Intro to

Macroeconomics
Lecture 1
Ibraheem Catovic
What is Economics?
• Textbook: Economics is the study of how humans make decisions in the face of
scarcity.
• Scarcity means that human wants for goods, services and resources exceed what is
available.
• American Economic Association: Economics is the study of scarcity, the study of
how people use resources and respond to incentives, or the study of decision-
making.
• Journal of Economic Literature Classification Codes
• Microeconomics focuses on the actions of individual agents within the
economy, like households, workers, and businesses.
• Macroeconomics is the branch of economics that focuses on broad issues such
as growth, unemployment, inflation, and trade balance.
 3.1
Demand, Supply, and Equilibrium in
Markets for Goods and Services
• Demand - the amount of some good or service consumers are willing
and able to purchase at each price.

• Price - what a buyer pays for a unit of the specific good or service.

• Quantity demanded - the total number of units of a good or service

consumers are willing to purchase at a given price

• Law of demand - keeping all other variables that affect demand

constant,

• if price goes , then quantity demanded goes

• if price goes , then quantity demanded goes

Demand Schedule & Curve
• Demand schedule - a table that shows a range of prices for a certain
good or service and the quantity demanded at each price.

• Demand curve - a graphic representation of the relationship between

price and quantity demanded of a certain good or service, with
quantity on the horizontal axis and the price on the vertical axis.
Graphing the Demand

• The points of a demand schedule are graphed, and the line connecting them is the
demand curve (D).

• The downward slope of the demand curve again illustrates the law of demand - the
inverse relationship between prices and quantity demanded.
Supply of Goods and Services
• Supply - the amount of some good or service a producer is willing to
supply at each price.

• Quantity supplied - the total number of units of a good or service

producers are willing to sell at a given price.

• Law of supply - assuming all other variables that affect supply are held
constant,

• if price goes , then quantity supplied goes

• if price goes , then quantity supplied goes

Supply Schedule & Curve
• Supply schedule - a table that shows the quantity supplied at a range
of different prices.

• Supply curve - a graphic illustration of the relationship between price,

shown on the vertical axis, and quantity, shown on the horizontal axis.
Graphing the Supply

• The supply curve (S) is created by graphing the points from a supply schedule and
then connecting them.

• The upward slope of the supply curve illustrates the law of supply - that a higher
price leads to a higher quantity supplied, and vice versa.
Equilibrium - Where Demand and Supply Intersect
• Equilibrium - the combination of price and quantity where there is no
economic pressure from surpluses or shortages that would cause price or
quantity to change
quantity demanded = quantity supplied

• Equilibrium price - the price where quantity demanded is equal to quantity

supplied
• Equilibrium quantity - the quantity at which quantity demanded and
quantity supplied are equal for a certain price level.
• Surplus or excess supply - at the existing price, quantity supplied exceeds
the quantity demanded.
• Shortage or excess demand - at the existing price, the quantity demanded
exceeds the quantity supplied.
Equilibrium - Where Demand and Supply Intersect

• The demand curve (D) and the supply curve (S) intersect at the equilibrium point E.
• The equilibrium price is the only price where,
quantity demanded = quantity supplied
• At a price above equilibrium, quantity supplied > quantity demanded, so there is excess
supply.
• At a price below equilibrium, quantity demanded > quantity supplied, so there is excess
demand.
 3.2
Shifts in Demand and Supply for Goods
and Services
• Ceteris paribus - Latin phrase meaning “other things being equal”

• Any given demand or supply curve is based on the ceteris paribus

assumption that all else is held equal.
Demand Curve

• The demand curve can be used to identify how much consumers

would buy at any given price.
Shifting the Demand Curve
Figure A Figure B

If income increases:

• Consumers will purchase larger quantities, pushing demand to the

right (figure A).
• Thus, causing the demand curve to shift right (figure B).
Shifting the Demand Curve

• Increased demand means that at every given price, the quantity demanded is
higher, so that the demand curve shifts to the right from D0 to D1.
• Decreased demand means that at every given price, the quantity demanded is
lower, so that the demand curve shifts to the left from D0 to D2.
What Factors Affect Demand?
• A shift in demand happens when a change in some economic factor (other
than price) causes a different quantity to be demanded at every price.

