National

Economic

Objectives

Introduction

Macroeconomics is the study of the economy as a whole

Behavior/condition of economy has a profound influence on us

Policymakers and economists use data to monitor the performance of the economy

National Economic Objectives

Economic GrowthUnemploymentPrice StabilityInternational Sector

Economic Growth

GDP measures both total income earned in an economy as well as total expenditure on the economy’s output

GDP is a good measure of economic prosperity

Increases in GDP are a good measure of economic progress (growth)

Economic Growth

Country GDP GDP Yearly 1870 1987 GrowthUS 2244 18,258 1.76%Japan 842 16,144 3.00%Brazil 436 3417 2.39%China 401 1748 1.71%India 378 662 0.65%

Economic Growth

Table shows GDP per person (economic prosperity) varies widely across nations

Table shows the the growth rates in GDP per person (economic growth) varies widely across nations

Differences in growth rates will cause economic prosperity to change drastically over time

Economic Growth

Small differences in growth rates are important over time

The rule of 70 states that if some variable grows at a rate of x percent per year, then the variable will double in approximately 70/x years If GDP grows at 1% per year, it will

double in 70 years. If it grows at 2% per year, it will double in only 35 years

Economic Growth

One of the economic objectives policymakers follow is to pursue policies that will enhance economic growth

Even policies that have a small impact on growth rates in GDP can have significant impacts over the long term

Unemployment

Unemployment affects both the economy and the individual

When there is unemployment, we produce fewer goods and services

When there is unemployment, crime rates increase, there is more domestic violence, there is more drug use

Individuals who become unemployed experience both physical and psychological effects

Unemployment

There are several types of unemployment: frictional, structural, cyclical

Frictional results when people enter the labor force or change jobs

Structural results when there are changes in the technological requirements of the workplace

Unemployment

Cyclical occurs when the economy goes into a downturn (recession)

Policymakers try to pursue policies that will minimize cyclical unemployment

Policymakers also try to pursue policies that will lower the natural rate of unemployment - the rate of unemployment normally experienced by the economy

Unemployment

When unemployment is at the natural rate, the economy is said to be experiencing full employment Cyclical unemployment is zero Only frictional and structural

unemployment exist This means that full employment is not

zero unemployment

Price Stability

Inflation refers to an increase in the overall level of prices The overall level of prices is determined

by looking at an average of prices, the general price level

The inflation rate is the percentage change in overall prices from one period to another

Inflation can impose many costs on the economy

Price Stability

Shoeleather CostsMenu CostsRelative-Price Variability and the

Misallocation of ResourcesInflation Induced Tax DistortionsConfusion and InconvenienceArbitrary Redistributions of Wealth

Price Stability

Shoeleather costs refer to the costs involved in reducing your money balances There is a time cost and inconvenience

involved when attempting to minimize your money balances - this is a waste of resources

Price Stability

Menu costs are the costs of changing prices

Printing new price lists, catalogs, etc. takes resources that could have been used in more productive activities

Price Stability

Relative prices determine the distribution of resources

Inflation distorts relative pricesThe distortion has an impact on

consumer choices and the distribution of resources

Resources are no longer allocated optimally

Price Stability

Inflation can result in tax distortions; these distortions can affect individual’s behavior and the allocation of resources

Inflation causes capital gains to rise at a faster rate

This will cause more taxes to be paid on capital gains

Price Stability

Inflation causes nominal interest rates to increase, thereby increasing interest income

This will cause more taxes to be paid on interest income

Price Stability

Inflation makes us unsure as to how well prices reflect the value of goods and services

Money is how we measure the value of different items in an economy

Inflation erodes the value of money, so we are no longer sure if it measures the value of goods and services accurately

Price Stability

Inflation redistributes wealth in the economy

Those living on fixed incomes are harmed

Creditors are hurt while debtors benefit by inflation

Price Stability

Because of these problems with inflation, policymakers pursue policies that will result in price stability (stability of the general price level)

Price stability does not mean a zero rate of inflation It does mean an absence of significant

changes in the general price level and relatively low rates of inflation

International Sector

Trade allows us to have goods and services that would not otherwise be available to us; it also allows an economy to concentrate on producing those goods that it can produce most efficiently

Trade can raise living standardsIn recent times, policymakers have

pursued policies that result in greater trade between the U.S. and other nations