18/7/2019

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
determines a country’s standard of living
IN THIS
• The meaning of inflation and deflation
CHAPTER and why price stability is preferred
• The importance of open economy
macroeconomics and how economies
interact through trade deficits and trade
surpluses

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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 facilities, the class materials, and so on.
Having determined the cost, the school can then decide
whether to offer the course by weighing the costs and
benefits.

Macroeconomics versus Microeconomics

• Macroeconomics examines the aggregate behavior of the
economy (that is, how the actions of all the individuals and
firms in the economy interact to produce a particular level
of economic performance as a whole).
Example: Overall level of prices in the economy (how high or
how low they are relative to prices last year) rather than the
price of a particular good or service.

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Macroeconomics versus Microeconomics

Let’s begin by looking more carefully at the difference between
microeconomic and macroeconomic questions.

MICROECONOMIC MACROECONOMIC
QUESTIONS QUESTIONS
Go to business school or take a How many people are
job? employed in the economy as a
whole?
What determines the salary What determines the overall
offered by Citibank to Cherie salary levels paid to workers in
Camajo, a new Columbia MBA? a given year?

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 attend college? the economy as a whole?
What determines whether What determines the overall
Citibank opens a new office in trade in goods, services and
Shanghai? financial assets between the
United States and the rest of
the world?

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Macroeconomics versus Microeconomics

• In macroeconomics, the behavior of the whole
macroeconomy is, indeed, greater than the sum of
individual actions and market outcomes.
Example: Paradox of thrift: when families and businesses are
worried about the possibility of economic hard times, they
prepare by cutting their spending.
This reduction 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 cutting their
spending.

Macroeconomics: Theory and Policy

• In a self-regulating economy, problems such
as unemployment are resolved without
government intervention, through the
working of the invisible hand.

• According to Keynesian economics, economic

slumps are caused by inadequate spending
and they can be mitigated by government
intervention.
The handling of the
economy is a
• Monetary policy uses changes in the quantity governmental
of money to alter interest rates and affect responsibility
overall spending.

• Fiscal policy uses changes in government

spending and taxes to affect overall spending.

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The Business Cycle

• The business cycle is the short-run alternation 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, sometimes 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.

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The Business Cycle

The Business Cycle

Real
A business cycle
GDP
peak
Recession
Depression
peak

trough
Prosperity

Recovery Expansion

Time
Contraction Expansion (year)
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The Business Cycle

The Business Cycle

• What happens during a business cycle, and what can be

done about it?
The effects of recessions and expansions on unemployment:
The unemployment rate, a measure of joblessness, rises
sharply during recessions and usually falls during expansions
(salaries and employment will be affected).
The effects on aggregate output: recessions would have a
negative impact on corporate profits.
The possible role of government policy: In recessions and
excessive expansions, governments must employ monetary
and fiscal policy measures to deal with them (Policy efforts
undertaken to reduce the severity of recessions are called
stabilization policies.).

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The U.S. Unemployment Rate

Long-Run Economic Growth

• Long-run economic growth is the sustained upward trend

in the economy’s output over time.

• A country can achieve a permanent increase in the

standard of living of its citizens only through long-run
growth.

• A central concern of macroeconomics is what determines

long-run economic growth.

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Long-Run Economic Growth

• In 1905, we find that life for many Americans was startlingly

primitive by today’s standards.

• Americans have become able to afford many more material

goods over time thanks to long-run economic growth.

Long-Run Economic Growth

Pib usa mills $: 1920 - 2016
20.000.000 PIB real Mills $ Población PIB percapita
18.000.000 Costa Rica 992 0,42 2.362
16.000.000 68.238 4,88 13.986
14.000.000
12.000.000 USA 906.885 106,88 8.485
10.000.000 17.211.638 324,66 53.015
8.000.000
6.000.000
4.000.000
2.000.000
0
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016

Pib CR mills $: 1920 - 2016

80.000

70.000
Millones de dolares

60.000

50.000

40.000

30.000

20.000

10.000

0
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016

Años

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Long Run Growth in U.S.

Long Run Growth in U.S.

Años Costa Rica USA Singapur India Etiopia

1920 2.362 8.485 1.320 1.301
1930 2.365 9.490 2.082 1.545
1939 2.715 10.459 2.671 1.483
1950 2.855 15.241 2.439 1.417 665
1960 3.823 18.058 2.365 1.403 750
1970 5.829 23.958 4.540 1.234 1.014
1980 8.012 29.613 9.287 1.143 1105
1990 7.945 36.982 15.476 1.283 979
2000 9.500 45.887 39.287 2003 608
2010 11.989 49.267 61.827 4.353 1.049
2016 13.986 53.015 67.180 5.961 1.659

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Macroeconomics versus Microeconomics

PIB percapita USD (2011)

Costa Rica USA Singapore Central African Republic
70000

65000

60000

55000

50000

45000

40000

35000

30000

25000

20000

15000

10000

5000

0
1950 1960 1970 1980 1990 2000 2010

Inflation and Deflation

• A rising aggregate price level is inflation.

• A falling aggregate price level is deflation.

• The inflation rate is the annual percent change in the

aggregate price level.

• The economy has price stability when the aggregate price

level is changing only slowly.

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Inflation and Deflation

1 de enero de 1978
20 colones la entrada

• IPC enero/78 = 0,54

• IPC julio/2019= _______
Tasa de inflación = _______

Hoy: (20 + 20*_____

=_____ colones)

International Imbalances

• An open economy is an economy that trades goods and

services with other countries.

• A country runs a trade deficit when the value of goods and

services bought from foreigners is more than the value of
goods and services it sells to them.

• It runs a trade surplus when the value of goods and

services bought from foreigners is less than the value of the
goods and services it sells to them.

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International Imbalances

Exports, Exports Imports

imports
(billions)

$2,500

2,000

1,500

1,000

500

United States Germany China Saudi Arabia

VIDEO
PBS NEWSHOUR: Laughing at Macroeconomics: The Cartoon
Introduction:
http://www.pbs.org/newshour/multimedia/cartoonecon/inde
x.html

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Summary

1. Macroeconomics is the study of the behavior of the

economy as a whole. Macroeconomics differs from
microeconomics in the type of questions 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-regulating.

Summary

2. One key concern of macroeconomics is the business cycle,

the short-run alternation 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.

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Summary

3. Another key area of macroeconomic study is long-run

economic growth, the sustained upward trend in the
economy’s output over time.

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 inflation. When the overall level of prices is
going down, the economy is experiencing deflation.

In the short run, inflation and deflation are closely related

to the business cycle. In the long run, prices tend to reflect
changes in the overall quantity of money.

Because inflation and deflation can cause problems,

economists and policy makers generally aim for price
stability.

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Summary
5. Although comparative 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

• Self-regulating economy • Price stability

• Keynesian economics • Open economy
• Monetary policy • Trade deficit
• Fiscal policy • Trade surplus
• Recession
• Expansion
• Business cycle
• Business-cycle peak
• Business-cycle trough
• Long-run economic growth
• Inflation
• Deflation

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