• Factors that affect demand:

• Income
• Changing tastes or preferences
• Changes in the composition of the population
• Price of substitute or complement changes
• Changes in expectations about future
How Factors Affect Demand

(a) A list of factors that can cause an increase in demand from D 0 to D1.
(b) The same factors, if their direction is reversed, can cause a decrease in demand from D 0 to D1.
Types of Goods & Services
• Normal good - A product whose demand rises when income rises, and vice
versa.

• Inferior good - A product whose demand falls when income rises, rises, and
vice versa.

• Substitute - a good or service that we can use in place of another good or

service.

• Complements - goods or services that are often used together so that

consumption of one good tends to enhance consumption of the other.
Supply Curve

• The supply curve can be used to show the minimum price a firm will
accept to produce a given quantity of output.
Supply Price

• The cost of production and the desired profit equal the price a firm
will set for a product.
Changing the Price

• Because the cost of production and the desired profit equal the price
a firm will set for a product,
• If the cost of production , the price for the product will also need to .
Shifting the Supply Curve

• When the cost of production increases, the supply curve shifts up to a

new price level.
Shifting the Supply Curve

• Decreased supply means that at every given price, the quantity supplied is
lower, so that the supply curve shifts to the left, from S0 to S1.
• Increased supply means that at every given price, the quantity supplied is
higher, so that the supply curve shifts to the right, from S0 to S2.
What Factors Affect Supply?
• Shift in supply - when a change in some economic factor (other than
price) causes a different quantity to be supplied at every price.

• Inputs or factors of production - the combination of labor, materials,

and machinery that is used to produce goods and services.

• Factors that affect supply:

• Natural conditions
• Input prices
• Technology
• Government policies
How Factors Affect Supply

(a) A list of factors that can cause an increase in supply from S 0 to S1.
(b) The same factors, if their direction is reversed, can cause a decrease in supply from S 0 to S1.
 3.3
Changes in Equilibrium Price and
Quantity: The Four-Step Process
Four-step process to determining how an economic event affects equilibrium
price and quantity:

• Step 1. Draw a demand and supply model before the economic change took
place.

• Step 2. Decide whether the economic change affects demand or supply.

• Step 3. Decide whether the effect causes a curve shift to the right or to the left,
and sketch the new curve on the diagram.

• Step 4. Identify the new equilibrium and then compare to the original.
Example: Shift in Supply

• Discussion Question: Using the 4-step approach, how did excellent

weather conditions during the summer affect the quantity and price
of salmon?
Example: Shift in Demand

• Discussion Question: From 2004 to 2012, the share of Americans who

reported obtaining their news from digital sources increased from 24% to
39%. Using the 4-step approach, how has this affected the consumption of
traditional sources, such as print news media, and radio and television news?
A Combined Example
• Discussion Question: Using the 4-step approach, what does an increase in labor compensation,
as well as an increase in digital communication suggest about the continued viability of the
Postal Service?

(a) Higher labor compensation causes a leftward shift in the supply curve, a decrease in the equilibrium quantity, and an
increase in the equilibrium price.
(b) A change in tastes away from Postal Services causes a leftward shift in the demand curve, a decrease in the equilibrium
quantity, and a decrease in the equilibrium price.
A Combined Example

• Superimposing the previous two diagrams one on top of the other, we

see that supply and demand shifts cause changes in equilibrium price
and quantity.
Movements vs. Shifts
• Movements are different than shifts.

• A shift in one curve never causes a shift in the other curve. Rather, a shift in
one curve causes a movement along the second curve.
 Intro to
Macroeconomics
Lecture 2
Ibraheem Catovic
Macroeconomic Goals, Framework, and Policies

• This chart shows what macroeconomics is about:

• Goals - a consensus of what are the most important goals for the macro economy.
• Framework - what economists use to analyze macroeconomic changes (such as inflation or
recession).
• Policy Tools - the tools the federal government uses to influence the macro economy.
 6.1
Measuring the Size of the Economy:
Gross Domestic Product
• Gross domestic product (GDP) - the value of the output of all final
goods and services produced within a country in a given year.
• Measures the size of a nation’s overall economy.

