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Economics Macroeconomics THIRD EDITION ECONOMICS and MACROECONOMICS Paul Krugman | Robin Wells Chapter 6(21) Macroeconomics: The Big Picture • What makes macroeconomics different from microeconomics • What a business cycle is and why policy makers seek to diminish the severity of WHAT YOU business cycles WILL LEARN • How long-run economic growth IN THIS determines a country’s standard of living CHAPTER • The meaning of inflaon and deflaon and why price stability is preferred • The importance of open economy macroeconomics and how economies interact through trade deficits and trade surpluses Macroeconomics versus Microeconomics MICROECONOMIC MACROECONOMIC QUESTIONS QUESTIONS What determines the cost to a What determines the overall university or college of offering level of prices in the economy a new course? as a whole? What government policies What government policies should be adopted to make it should be adopted to promote easier for low-income students full employment and growth in to aend college? the economy as a whole? What determines whether What determines the overall CiHbank opens a new office in trade in goods, services and Shanghai? financial assets between the United States and the rest of the world? Macroeconomics versus Microeconomics • Microeconomics focuses on how decisions are made by individuals and firms and the conseQuences of those decisions. § Example: How much it would cost for a university or college to offer a new course ─ the cost of the instructor’s salary, the classroom faciliHes, etc. Then decide whether to offer the course by weighing the costs and benefits. • Macroeconomics examines the aggregate behavior of the economy (that is, how the acHons of all the individuals and firms in the economy interact to produce a parHcular level of economic performance as a whole). § Example: Overall level of prices in the economy (how high or how low they are relave to prices last year) rather than the price of a parHcular good or service. Macroeconomics versus Microeconomics • In macroeconomics, the behavior of the whole macroeconomy is, indeed, greater than the sum of individual acHons and market outcomes. § Example: Paradox of thri,: when families and businesses are worried about the possibility of economic hard Hmes, they prepare by cung their spending. § This reducHon in spending depresses the economy as consumers spend less and businesses react by laying off workers. § As a result, families and businesses may end up worse off than if they hadn’t tried to act responsibly by cung their spending. ECONOMICS IN ACTION Fending off Depression • In the early 1930s, some countries’ monetary authoriHes actually raised interest rates in the face of the slump, while governments cut spending and raised taxes—acHons that deepened the recession. • In the aermath 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 reducHons in taxes in an aempt to sustain spending. Growth, Interrupted, 1988-2010 The Business Cycle The Business Cycle Real A business cycle GDP peak Recession Depression peak trough Prosperity Recovery Expansion Time ContracHon Expansion (year) 1/21/14 9 The U.S. Unemployment Rate Taming the Business Cycle • Policy efforts undertaken to reduce the severity of recessions are called stabilizaon policies. • One type of stabilizaon policy is monetary policy: changes in the QuanHty of money or the interest rate. • The second type of stabilizaon policy is fiscal policy: changes in tax policy or government spending, or both. Global Comparison: Internaonal Business Cycles Summary 1. Macroeconomics is the study of the behavior of the economy as a whole. Macroeconomics differs from microeconomics in the type of QuesHons it tries to answer and in its strong policy focus. Keynesian economics, which emerged during the Great Depression, advocates the use of monetary policy and fiscal policy to fight economic slumps. Prior to the Great Depression, the economy was thought to be self-regulang. Summary 2. One key concern of macroeconomics is the business cycle, the short-run alternaon between recessions, periods of falling employment and output, and expansions, periods of rising employment and output. The point at which expansion turns to recession is a business-cycle peak. The point at which recession turns to expansion is a business-cycle trough. Summary 3. Another key area of macroeconomic study is long-run economic growth, the sustained upward trend in the economy’s output over Hme. Long-run economic growth is the force behind long-term increases in living standards and is important for financing some economic programs. Summary 4. When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflaon. When the overall level of prices is going down, the economy is experiencing deflaon. In the short run, inflaon and deflaon are closely related to the business cycle. In the long run, prices tend to reflect changes in the overall QuanHty of money. Because inflaon and deflaon can cause problems, economists and policy makers generally aim for price stability. Summary 5. Although comparave 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. .
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