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Adriene: Hi I'm Adriene Hill, welcome back
to Crash Course Economics. As you may remember
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from our first video, economics can be divided
into two parts: microeconomics and macroeconomics.
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Since macroeconomics is the one that's most
often in the news, that's where we're gonna
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start. We'll get to microeconomics, which
is also super important in future episodes,
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but what is macroeconomics again?
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Mr. Clifford: (monotone) It's the study of
economic aggregates revealed through national
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income accounting, which is then-
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Adriene: Okay okay, when you explain it like
that it sounds boring but it is not boring!
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Macro is about booms and busts, will you get a job
when you graduate, should the government cut taxes?
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Mr. Clifford: In theory, lowering marginal
tax rates would actually increase-
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Adriene: No no no! Remember, the goal of learning
economics is to become a better decision maker,
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and part of that is learning how the whole economy
works. So let's learn about the whole economy.
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[Theme Music]
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So, macroeconomics is the study of the entire
economy. Macroeconomists study the big stuff,
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like economic output, unemployment, inflation,
interest rates, and government policies.
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Now when it comes to fields of study, macroeconomics
is a relatively new subject. It wasn't until
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the Great Depression in the 1930's that economists
fully appreciated the need for a systematic way to
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measure the overall economy, and that we might need
theories to guide policies and fix potential problems.
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A hundred years ago there was no comprehensive
data on economic activity, so there was no
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macroeconomics. Today, economic data is plentiful,
but that doesn't mean that economists agree
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about where the economy is, where it's going,
or what should be done to help. Macroeconomists
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make predictions based on data, theoretical models and
historical trends, but in the end they're just predictions.
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If you ask three economists the same question,
you're likely to get three different answers,
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but how, you ask, can the dismal "science"
be so subjective? Well, economics is not a
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traditional science because it is nearly impossible
to control all the different variables. Like
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all the social sciences, economics is studying people,
and it turns out that sometimes people are unpredictable.
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Stan Muller: I challenge all of you to a tournament
of champions in Flappy Bird!
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Adriene: Who saw that coming?
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That doesn't mean that economics is all guesswork.
For example, right now in early 2015, the
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economy of Greece is, well it's not, it's
not good. But how can we tell, and is it gonna
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get better? Is it gonna get worse? What should
be done about it?
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These are all questions that macroeconomists
try to answer, but for this video, we're gonna
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focus on the question "How can we tell?"
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Mr. Clifford: Well in general, policy makers
have three economic goals: they want to keep
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the economy growing over time, they want to
limit unemployment, and they want to keep
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prices stable. Now for the most part when
these three things happen, the citizens are
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happy, politicians get reelected, and economists
get raises.
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There are three specific measurements that
economists analyze to see if a country is
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achieving each goal. They're the Gross Domestic
Product, unemployment rate, and the inflation rate.
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The most important measure of an economy is
Gross Domestic Product or GDP. GDP is the
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value of all final goods and services
produced within a country's border in a
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specific period of time, usually a year.
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Now there are some details worth mentioning.
GDP doesn't include every transaction that's
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in the economy. For example, if you buy a
used domestic car, it doesn't count towards
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GDP because nothing new was produced. Now
that same logic applies to buying financial
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assets like stocks, or when one company buys
another company, for example when Google bought
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YouTube. Those don't count towards GDP because
no new good or service was produced.
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Also, GDP often doesn't include illegal activity,
since drug dealers don't usually report their
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sales to the government, or non-traditional
economic activity like household production.
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For example, if a plumber charges someone
$100 to fix their hot water heater, that counts
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towards GDP, when he fixes his own water heater,
that doesn't count towards GDP.
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Here's a list of countries organized by GDP.
Notice that GDP is measured in dollars, not
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in the raw number of things produced. If we
analyzed just the raw number, then a country
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that produced five million thumbtacks would
look like they're doing just as well as a
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country that produced five million cars, but
there's also a problem with using the dollar
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value of stuff produced: it's inflation.
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If two countries produce the same amount of
cars, but one has higher prices, then that
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country's going to have a higher nominal GDP,
or GDP not adjusted for inflation. To get
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a more accurate idea of the health of the
economy, economists look at Real GDP, which
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is GDP adjusted for inflation. Just what "adjusted
for inflation" means is really important,
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but too big of a topic to discuss right now.
We'll get to it.
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Adriene: So what does the Real GDP in Greece
tell us about its economy? In 2013, the Greek
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Real GDP was around 242 billion dollars, but
that number doesn't really mean anything until
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you compare it to previous years.