• An economy's GDP can be measured by either:

• the total dollar value of what consumers purchase in the economy.
• the total dollar value of what the country produces.
• They are EQUAL.
GDP Measured by Components of Demand
• Who buys all of a country’s production?
1. Households: Consumption
2. Businesses: Investment
3. Governments: Government
4. Foreigners: Net Exports

GDP Explained:
https://www.youtube.com/watch?v=yUiU_xRPwMc&list=PLF2A36
93D8481F442&index=27&t=38s
Components of GDP on the Demand Side

• For graph (a):

• Consumption is about two-thirds of GDP, but it moves relatively little over time.
• Business investment hovers around 15% of GDP, but it increases and declines more than
consumption.
• Government spending on goods and services is around 20% of GDP.
Components of GDP on the Demand Side, Continued

• For graph (b):

• Exports are added to total demand for goods and services, while imports are subtracted from total
demand.
• If exports exceed imports, as in most of the 1960s and 1970s in the U.S. economy, a trade surplus exists.
• If imports exceed exports, as in recent years, then a trade deficit exists. (Source:
http://bea.gov/iTable/index_nipa.cfm, Table 1.1.10)
Net Export Component
• The GDP net export component, or trade balance, is equal to the dollar value of
exports (X) minus the dollar value of imports (M).

• Trade balance - the gap between exports and imports.

• Trade balance = (X – M)

• Trade surplus - when a country’s exports are larger than its imports; calculated
as exports – imports.

• Trade deficit - when a country’s imports exceed exports; calculated as imports –

exports.
GDP Using Demand
• Based on the four components of demand, GDP can be measured as:

GDP = Consumption + Investment + Government + Trade balance

OR

GDP = C + I + G + (X – M)
GDP Measured by What is Produced
• Production can be divided into five main parts:
• Durable goods - long-lasting good like a car or a refrigerator.
• Nondurable goods - short-lived good like food and clothing.
• Services - product which is intangible (in contrast to goods) such as entertainment,
healthcare, or education.
• Structures - building used as residence, factory, office building, retail store, or for
other purposes.
• Change in inventories - good that has been produced, but not yet been sold.

• Every market transaction must have both a buyer and a seller, so GDP must
be the same whether measured by what is demanded or by what is
produced.
Types of Production

• Services are the largest single

component of total supply,
representing over 60 percent of
GDP, up from about 45 percent in
the early 1950s.

• Durable and nondurable goods

constitute the manufacturing
sector, and they have declined
from 40 percent of GDP in 1950
to about 30 percent in 2016.
Types of Production, Continued

• Nondurable goods used to be larger

than durable goods, but in recent
years, nondurable goods have been
dropping to below the share of
durable goods, which is less than 20%
of GDP.

• Structures hover around 10% of GDP.

• The change in inventories is not

shown here since it is typically less
than 1% of GDP.
The Problem of Double Counting
• Final goods and services - output used directly for consumption, investment,
government, and trade purposes.
• Goods at the furthest stage of production at the end of a year.
-vs.-
• Intermediate goods - output provided to other businesses at an intermediate stage of
production, not for final users.
• Excluded from GDP calculation.

• Double counting - output that is counted more than once as it travels through the
stages of production.
• A potential mistake to avoid in measuring GDP.

• GDP is the dollar value of all final goods and services produced in the economy in a year.
GDP Per Capita
• The U.S. economy has the largest GDP in the world, and is also a populous
country.

• Is its economy also larger on a per-person basis?

• GDP per capita - the GDP divided by the population.

GDP per capita = GDP

population
 6.5
How Well GDP Measures the Well-Being
of Society
• GDP developed in the 1930s to determine national income
• Not intended as a measure of welfare
• Standard of living - all elements that affect people’s happiness and
well-being, whether they are bought and sold in the market or not.

• Difference between GDP and standard of living.

• GDP does not include:
• leisure time
• actual levels of environmental cleanliness, health, and learning
• production that is not exchanged in the market
• the level of inequality in society
• what technology and products are available
Alternatives to GDP
• Human Development Index
• UN index
• Income, Health, Education
• Genuine Progress Indicator
• Variety of social and environmental factors, comprehensive
• Several US states are adopting such indicators
• Gross National Happiness
• Self-reported happiness ratings
• Bhutan adopted as official national progress indicator in 2008
• Finland 7x reigning happiness leader
• Countries with high taxes and social services are happiest
• But they are also not very diverse
 Intro to
Macroeconomics
Lecture 3
Ibraheem Catovic
 14.1
Defining Money by Its Functions
Cowrie Shell or Money?

