MACROECONOMİCS ECONOMİC GROWTH STUDY.pptx

A STUDY FOR ECONOMİC GROWTH

1. Performance and Policy The Miracle of Modern Economic Growth Saving, Investment, and Choosing between Present and Future Consumption Uncertainty, Expectations, and Shocks How Sticky Are Prices? Categorizing Macroeconomic Models Using Price Stickiness 26- 1 Chapter Contents

2. Performance and Policy Business Cycle : Recession Real GDP : Corrects for price changes Nominal GDP : Uses current prices Unemployment Inflation : Increase in overall level of prices LO26.1 26- 2

3. Modern Economic Growth Standard of living measured by output per person No growth in living standards prior to Industrial Revolution Modern economic growth : Output per person rises Not experienced by all countries LO26.2 26- 3

4. Global Perspective 26.1 LO26.2 Source: The World Bank Group 26- 4

5. Saving and Investment Saving : Trade-off current for future consumption Investment Financial investment Economic investment Banks and financial institutions LO26.3 26- 5

6. Uncertainty, Expectations, and Shocks The importance of expectations and shocks Expectations affect investment Shocks: What happens is not what was expected Demand shocks Supply shocks LO26.4 26- 6

7. Demand Shocks Demand shocks and flexible prices Price falls if demand is low Sales unchanged Demand shocks and sticky prices Maintain inventory Sales change Business cycles LO26.4 26- 7

8. Demand Shocks and Flexible Prices LO26.4 Price D M D L D H 900 $40,000 37,000 35,000 Cars per week 26- 8

9. Demand Shocks and Fixed Prices LO26.4 D M D L D H 700 900 1,150 $37,000 Cars per week Price 26- 9

10. How Sticky Are Prices? Inflexible prices /sticky prices Flexible prices : Examples: corn, oil, natural gas LO26.5 26- 10

11. Average Number of Months between Price Changes in Selected Industries  Industry Months Services 11.3 Manufacturing 8.1 Finance 7.1 Utilities 4.7 Retail 4.6 Agriculture 3.2 Source: Yuriy Gorodnichenko and Michael Weber, “Are Sticky Prices Costly? Evidence from the Stock Market,” American Economic Review , January 2016, pp. 165–199 . Used with permission of The University of Chicago Press via Copyright Clearance Center. LO26.5 26- 11

12. Sticky Prices: Consumers and Firms Many prices are sticky in the short run: Consumers prefer stable prices. Firms want to avoid price wars. All prices are flexible in the long run: Firms adjust to unexpected, but permanent changes in demand. LO26.5 26- 12

13. Categorizing Macroeconomic Models Using Price Stickiness Sticky prices rather than stuck. Aggregate expenditures model. Aggregate demand-aggregate supply model. LO26.6 26- 13

14. Last Word: The Behavioral Economics of Sticky Prices Reasons for sticky prices: Consumer preference Business price wars Wages and salaries 70% of costs. Reductions in per-unit labor costs self-defeating. 26- 14