ABC: Ch.

1 Introduction to Macroeconomics

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OUTLINE
What Macroeconomics Is About Leading Macroeconomists

WHAT MACROECONOMICS IS ABOUT

Macroeconomics:

The study of structure and performance of national economies and government policies that affect economic performance

Issues addressed by macroeconomists:

Long-run economic growth Business cycles Unemployment Inflation The international economy Macroeconomic policy

WHAT MACROECONOMICS IS ABOUT

Long-run economic growth

The extremes of rich and poor World Bank:

DR of Congo has the second-lowest GDP per head of $163 in the world, and a quarter of the population live on less than $1.25 a day Monaco has the highest GDP per head in the world $211,501, according to 2008 figures

WHAT MACROECONOMICS IS ABOUT

Long-run economic growth

Long-run growth makes a huge difference

WHAT MACROECONOMICS IS ABOUT

Long-run economic growth

Growth of output over time Figure 1.1: Output of United States since 1869

Figure 1.1 Output of the U.S. economy, 1869-2008

WHAT MACROECONOMICS IS ABOUT

Long-run economic growth

Main source of growth

Increases in average labor productivity Output produced per unit of labor input

Average labor productivity

Figure 1.2

Figure 1.2 Average labor productivity in the United States, 1900-2008

WHAT MACROECONOMICS IS ABOUT

Business cycles
Business cycle: short-run contractions and expansions in economic activity Downward phase is called a recession

Unemployment

Unemployment: the number of people who are available for work and actively seeking work but cannot find jobs U.S. experience shown in Fig. 1.3

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Figure 1.3 The U.S. unemployment rate, 1890-2008

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WHAT MACROECONOMICS IS ABOUT

Percentage change in the level of prices

Inflation rate: the percentage increase in the average level of prices over a year Hyperinflation: an extremely high rate of inflation Deflation: when prices of most goods and services decline U.S. experience shown in Fig. 1.4

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Figure 1.4 Consumer prices in the United States, 1800-2008

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WHAT MACROECONOMICS IS ABOUT

Example: hyperinflation in Zimbabwe

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AUSTRALIA VS. US

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WHAT MACROECONOMICS IS ABOUT

Macroeconomic Policy

Fiscal policy: government spending and taxation

U.S. experience in Fig. 1.6

Monetary policy: growth of money supply; determined by central bank; the Fed in U.S.

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Figure 1.6 U.S. Federal government spending and tax collections, 1869-2008

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WHAT MACROECONOMICS IS ABOUT

Big questions

Thinking about the economy as a whole. General Equilibrium What determine output and long-run economic growth? What are the causes of business cycles? Can government help to stabilize the macroeconomy? Why causes unemployment, and why does the unemployment rate fluctuate so much? What causes inflation? Can central banks control inflation?

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WHAT MACROECONOMICS IS ABOUT

A Model of Macroeconomy:

Three markets: labor, goods, and assets (money and bonds) Three prices: the wage, the price level, and the interest rate Three equations:
The aggregate supply curve (equilibrium in the labor market) The IS curve (equilibrium in the goods market) The LM curve (equilibrium in the asset market)

Keynesian vs. Classical

How quickly does the economy adjust to shocks?

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LEADING KEYNESIAN MACROECONOMISTS

John Maynard Keynes (18831946)

Created the field of macroeconomics

Sir John Hicks (19041989)

Nobel Prize winner in 1972. Developed the IS-LM model as a way of explaining Keynes ideas

James Tobin (19182002)

Nobel Prize winner in 1981. Tried to reconcile Keynesian macroeconomics with modern microeconomic theory
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LEADING NEW CLASSICAL MACROECONOMISTS

Robert E. Lucas, Jr., Thomas J. Sargent

Leaders of the new classical revolution in the 1970s. Lucas won the Nobel Prize in 1995.

Finn E. Kydland, Edward C. Prescott

Nobel Prize winners in 2004. Pioneers of real business cycle theory

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NEXT TOPIC:
The Labor Market and the FE line Chapter 3, Section 9.1, Appendix 9.B.

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