• The most widely and longest used currency in human history

• Since 700 BC into the 1900s, people used the extremely durable cowrie shell as a medium of
exchange in various parts of the world.
(Credit: modification of “Cowry Shell (Cypraeidae)” by Silke Baron/Flickr Creative Commons, CC BY 2.0)
• What the world would be like without money?
• Barter - trading one good or service for another, without using
money.
• Double coincidence of wants - a situation in which two people each
want some good or service that the other person can provide.
• Adam Smith’s Wealth of Nations: Baker and Butcher example
• Made up scenario about barter that was presumed fact
• Still useful hypothetical to motivate the use of money
• Myth of the barter economy:
https://www.theatlantic.com/business/archive/2016/02/barter-societ
y-myth/471051/
Functions for Money
• Money - whatever serves society in four functions:

1. Medium of exchange - whatever is widely accepted as a method of

payment.
2. Store of value - something that serves as a way of preserving economic
value that one can spend or consume in the future.
3. Unit of account - the common way in which we measure market values in
an economy.
4. Standard of deferred payment - money must also be acceptable to make
purchases today that will be paid in the future.
• Not included unanimously in the definition of money
Commodity versus Fiat Money
• Commodity money - an item that is used as money, but which also
has value from its use as something other than money.
• Gold
• Silver

• Commodity-backed currencies - dollar bills or other currencies with

values backed up by gold or another commodity.
• During much of its history, gold and silver backed the money supply in the
United States.
• Ended the gold standard in 1971
Commodity versus Fiat Money, Continued
• Now, by government decree, if you owe a debt, then legally speaking,
you can pay that debt with the U.S. currency, even though it is not
backed by a commodity.

• Fiat money - has no intrinsic value, but is declared by a government to

be the country's legal tender.

• The only backing of our money is universal faith and trust that the
currency has value, and nothing more.
A Silver Certificate and a Modern U.S. Bill

• Until 1958, silver certificates were commodity-backed money - backed by silver, as indicated by the words
“Silver Certificate” printed on the bill, pictured at bottom.
• Today, The Federal Reserve backs U.S. bills, but as fiat money (inconvertible paper money made legal tender
by a government decree). (Credit: "One Dollar Bills" by “The.Comedian”/Flickr Creative Commons, CC BY 2.0)
The History of Paper Money
• Part 1: https://www.youtube.com/watch?v=-nZkP2b-4vo
• Part 2: https://www.youtube.com/watch?v=rPHTmGjoe2k
• Part 3: https://www.youtube.com/watch?v=GKtNuzakzMA
• Part 4: https://www.youtube.com/watch?v=lzH1p3t2oRE
• Part 5: https://www.youtube.com/watch?v=LrB9bS2VOLE
• Part 6: https://www.youtube.com/watch?v=GNo7MDN5-0g
 Intro to
Macroeconomics
Lecture 4
Ibraheem Catovic
GDP Changes
• Country A
• Period 1: 100 cars at $1,000 each = $100,000 GDP
• Period 2: 200 cars at $1,000 each = $200,000 GDP
• Country B
• Period 1: 100 cars at $1,000 each = $100,000 GDP
• Period 2: 100 cars at $2,000 each = $200,000 GDP

• Have these countries experienced the same GDP increase?

• Inflation: https://www.youtube.com/watch?v=t_LWQQrpSc4
 6.2
Adjusting Nominal Values to Real Values
• Nominal value - the economic statistic actually announced at that
time; not adjusted for price changes (inflation or deflation)
-vs.-
• Real value - an economic statistic after it has been adjusted for price
changes (inflation or deflation)

• Real Interest Rate = Nominal Interest Rate – Inflation Rate

• Price index – measure of relative prices

• Price index = Price in Period of Interest/Price in Base Period
Calculating Real GDP

• Country A
• Period 1: 100 cars at $1,000 each = $100,000 GDP
• Period 2: 200 cars at $1,000 each = $200,000 GDP
• Country B
• Period 1: 100 cars at $1,000 each = $100,000 GDP
• Period 2: 100 cars at $2,000 each = $200,000 GDP

