5 An Introduction to Macroeconomics Where the telescope ends the microscope begins Which of the two has the grander view VICTOR HUGO Contents Contents Drawing Drawing aa Line Line Between Between Macroeconomics Macroeconomics and and Microeconomics Microeconomics Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Gross Gross Domestic Domestic Product Product The The Economy Economy on on aa Roller Roller Coaster Coaster The The Problem Problem of of Macroeconomic Macroeconomic Stabilization Stabilization A ASneak Sneak Preview Preview Copyright 2006 South Western Thomson Learning All rights reserved Drawing Drawing aa Line Line Between Between Macro Macro and and Microeconomics Microeconomics In In macroeconomics macroeconomics we we typically typically assume assume that that most most details details of of resource resource allocation allocation and and income income distribution distribution are are of of secondary secondary importance importance to to the the study study of of the the overall overall rates rates of of inflation inflation and and unemployment unemployment Copyright 2006 Southwestern Thomson Learning All rights reserved Drawing Drawing aa Line Line Between Between Macro Macro and and Microeconomics Microeconomics Aggregation Aggregation and and Macroeconomics Macroeconomics An An economic economic aggregate aggregate isis nothing nothing but but an an abstraction abstraction that that people people use use to to describe describe some some important important feature feature of of economic economic life life such such as as total total domestic domestic product product Copyright 2006 Southwestern Thomson Learning All rights reserved Drawing Drawing aa Line Line Between Between Macro Macro and and Microeconomics Microeconomics The The Foundations Foundations of ofAggregation Aggregation The The composition composition of of demand demand and and supply supply in in various various markets markets isis of of little little consequence consequence for for the the economy wide economy wide issues issues of of growth growth inflation inflation and and unemployment unemployment During During economic economic fluctuations fluctuations markets markets tend tend to to move move up up or or down down together together Copyright 2006 Southwestern Thomson Learning All rights reserved Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Moving Moving to to Macroeconomic MacroeconomicAggregates Aggregates Aggregate Aggregate supply supply and and aggregate aggregate demand demand relate relate domestic domestic product product on on the the horizontal horizontal axis axis to to the the price price level level on on the the vertical vertical axis axis Copyright 2006 Southwestern Thomson Learning All rights reserved Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Moving Moving to to Macroeconomic MacroeconomicAggregates Aggregates Aggregate Aggregate demand demand AD AD quantity quantity of of domestic domestic product product that that isis demanded demanded at at each each possible possible price price level level Aggregate Aggregate supply supply AS AS quantity quantity of of domestic domestic product product that that isis supplied supplied at at each each possible possible price price level level Copyright 2006 Southwestern Thomson Learning All rights reserved FIGURE FIGURE 1 1 Two Two Interpretations Interpretations of of aa Shift Shift in in the the Demand Demand Curve Curve D1 S D S D E Price Price A P0 E P0 D1 S D Q0 Quantity a S D Quantity a Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 2 2 An An Economy Economy Slipping Slipping into into aa Recession Recession S D0 Price Level D2 E B D0 S D2 Domestic Product Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 3 3 Economic Economic Growth Growth S0 D1 S1 D0 Price Level C E D1 S0 S1 D0 Q0 Q1 Domestic Product Copyright 2006 South Western Thomson Learning All rights reserved Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Major Major concerns concerns of of macroeconomics macroeconomics Inflation Inflation Unemployment Unemployment Growth Growth AD AD price price level level Copyright 2006 Southwestern Thomson Learning All rights reserved Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Recession Recession and and Unemployment Unemployment AD AS AD AS unemployment unemployment Recession Recession aa period period of of time time during during which which production production falls falls and and people people lose lose jobs jobs Copyright 2006 Southwestern Thomson Learning All rights reserved Supply Supply and and Demand Demand in in Macroeconomics Macroeconomics Economic Economic Growth Growth Economic Economic growth growth GDP GDP AD AD and or and or AS AS growth growth Copyright 2006 Southwestern Thomson Learning All rights reserved Gross Gross Domestic Domestic Product Product Money Money as as the the Measuring Measuring Rod Rod Real Real Versus Versus Nominal Nominal GDP GDP GDP GDP sum sum of of the the money money values values of of all all final final goods goods and and services services produced produced in in the the domestic domestic economy economy within within the the year year Nominal Nominal GDP GDP GDP GDPin in current current dollars dollars values values each each good good and and service service at at the the price price at at which which itit was was actually actually sold sold during during the the year year Copyright 2006 Southwestern Thomson Learning All rights reserved Gross Gross Domestic Domestic Product Product Drawback Drawback of of Nominal Nominal GDP GDP itit changes changes when when prices prices change change even even ifif there there isis no no change change in in actual actual production production Solution Solution calculate calculate real real GDP GDPor or GDP GDPin in constant constant dollars dollars Distinction Distinction between between Nominal Nominal and and Real Real GDP GDP aa working working definition definition of of aa recession recession as as aa period period in in which which real real GDP GDPdeclines declines Copyright 2006 Southwestern Thomson Learning All rights reserved GDP GDP Example Example 2005 2006 Pounds Produced Beef Price per lb Pounds Produced Price per lb 15 15 20 13 Corned Beef 5 10 2 12 Beef Jerky 3 20 8 8 Copyright 2006 Southwestern Thomson Learning All rights reserved