hi I'm Adriene Hill welcome back to
crash course economics as you may
remember from our first video economics
can be divided into two parts
microeconomics and macroeconomics since
macroeconomics is the one that's most
often in the news that's where we're
going to start we'll get to
microeconomics which is also super
important in future episodes but what is
macroeconomics again it's the study of
economic aggregates revealed through
national income accounting which does
okay okay we need to find out like that
macroeconomics sounds boring but it is
not boring
it is exciting macro is about booms and
busts will you get a job when you
graduate should the government cut taxes
and Theory lowering marginal tax rates
would actually increase no no no
remember the goal of learning economics
is to become a better decision maker and
part of that means learning about how
the whole economy works so let's learn
about the whole economy
[Music]
so macroeconomics is the study of the
entire economy macro economists stay the
big stuff like economic output
unemployment inflation interest rates
and government policies now when it
comes to fields of study macroeconomics
is a relatively new subject it wasn't
until the Great Depression in the 1930s
that economists fully appreciated the
need for a systematic way to measure the
overall economy and that we might need
theories to guide policies and fix
potential problems a hundred years ago
there was no comprehensive data on
economic activity so there was no
macroeconomics today economic data is
plentiful but that doesn't mean that
economists agree about where the economy
is where it's going or what should be
done to help macro economists make
predictions based on data theoretical
models and historical trends but in the
end they're just predictions if you ask
three economists the same question
you're likely to get three different
answers but how you ask can the dismal
science be so subjective
well economics is not a traditional
science because it is nearly impossible
to control all the different variables
like all the social sciences economics
is studying people and it turns out that
sometimes people are unpredictable I
challenge all of you to a Tournament of
Champions and floppy bird who started
that coming that doesn't mean that
economics is all guesswork for example
right now in early 2015 the economy of
Greece is well it's not it's not good
but how can we tell and is it gonna get
better is it gonna get worse what should
be done about it these are all questions
that macro economists try to answer but
for this video we're gonna focus on the
question how can we tell well in general
policymakers have three economic goals
they want to keep the economy growing
over time they want to limit
unemployment they want to keep prices
stable for the most part when those
three things happen the citizens are
happy politicians get reelected and
economists get raises there are three
specific measurement that economists
analyzed to see if the country is
achieving each goal but the gross
domestic product unemployment rate and
the inflation rate the most important
measure of an economy is gross domestic
product or GDP GDP is the value of all
final goods and services produced within
a country's border in a specific period
of time usually a year and there are
some details worth mentioning GDP
doesn't include every transaction within
the economy for example if you buy a
youth domestic
it doesn't count towards GDP cuz nothing
new is produced now that same logic
applies to buying financial assets like
stocks when one company buys another
company for example when Google bought
YouTube those don't count towards GDP
cuz no new good or service was produced
also GDP often doesn't include illegal
activity since drug dealers don't
usually report their sales to the
government or non-traditional economic
activity like household production for
example if a plumber charges someone a
hundred dollars to fix their hot water
heater that counts toward GDP when he
fixes his own water heater that doesn't
count with GDP here's a list of
countries organized by GDP notice that
GDP is measured in dollars not in the
raw number of things produced if we
analyze just the raw number then a
country that produced five million thumb
tacks would look like they're doing just
as well as the country that produced
five million cars but there's also a
problem with using the dollar value of
stuff produced it's inflation or if two
countries produced the same amount of
cars but one has higher prices then that
countries can have a higher nominal GDP
or GP not adjusted for inflation to get
a more accurate idea of the health of
the economy economists look at real GDP
which is GDP adjusted for inflation just
what a just sit for inflation means is
really important but it's too big of a
topic to discuss right now we'll get to
it so what does the real GDP increase
tell us about its economy in 2013 the
Greek real GDP was around two hundred
forty two billion dollars but that
number doesn't really mean anything
until you compare it to previous years
in 2012 it was 250 billion dollars in