Real GDP = Nominal GDP/Price Index

Period 1 is the Base Period

• Price index = Price in Period of Interest/Price in Base Period

• Price index for Period 1, Country A is 1

• Period 1 Real GDP = $100,000 in Period 1 dollars
• Price index for Period 2, Country A is $1,000/$1,000 = 1
• Period 2 Real GDP = $200,000/1 = $200,000 in Period 1 dollars

• Price index for Period 1, Country B is 1

• Period 1 Real GDP = $100,000 in Period 1 dollars
• Price index for Period 2, Country B is $2,000/$1,000 = 2
• Period 2 Real GDP = $200,000/2 = $100,000 in Period 1 dollars
Period 2 is the Base Period

• Price index = Price in Period of Interest/Price in Base Period

• Price index for Period 1, Country A is $1,000/$1,000 = 1

• Period 1 Real GDP = $100,000/1 = $100,000 in Period 2 dollars
• Price index for Period 2, Country A is 1
• Period 2 Real GDP = $200,000 in Period 2 dollars

• Price index for Period 1, Country B is $1,000/$2,000 = 1/2

• Period 1 Real GDP = $100,000/(1/2) = $200,000 in Period 2 dollars
• Price index for Period 2, Country B is 1
• Period 2 Real GDP = $200,000 in Period 2 dollars
U.S. Nominal and Real GDP, 1960–2020

• Since we express real GDP in 2012 dollars, the two lines cross in 2012.
• Real GDP will appear higher than nominal GDP in the years before 2012,
because dollars were worth less in 2012 than in previous years.
• Nominal GDP curve is steeper because prices increase with time, i.e.
inflation is positive over the time period
 9.4
The Confusion Over Inflation
• Inflation - a general and ongoing rise in the level of prices in an entire
economy.
• Inflation does not refer to a change in relative (individual) prices.
• Deflation - severe negative inflation.
• Hyperinflation - an outburst of high inflation
• Typically defined as price increases of more than 50% monthly

• Basket of goods and services - a hypothetical group of different

items, with specified quantities of each one meant to represent a
“typical” set of consumer purchases.
• Used to calculate the price level, by looking at how the prices of those items
change over time.
• Computed using a weighted average.
• Consumer Price Index (CPI) - a measure of inflation that U.S.
government statisticians calculate based on the price level from a
fixed basket of goods and services that represents the average
consumer's purchases.
• If other economic variables (prices, wages, and interest rates) do not
move in sync with inflation, or if they adjust for inflation only after a
time lag, then inflation can cause three types of problems:

1. unintended redistributions of purchasing power

2. blurred price signals
3. difficulties in long-term planning
1. Unintended Redistributions of Purchasing Power

• People are hurt by inflation when:

• they are holding cash
• they have financial asset investments where the nominal return does not
keep up with inflation (also can be exacerbated by taxes)
• wages lag behind inflation
• they are a retiree receiving a private company defined pension

• Ordinary people can sometimes benefit from inflation.

• A borrower paying a fixed interest rate can end up better off, because they
can repay their loans in dollars that are worth less than originally expected.
U.S. Minimum Wage and Inflation

• After adjusting for inflation, the federal minimum wage dropped about 30 percent from
1965 to 2020, even though the nominal figure climbed from $1.40 to $7.25 per hour.
• Increases in the minimum wage between 2008 and 2010 kept the decline from being
worse - as it would have been if the wage had remained the same as it did from 1997
through 2007. (Sources: http://www.dol.gov/whd/minwage/chart.htm;
http://data.bls.gov/cgi-bin/surveymost?cu)
2. Blurred Price Signals

• Prices are the messengers in a market economy, conveying information

about conditions of demand and supply.

• Inflation blurs those price messages.

• Inflation means that we perceive price signals more vaguely, like static
on the radio .

• When the levels and changes of prices become uncertain, businesses

and individuals find it harder to react to economic signals.
3. Problems of Long-Term Planning

• Inflation can make long-term planning difficult.

• Planning for retirement in unknown future dollar levels.