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In 2012, it was 250 billion dollars, in 2011,
it was 288 billion, and in 2010 it was 300
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billion. In fact, starting in 2008, Greece
has had six years of decreasing GDP, and the
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data reveals that this recession is just as
deep and prolonged as the Great Depression
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in the United States in the 1930's.
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Now, I just used the term recession, which
a lot of people use incorrectly. A recession
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is not just when the economy's bad, officially
it's when two successive quarters or six months
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show a decrease in Real GDP. Even though the
economy in Greece is still struggling, it
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climbed out of its recession in 2014, experiencing
a slight increase in GDP.
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A depression, on the other hand, doesn't have
a technical definition, but it's a severe
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recession, when the economy's really really
bad. It's worth noting though that GDP can
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be a little problematic. I mean not all countries
measure GDP in the same way, and in recent
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years some European Union countries have started
experimenting with counting underground markets,
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like the sex trade and drug trade as part
of the total.
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In fact, GDP isn't even that old an idea.
According to Robert Froyen, during the Great
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Depression, economic decisions were made "on
the basis of such sketchy data as stock price
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indices, freight car loadings, and incomplete
indices of industrial production. The fact
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was that comprehensive measures of national
income and output did not exist at the time.
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The depression, and with it the growing role
of government in the economy, emphasized the
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need for such measures and led to the development
of a comprehensive set of national income accounts."
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So GDP was invented to account for national
income, and it may not necessarily provide
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a complete picture of a country's economy,
but for the moment it's what we've got.
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So that's economic growth, or at least one
way to look at economic growth. now, for the
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next big issue for macroeconomists: unemployment.
Anyway, the major goal of unemployment policy
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is to limit unemployment, and that's measured
by - you guessed it - the unemployment rate.
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In Greece, unemployment is over 25%.
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Mr Clifford: The unemployment rate is calculated
by taking the number of people that are unemployed
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and dividing by the number of people in the
labor force, times 100. Now this percentage
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represents the number of people that are actively
looking for a job but just can't find one.
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First, the labor force only includes people
that are of legal working age and working
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or actively looking for work, so little kids
don't count and neither do people who aren't
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able to work or who just choose not to work.
So what about someone who's been looking for
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a job but just gives up? Well, they're no
longer part of the labor force, and they're
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no longer considered unemployed. These are
called discouraged workers.
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The unemployment rate also doesn't take into
account people that are underemployed. A worker
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with a five hour a week part time job is considered
fully employed even if they're looking for a better
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job. In both of these cases, the official unemployment
rate underestimates the problems in the labor market.
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A common misconception is that the goal is
to have 0% unemployment, but it turns out
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there's types of unemployment that'll exist even
when the economy's going strong. Economists would
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point out that there's three types of unemployment,
or three reasons why people would be unemployed.
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First is frictional unemployment. This is
when people are temporarily unemployed or
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between jobs. So if you quit your job and
look for a new one, or if you're just entering
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the labor force, then you're frictionally
unemployed.
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The second is called structural unemployment.
Workers are out of work because there's no
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demand for that specific type of labor. This
would be like a VCR repair person, but it
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also includes technological unemployment,
where workers are replaced by machines.
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Now both frictional and structural unemployment
will always exist; the goal is not to have
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0% unemployment. I mean, 0% is not even possible.
We're always going to have people between
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jobs or people fired because machines do it
better.
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So the goal is to have no cyclical unemployment.
This is unemployment due to a recession. It's
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when people stop buying stuff, so businesses
lay off their workers and since workers have
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lower incomes, they stop buying stuff which
means more people lose their jobs.
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An economy is considered to be at full employment
when there's only frictional and structural
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unemployment. This is called the natural rate
of unemployment. This natural rate differs
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slightly between countries, in the United States
it's usually between 4 to 6 percent unemployment.
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Now as you might expect the GDP growth rate
and the unemployment rate are inversely related.
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That means that when GDP is rising, the unemployment
rate is falling, when GDP is falling, the unemployment rate is rising.
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Adriene: And that's exactly what happened
in the United States during the Great Depression.
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in the 1930's, droughts, bank failures, and
counterproductive policies caused GDP to fall,
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and unemployment peaked at 25 percent.
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Let's move on to the third economic goal:
stable prices. While I might like the idea
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of the stuff I buy getting cheaper across
the board, falling prices are not really a
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good thing. Average prices in Greece have
fallen about two percent recently, and during
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the 1930's, the inflation rate in the US was
negative ten percent, but how can cheaper
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stuff be bad for the economy?