2011 it was 288 billion and in 2010 it
was 300 billion in fact starting in 2008
Greece has had six years of decreasing
GDP and the data reveals that this
recession is just as deep and prolonged
as the Great Depression in the United
States in the 1930s now I just use the
term recession which a lot of people use
incorrectly a recession is not just when
the economy's bad officially it's when
two successive quarters or six months
show a decrease in real GDP even though
the economy in Greece is still
struggling it climbed out of its
recession in 2014 experiencing a slight
increase in GDP a depression on the
other hand doesn't have a technical
definition but it's a severe recession
when the economy's really really bad
it's worth noting though that GDP can be
a little problematic I mean not all
countries measure GDP
in the same way and in recent years some
European Union countries have started
experimenting with counting underground
markets like the sex trade and drug
trade is part of the total in fact GDP
isn't even that old an idea according to
Robert Freud during the Great Depression
economic decisions were made quote on
the basis of such sketchy data as stock
price indices freight car loadings and
incomplete indices of industrial
production the fact was that
comprehensive measures of national
income and output did not exist at the
time the depression and with it the
growing role of government the economy
emphasized the need for such measures
and led to the development of a
comprehensive set of national income
accounts so GDP was invented to account
for national income and it may not
necessarily provide a complete picture
of a country's economy but for the
moment it's what we've got
so that's economic growth or at least
one way to look at economic growth now
for the next big issue for macro
economists unemployment anyway the major
goal of unemployment policy is to limit
unemployment and that's measured by you
guessed it the unemployment rate in
Greece unemployment is over 25 percent
the unemployment rate is calculated by
taking the number of people that are
unemployed and dividing by the number of
people in the labor force times 100
now this percentage represents the
number of people they're actively
looking for a job but just can't find
one first the labor force only includes
people that have legal working age and
working or actively looking for work so
little kids don't count - neither do
people who are unable to work or those
who just choose not to work so what
about someone who's been looking for a
job but just gives up
well they're no longer part of the labor
force and they're no longer considered
unemployed these are called discouraged
workers the unemployment rate also
doesn't take into account people that
are underemployed a worker with a five
hour a week part-time job is considered
fully employed even if they're looking
for a better job in both of these cases
the official unemployment rate
underestimates the problems in the labor
market a common misconception is that
the goal is to have 0% unemployment but
it turns out there's types of
unemployment that'll exist even when the
economy is going strong economists would
point out that there's three types of
unemployment or three reasons why people
will be unemployed
first is frictional unemployment this is
when people are temporarily unemployed
or between jobs so if you quit your job
and look for a new one or if you're just
entering the labor force then your
fictionally unemployed the second is
called structural unemployment workers
are out of work because there's no
demand for the
specific type of labor this would be
like a VCR repair person but it also
includes technological unemployment
where workers are replaced by machines
now both frictional and structural
unemployment will always exist so the
goal is not to have 0% unemployment
means the represents not even possible
we're always gonna have people between
jobs or people fired because machines do
it better so the goal is to have no
cyclical unemployment this is
unemployment due to a recession it's
when people stop buying stuff so
businesses lay off their workers and
since workers have lower incomes they
stop buying stuff which means more
people lose their jobs
an economy is considered to be at full
employment when there's only frictional
and structural unemployment this is
called the natural rate of unemployment
this natural rate differs slightly
between countries in the United States
it's usually between 4 to 6%
unemployment now as you might expect the
GDP growth rate and the unemployment
rate are inversely related that means
that when GDP is rising unemployment
rate is falling when GDP is falling the
unemployment rate is rising and that's
exactly what happened in the United
States during the Great Depression in
the 1930s droughts bank failures and
counterproductive policies caused GDP to
fall and unemployment peaked at 25
percent let's move on to the third
economical stable prices well I might
like the idea of the stuff I buy getting
cheaper across the board falling prices
are not really a good thing
average prices in Greece have fallen