• More time spent by businesses finding ways of profiting from inflation vs. less
time spent on productivity, innovation, or quality of service.
Worst Cases of Hyperinflation

1. Hungary 1946
• Monthly Rate: 14 quadrillion percent
• Prices doubled every 16 hours
2. Zimbabwe 2008
• Monthly Rate: 79 billion percent
• Prices doubled every 24 hours
3. Yugoslavia 1993
• Monthly Rate: 316 million percent
• Prices doubled every 1.4 days
4. Germany 1923
• Monthly Rate: 30 thousand percent
• Prices doubled every 3.7 days
5. Greece 1944
• Monthly Rate: 14 thousand percent
• Prices doubled every 4.3 days
• https://www.cnbc.com/2011/02/14/The-Worst-Hyperinflation-Situations-of-All-Time.html
 Intro to
Macroeconomics
Lecture 5
Ibraheem Catovic
Reverend Thomas Malthus
• Essay on the Principle of Population, 1798

• Malthusian Trap: population growth will outpace food production and eventually
lead to population decline

• Increase in food production results in population growth

• Increase in population means increase in labor force

• More laborers means lower wages

• Poor cannot afford to live on lower wages

• Disease and famine will reduce population back to sustainable levels

 Chapter 7
Economic Growth
 GDP Per Capita
45000

40000

35000

30000

25000

20000

15000

10000

5000

0
1 730 1000 1090 1120 1300 1400 1500 1600 1700 1800 1850 1900 1920 1940 1960 1980 2000 2018

China Iraq Egypt Japan UK

 GDP Per Capita
70000

60000

50000

40000

30000

20000

10000

0
1800 1850 1900 1920 1940 1960 1980 2000 2018

Botswana Ireland South Korea North Korea Liberia Saudi Arabia USA
• Before the last two centuries, the average person’s standard of living
had not changed much for centuries.

• Industrial Revolution - the widespread use of power-driven

machinery and the economic and social changes that resulted in the
first half of the 1800s.
• Driven by the invention of the steam engine

• The Industrial Revolution led to increasing inequality among nations.

• 1870: GDP of the top economies of the world was 2.4 times the GDP per
capita of the world’s poorest economies.
• 1960: the top economies had 4.2 times the GDP per capita of the world’s
poorest economies.
• Influence of two key factors on an economy's long-run economic growth:

1. Adherence to rule of law -

• The process of enacting laws that protect individual and entity rights to use their
property as they see fit.
• Laws must be clear, public, fair, and enforced, and applicable to all members of society.
• Botswana (diamonds), Liberia (gold), and Saudi Arabia (oil) are resource-rich
• Botswana is the least corrupt African nation and has high GDP growth
• Liberia has corruption issues and low GDP growth

2. Protection of contractual rights -

• The rights of individuals to enter into agreements with others regarding the use of their
property
• Providing recourse through the legal system in the event of noncompliance.
• North Korea vs South Korea GDP growth
Aggregate Production Components

1. Physical capital - the plant and equipment that firms use in production; this
includes infrastructure.
• Infrastructure - a component of physical capital such as roads and rail systems.
• increase in the quantity
• increase in the quality

2. Human capital - the accumulated knowledge (from education and experience),

skills, and expertise that the average worker in an economy possesses.
• Increases in human capital improve labor productivity

3. Technology - all the ways in which existing inputs produce more or higher
quality, as well as different and altogether new products.
Components of Aggregate Production

• An aggregate production function

shows what goes into producing
the output for an overall economy.
(a) This aggregate production function
has GDP as its output.

(b) This aggregate production function

has GDP per capita as its output.
Because we calculate it on a per-
person basis, we already figure the
labor input into the other factors and
we do not need to list it separately.
The Power of Sustained Economic Growth
• Even small changes in the rate of growth, when sustained and
compounded over long periods of time, make an enormous difference
in the standard of living.
• To calculate what GDP will be at the given growth rate in the future:
• GDP at starting date × (1 + growth rate of GDP)years = GDP at end date
• Examples of growth of GDP over different time horizons:
Capital Deepening
• Capital deepening - when society increases the level of capital per
person.

• The idea of capital deepening can apply both to additional human

capital per worker and to additional physical capital per worker.
Human Capital Deepening in the U.S.