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Mr. Clifford: Well the goal is to keep prices
stable, mainly to avoid rapid inflation, or
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rising prices, but we also want to avoid excessive
deflation which is falling prices. Inflation
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is measured by tracking the prices of a set
amount of commonly purchased items, or what
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economists call a market basket. The inflation rate is
the percent change in the price of that basket over time.
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Too much inflation is bad because it decreases
the purchasing power of money; it means you
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can buy less stuff with the same amount of
money, which has all sorts of negative effects
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on the economy. Business costs increase as
workers demand higher wages and interest rates
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increase, so it's harder to buy loans, so
people buy less cars and houses.
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Deflation on the other hand, seems like it
would be a good thing but most economists
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see falling prices as a bad thing. Falling
prices actually discourage people from spending
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since they might expect prices to fall more
in the future. Less spending in the economy
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means GDP is gonna decrease and unemployment's
gonna increase, and that just becomes a vicious
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cycle. So severe recessions are often accompanied
by deflation because the demand for goods
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and services falls, but when the economy starts
to improve again, we often see an increase in prices.
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Adriene: Throughout history, economies have
expanded and contracted. It's called the business
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cycle. Let's go to the Thought Bubble.
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If we imagine the economy as a car, then GDP,
employment and inflation are the gauges. A
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car can cruise along at 65 miles per hour
without overheating. Safe cruising speed is
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like full employment; unemployment is low,
prices are stable and people are happy.
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But if we drive that car too fast for too
long, it'll overheat, and in the economy,
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significant spending increases GDP causing
an expansion. Unemployment falls and factories
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start producing at full capacity to keep up
with demand. Since the amount of products
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that can be produced is limited, people start
to outbid each other, resulting in inflation.
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Eventually, production costs increase as workers
demand higher wages and the economy starts
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to slow down. Businesses lay off a few workers,
those unemployed workers spend less causing
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the businesses that produce the good that they
would otherwise be buying to lay off more workers.
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This is a contraction, the economy is going
to slow. Eventually things stabilize, production
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costs fall since resources are sitting idle,
and the economy starts to expand again. This
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process of booms and busts is called the business
cycle.
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To understand why these fluctuations might
occur, let's take this car analogy just a
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little further and look at the engine. Much
like the four cylinder engine that powers
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the Volkswagen of growth, an economy has four
components that make up GDP. Each represents
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a different group that can purchase things
in the economy. They're consumer spending,
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business spending which is called investment,
government spending, and net exports which
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is basically spending by other countries.
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If any one of these components loses power,
the economy will slow down, but not all of
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them are created equal. Most economies rely
heavily on consumer spending. For example,
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in the US, consumers account for about 70%
of GDP, but other countries might rely more
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heavily on exports. The point is, changes in these four
components change the speed of the economy.
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Thanks Thought Bubble. So when I'm driving
my car on the highway, I use cruise control
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to regulate my speed. So why don't we have
cruise control for the economy? Well many
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economists think that the government should
play a role in speeding up or slowing down
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the economy. For example, when there's a recession,
the government can increase spending or cut
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taxes so consumers have more money to spend.
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Proponents of this policy argue that it would
get the economy back to full employment, but
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it has its drawback: debt, which some economists
hate while others argue isn't very much of
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a drawback at all. Stupid economic policy,
always resisting simplistic explanations.
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We're gonna save the debate over how to fix
the economy for future videos, but for now
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it's important for you to have a general understanding
of how the economy works and how it's measured.
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After all, whether you're driving a Namco
in Greece, a Kia in Korea or a Ford in the
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US, your livelihood and your future will be
shaped by what happens in the economy. So
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wear your seat belt. By which I mean try to
save a little once in a while, OK?
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So we've really just touched on these three
major indicators of economic health, and while
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they can be useful in providing a broad overview
of a nation's economy, reality is, as usual,
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a little more nuanced than that.
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Mr. Clifford: Next week, we're gonna go under
the hood and look at the greasy, dirty details
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of how economists calculate growth, and tune
up thee economy, and rev up their economic
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engines and drive around the drag racing tr--
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Adriene: OK, I think that's enough with the cars,
Thanks for watching, we'll see you next week.
00:13:10
Mr. Clifford: Thanks for watching Crash Course
Economics. It was made with the help of all
00:13:13
of these nice people. Now, if you want to
help keep Crash Course free for everyone forever,
00:13:17
please consider subscribing over at Patreon.
It's a voluntary subscription platform that
00:13:21
allows you to pay whatever you want per month
to make Crash Course exist, and it also increases
00:13:25
GDP. Thanks for watching, DFTBA.
