11-1Introduction to Macroeconomics1-2Agenda• What Macroeconomics Is About.• What Macroeconomists Do.• Why Macroeconomists Disagree.1-3What Macroeconomics Is About• Macroeconomics is the study of:1. The structure, dynamic adjustment, and performance of national economies, and2. The government policies that affect national economic performance.1-4What Macroeconomics Is About• The main issues of macroeconomics are:– Long-run economic growth– Business cycles/fluctuations– Unemployment– Inflation– The international economy– Macroeconomic policy21-5What Macroeconomics Is About• Long-run economic growth:– Figure 1.1: Output of the U.S. economy.1-6Figure 1.1 Output of the U.S. economy.1-7What Macroeconomics Is About• Long-run Economic Growth:– Two main sources of growth.• Population growth.• Increases in average labor productivity.– Figure 1.2: Average labor productivity in the U.S.• Average labor productivity is output per unit of labor.1-8Figure 1.2 Average labor productivity.31-9What Macroeconomics Is About• Average labor productivity growth:– About 2.5% per year from 1949 to 1973.– About 1.1% per year from 1973 to 1995.– About 2.0% per year from 1995 to 2005. 1-10What Macroeconomics Is About• Business cycles or fluctuations:– Business cycles are the short-run contractions and expansions in economic activity.1-13What Macroeconomics Is About• Unemployment:– Unemployment is the number of people who are available for work andactively seeking work butcannot find jobs.• Figure 1.3: The U.S. unemployment rate.1-14Figure 1.3 The U.S. unemployment rate.41-16What Macroeconomics Is About• Inflation:– Inflation is a persistent rise in the general price level. • Hyperinflation is an extremely high rate of inflation.• Deflation is a persistent decline in the general price level.• Figure 1-4: Consumer prices in the U.S.1-17Figure 1.4 Consumer prices in the U.S.1-20What Macroeconomics Is About• The international economy:– Open vs. closed economies:•An open economy has extensive trading and financial relationships with other national economies.•A closed economy has limited (or no) trading and financial relationships with other national economies. 1-21What Macroeconomics Is About• The international economy:– Trade imbalances are the differences between exports and imports:• Trade surplus occurs when exports exceed imports.• Trade deficit occurs when imports exceed exports. • Figure 1.5: U.S. exports and imports.51-22Figure 1.5 U.S. exports and imports.1-23What Macroeconomics Is About• Macroeconomic Policy:– Fiscal policy is the decisions made about the levels of government spending and tax rates.• Figure 1.6: Federal government spending and taxes.1-24Figure 1.6 Federal government spending, taxes.1-26What Macroeconomics Is About• Macroeconomic Policy:– Monetary policy is the growth of money supply, determined by a nation’s central bank.• In the U.S., the Federal Reserve System or the Fed.61-28What Macroeconomics is About• Aggregation:– Aggregation is the summing up of individual economic variables to obtain economy-wide totals.– This distinguishes microeconomics (disaggregated) from macroeconomics (aggregated).1-29What Macroeconomists Do• Teaching macroeconomics.• Macroeconomic forecasting.• Macroeconomic analysis.• Data development.• Macroeconomic research.1-30What Macroeconomists Do• Macroeconomic research:–The goal is to make general statements about how the macroeconomy works.•An economic theory is a set of ideas about the economy, organized in a logical framework.•An economic model is a simplified description of some aspect of the economy.1-31What Macroeconomists Do• Usefulness of theory and models depends on:1. The reasonableness of assumptions. 2. The possibility of being applied to real problems.3. Whether there are empirically testable implications.4. Whether the theoretical results are consistent with real-world data.71-32What Macroeconomists Do• Developing and Testing Economic Theories:1. State the research question.2. Make provisional assumptions.3. Work out the implications of the theory.4. Conduct an empirical analysis.5. Evaluate the results.1-33Why Macroeconomists Disagree• Policy Differences.• Theoretical Differences.1-34Why Macroeconomists Disagree• Policy Differences:– Economists may have different policy recommendations even if they agree on current economic conditions and the outlook for the economy.1-36Why Macroeconomists Disagree• Policy Differences:– Positive vs. normative analysis:• Positive analysis examines the economic consequences of a policy.• Normative analysis determines whether a policy should be used.81-39Why Macroeconomists Disagree• Theoretical Differences:– Classical economists and Keynesians economists have different views of the structure and dynamic adjustment of the economy.1-40Why Macroeconomists Disagree• Classicals versus Keynesians:– The classical approach:• The economy works well on its own.• The “invisible hand” is the idea that if there are free markets and individuals conduct their economic affairs in their own best interests, the overall economy will work well.1-41Why Macroeconomists Disagree• Classicals versus Keynesians:– In the classical approach:• Wages and prices adjust rapidly to get to equilibrium.• One conclusion is that the government should have only a limited role in the economy 1-42Why Macroeconomists Disagree• Classicals versus Keynesians:– The Keynesian approach:• Observed that during the Great Depression, the classical theory failed because of persistent high unemployment.91-43Why Macroeconomists Disagree• Classicals versus Keynesians:– The Keynesian approach:• Keynes concluded that persistent unemployment occurred because wages and prices are slow to adjust so that markets can remain out of equilibrium for long periods.• One conclusion is that government should intervene to restore full employment more quickly.1-44Why Macroeconomists Disagree• Evolution of the Classical-Keynesian debate:– Keynesians dominated from WWII to 1970.– Stagflation led a classical comeback in the 1970s.– Excellent research with both approaches since.1-45Preview: A Unified Approach• A unified approach to macroeconomics:– A single model of the macroeconomy to present both classical and Keynesian ideas.– The model is built on 3 aggregate markets—the labor market, the