• Rising levels of education for persons 25 and older show the deepening of human capital in the U.S. economy.
• Today, under one-third of U.S. adults have completed a four-year college degree.
• There is clearly room for additional deepening of human capital to occur. (Source: Penn World Tables, 10.0
https://www.rug.nl/ggdc/productivity/pwt/?lang=en)
Physical Capital per Worker in the US

• The value of physical capital, measured

by plant and equipment, used by the
average worker in the U.S. economy has
risen over the decades.
• The increase leveled off in the 1970s and
1980s, which were also times of slower-
than-usual growth in worker productivity.
• We see a renewed increase in physical
capital per worker in the late 1990s,
followed by a flattening in the early
2000s. (Source: Center for International
Comparisons of Production, Income and
Prices, University of Pennsylvania)
Growth Accounting Studies
• Economists can conduct growth accounting studies to determine the extent
to which physical and human capital deepening and technology have
contributed to growth.

• Technology is typically the most important contributor to U.S. economic growth.

• Growth in human capital and physical capital explains only half or less of economic
growth.

• The three factors of human capital, physical capital, and technology must all
be present to succeed.
A Healthy Climate for Economic Growth
• Markets that allow personal and business rewards and incentives for increasing
human and physical capital encourage overall macroeconomic growth.
• There are times when markets fail to allocate capital or technology in a manner
that provides the greatest benefit for society as a whole.
• Some areas in which governments around the world have chosen to invest in to
facilitate capital deepening and technology:
• Education and Infrastructure
• Private markets fail because the cost > private benefit
• Governments intervene because social benefit > cost > private benefit
• Special Economic Zones - area of a country, usually with access to a port where, among
other benefits, the government does not tax trade.
• Ireland’s recent GDP growth due to tax haven status
• Apple registers intellectual property there so Apple sales show up in Ireland’s GDP
• Scientific Research
• Vaccines are generally not very profitable and very risky
• Governments can provide R&D subsidies or guarantee future purchases (1 million vaccines at $10
each)
Back to Malthus
Question: Why has the Malthusian Trap not materialized?

Answer: Massive improvements in agricultural productivity

• Green Revolution: High-yield crops, pesticides, fertilizers
• Saved an estimated 1 billion lives
• Reduced the need of having children to grow food

• Malthus predicted increased labor supply would reduce wages

• Increased labor productivity increases labor demand
• Leads to equilibrium wage and production increases
• Increased productivity means smaller percentage of agricultural workers
• Labor can go to other productive means and improve living standards
• Changes in reproductive preferences and birth control
• Higher crop yields doesn’t result in ever-increasing birth rates
 Intro to
Macroeconomics
Lecture 6
Ibraheem Catovic
Karl Marx
•Father of Communism, Critic of Capitalism
•Author of Communist Manifesto, Das Kapital
•Thesis: Capitalism concentrates wealth in the hands of the owners of physical capital
•Creates two distinct classes in constant conflict
1.Bourgeoisie (physical capital owners)
2.Proletariat (laborers)
•Technology accelerates and compounds this process

“Capitalist production, therefore, develops technology, and the combining

together of various processes into a social whole, only by sapping the
original sources of all wealth-the soil and the labourer.” - Marx

“The production of too many useful things results in too many useless people.” - Marx

Does technological advancement necessarily result in unemployment?

 8.1
How Economists Define and Compute
Unemployment Rate
• The adult population consists of:
1. Employed - currently working for pay.
2. Unemployed - out of work and actively looking for a job.
3. Out of the labor force - those who are not working and not looking for work,
whether they want employment or not.
• also termed “not in the labor force”

• Total Labor Force = Employed + Unemployed

• Unemployment rate - the percentage of adults who are in the labor force
and thus seeking jobs, but who do not have jobs.

Unemployment rate = Unemployed people x 100

Total labor force
Employed, Unemployed, and Out of the Labor Force Distribution
of Adult Population (age 16 and older), January 2021

• The total adult, working-age

population in January 2021 was
262.029 million.
• Out of this total population,
155.175 million were classified
as employed, and 6.877 million
were classified as unemployed.
• The remaining 99.977 million
were classified as out of the
labor force.
Hidden Unemployment
“Hidden unemployment” - people who are mislabeled in the
categorization of employed, unemployed, or out of the labor force.

• Part-time or temporary workers looking for full-time or permanent

work.

• Underemployed - individuals who are employed in a job that is below

their skills.

