Stability and Growth Pact National government

deficit no larger than 3% of GDP debt-to-GDP ratio of 60%

Reduces inflationary pressures (and free-riding) Main purpose of fiscal policy should be stabilization

But fiscal policy is main tool left to governments where monetary policy is constrained Evidence that most fiscal policy is pro-cyclical Automatic stabilizer

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Other Public Policies

Investing in productivity (technology policy)

Improving human capital (education) Improving physical capital (infrastructure) External relations (e.g. war expenditures

in Iraq)

In the EU, these public policies mostly not integrated

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Euro: Optimal Currency Area?

Common currency:Benefits: elimination of foreign exchange

transactions lead to reduction in costs (0.5% of GDP), increased competition

The euro is as stable as the best-performing currencies previously used in the euro area countries

Costs: loss of monetary policy

Optimal currency area (Robert Mundell): Countries have to experience similar shocks If not: countries must have high factor (labor)

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