about two percent recently and during
the 1930s the inflation rate in the US
was negative ten percent but how can
cheaper stuff be bad for the economy
well the goal is to keep prices stable
mainly to avoid rampant inflation or
rising prices but we also want to avoid
excessive deflation which is falling
prices inflation is measured by tracking
the prices of a set amount of commonly
purchased items or what economists call
a market basket the inflation rate is
the percent change in the price of that
basket over time too much inflation is
bad because it decreases the purchasing
power of money means you can buy less
stuff for the same amount of money which
has all sorts of negative effects in the
economy business cost increases workers
demand higher wages and interest rates
increase and so it's harder to get loans
so people buy less cars and houses
deflation on the other hand seems like
it would be a good thing but most
economists see falling prices is a bad
thing falling prices actually discourage
people from spending since they might
expect prices to fall more in the future
less than in the economy means GDP is
going to decrease and unemployment going
to increase and that becomes a vicious
cycle so severe recessions are often
accompanied by deflation because the
demand for goods and services Falls when
the economy starts to improve again we
often see an increase in prices
throughout
history economies have expanded and
contracted it's called the business
cycle let's go to the thought-bubble if
we imagine the economy as a car then GDP
employment and inflation are the gauges
a car can cruise along at 65 miles per
hour without overheating safe cruising
speed is like full employment
unemployment is low prices are stable
and people are happy but if we drive
that car too fast for too long it'll
overheat and an economy significant
spending increases GDP causing an
expansion unemployment falls and factory
start producing at full capacity to keep
up with demand since the amount of
products that can be produced is limited
people start to outbid each other
resulting in inflation eventually
production costs increase as workers
demand higher wages and the economy
starts to slow down businesses lay off a
few workers those unemployed workers
spend less causing the businesses that
produce the goods that they would
otherwise be buying to lay off more
workers this is a contraction the
economy is going too slow
eventually things stabilize production
costs fall since resources are sitting
idle and the economy starts to expand
again this process of booms and busts is
called the business cycle to understand
why these fluctuations might occur let's
take this car analogy just a little
further and look at the engine much like
the four-cylinder engine that powers the
Volkswagen of growth an economy has four
components that make up GDP each
represents a different group that can
purchase things in the economy their
consumer spending business spending
which is called investment government
spending and net exports which is
basically spending by other countries if
any one of these components loses power
the economy will slow down but not all
of them are created equal most economies
rely heavily on consumer spending for
example in the US consumers account for
about 70 percent of GDP but other
countries might rely more heavily on
exports the point is changes in these
four components change the speed of the
economy thanks thought-bubble
so when I'm driving my car on the
highway I use cruise control to regulate
my speed so why don't we have cruise
control for the economy well many
economists think that the government
should play a role in speeding up or
slowing down the economy for example
when there's a recession the government
can increase spending or cut taxes so
consumers have more money to spend
opponents of this policy argue that it
would get the economy back to full
employment but it has its drawback
debt which some economists hate while
others argue is it really much of a
drawback at all
stupid economic policy always resisting
simplistic explanations we're gonna save
the debate over how to fix the economy
for future videos but for now it's
important for you to have a general
understanding of how the economy works
and how its measured after all whether
you're driving an AAMCO in Greece a Kia
in Korea or a Ford in the US your
livelihood and your future will be
shaped by what happens in the economy so
wear your seat belt by which I mean try
to save a little once in a while okay
so we've really just touched on these
three major indicators of economic
health and while they can be useful in
providing a broad overview of a nation's
economy reality is as usual a little
more nuanced than that next week we're
gonna go under the hood and look at the
greasy dirty details of economists
calculate growth and tune up the economy
and rev up their economic engines and
drive around the drag racing track okay
okay I think that's enough with the cars
thanks for watching we'll see you next
week thanks watching crash course
economics it was made with the help of
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you