• Discouraged workers - those who have stopped looking for

employment due to the lack of suitable positions available.
• Removed from labor force
• Labor force participation rate - the percentage of adults in an
economy who are either employed or who are unemployed and
looking for a job.

Labor force participation rate = Total labor force x 100

Total adult population

• Bureau of Labor Statistics uses Current Population Survey (CPS) to

estimate unemployment statistics
• Monthly survey of 60,000 households
 8.3
What Causes Changes in Unemployment
over the Short Run
• Cyclical unemployment - unemployment closely tied to the business
cycle, like higher unemployment during a recession.
• Prevalent over short time periods

• Supply and demand for labor model inconsistent with unemployment

• People willing to work at the equilibrium wage should find jobs
• In reality, there are unemployed willing to work at market wages
Unemployment and Equilibrium in the Labor Market

• In a labor market with flexible wages, the equilibrium will occur at wage We
• Anyone willing to work at the equilibrium wage should be able to find work
• Not the case in reality
Sticky Wages in the Labor Market

• Because the wage rate is stuck at W, above the equilibrium, the number of
those who want jobs (Qs) is greater than the number of job openings (Qd).
• The result is unemployment, shown by the bracket in the figure.
Why Wages Might Be Sticky
• Conceivable that instead of sticky wages and unemployment during
economic downturns, there could be flexible wages and full
employment

• Why are wages sticky?

1. Employers reluctant to drop wages when economy is rough and
only modestly increases wages in good times
• Widespread aversion to nominal wage decreases
2. If employers cut wages, the best workers will leave
Rising Wage and Low Unemployment:
Where Is the Unemployment in Supply and Demand?

(a) In a labor market where wages are able to rise, an increase in the demand
for labor from D0 to D1 leads to an increase in equilibrium quantity of labor
hired from Q0 to Q1 and a rise in the equilibrium wage from W0 to W1.
Rising Wage and Low Unemployment:
Where Is the Unemployment in Supply and Demand?

(b) In a labor market where wages do not decline, a fall in the demand for labor
from D0 to D1 leads to a decline in the quantity of labor demanded at the
original wage (W0) from Q0 to Q2. These workers will want to work at the
prevailing wage (W0), but will not be able to find jobs.
 8.4
What Causes Changes in Unemployment
over the Long Run
• Natural rate of unemployment - the unemployment rate that would
exist in a growing and healthy economy from the combination of
economic, social, and political factors that exist at a given time.

• Why natural rate of unemployment is positive:

• Frictional unemployment - unemployment that occurs as workers move
between jobs.
• Structural Unemployment - unemployment that occurs because individuals
lack skills valued by employers.

• Economists consider the economy to be at full employment when the

actual unemployment rate is equal to the natural unemployment rate.
Public Policy and the Natural Rate of Unemployment
• On the supply side of the labor market, public policies to assist the unemployed can
affect how eager people are to find work.
• Example: unemployment insurance, welfare benefits, food stamps, and government medical
benefits may make the opportunity cost of unemployment lower -> a worker may be less eager to
seek a new job.

#1 Billboard Hot 100 and intro to August 2023 Republican Presidential Debate:
https://www.youtube.com/watch?v=mipujcSZrJs&t=80s

• Government assistance for job search or retraining can sometimes encourage people
back to work sooner.

• On the demand side of the labor market some public policies can affect the willingness
of firms to hire:
• Government rules, Social institutions, Presence of unions
• European countries have higher natural rates of unemployment
The Natural Rate of Unemployment in Recent Years
• Underlying economic, social, and political factors that determine the
natural rate of unemployment can change over time, which means
that the natural rate of unemployment can change over time too.

• Estimates by economists of the natural rate of unemployment in the

U.S. economy is about 4.5 to 5.5%, which is a lower estimate than
previously.

• Reasons for this lower rate:

• Internet as a job seeking tool – lower frictional unemployment
• Growth of the temporary worker industry – lower frictional unemployment
• Aging of the “baby boom generation” – leaving the workforce
Back to Marx
• The most technologically advanced societies today have low
unemployment
• Technology tends to kill certain jobs and create others
• Can result in structural unemployment
• Workers adjust skill accumulation based on market demands
• Technology has not led to massive unemployment…yet?
• ChatGPT, AI and a fully autonomous economy?