EC 12 Macroeconomics Inflation and Unemployment Unemployment Measurement

EC 12 - Macroeconomics Inflation and Unemployment

Unemployment • Measurement • 3 types of unemployment • Cyclical • Structural • Frictional

Inflation • Measurement • Fixed Market Basket • Example: Year 1 EXP 2 gallons of milk 2 lbs. of apples 1 loaf of bread Total $3. 40 $1. 80 $2. 40 6. 80 3. 60 2. 40 12. 80 Year 2 EXP $3. 80 $2. 00 $2. 20 7. 60 4. 00 2. 20 13. 80

Other Measures of Inflation • Price Index • GDP Deflator • Types of Inflation • Cost-push • Demand-pull • Who wins and loses

GDP Accounting • Circular Flow • Expenditure Approach • Consumption • Investment • Government Spending • Net Exports

Income Approach • Wages and Salaries • Proprietors’ Income • Interest Income • Rental Income • Corporate Profits =National Income

• National Income +Indirect Business Taxes =Net National Product • NNP +Depreciation =GDP

Errors • Self-produced goods • Barter • Underground economy

Measure of Welfare? • Key exceptions • Leisure • Externalities

Business Cycles • Diagram • Theories: • Sunspots • Keynes – Durable Goods Cycle • Consumer Sentiment • Long-run: • Schumpeter – waves of innovation • Malthus – Resource constraints • Marx

Macroeconomics – Range of Viewpoints Marxian Socialism Mixed Economy Free Market Libertarianism

Debate…. Keynes v. Hayek • https: //www. bing. com/videos/search? q=keynes+v. +hayek+second+r ound&view=detail&mid=0 E 3266689796 E 9 D 7 ACDF&FORM=V

Onset of the Great Depression • Crash of 1929 • Dustbowl • Banking Crisis of 1931 • Smoot-Hawley (1932)

FDR Administration Response • WPA • Income stabilization schemes (Social Security 1935) • GDP recovered, but slowly

Great Depression Ended with Lend-Lease in 1939/1940 • No Theoretical Basis to Understand Failed Economy • John Maynard Keynes (British Economist) proposes use of government spending to offset recessions • Argues that, at low levels of income, demand determines output (versus Jean-Baptiste Say) • As an aside, “invented” macroeconomics

Basic Framework of Keynsian Economics • Used C+I+G+(X-M) • Primary focus is on consumption • Keynes divided consumption into autonomous and induced • Graphically