Chapter 1Chapter OutlineWhat Macroeconomics Is AboutSlide 4PowerPoint PresentationSlide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20What Macroeconomists DoSlide 22Slide 23Slide 24Why Macroeconomists DisagreeSlide 26Slide 27Slide 28Slide 29© 2008 Pearson Addison-Wesley. All rights reservedIntroduction to MacroeconomicsChapter 1© 2008 Pearson Addison-Wesley. All rights reserved1-2Chapter Outline•What Macroeconomics Is About•What Macroeconomists Do•Why Macroeconomists Disagree© 2008 Pearson Addison-Wesley. All rights reserved1-3What 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•Aggregation: from microeconomics to macroeconomics© 2008 Pearson Addison-Wesley. All rights reserved1-4What Macroeconomics Is About•Long-run economic growth–Figure 1.1: Output of United States since 1869© 2008 Pearson Addison-Wesley. All rights reserved1-5Figure 1.1 Output of the U.S. economy, 1869-2005© 2008 Pearson Addison-Wesley. All rights reserved1-6What Macroeconomics Is About•Long-run economic growth–Figure 1.1: Output of United States since 1869–Note decline in output in recessions; increase in output in some wars–Two main sources of growth•Population growth•Increases in average labor productivity© 2008 Pearson Addison-Wesley. All rights reserved1-7What Macroeconomics Is About•Average labor productivity–Output produced per unit of labor input–Figure 1.2 shows average labor productivity for United States since 1900© 2008 Pearson Addison-Wesley. All rights reserved1-8Figure 1.2 Average labor productivity in the United States, 1900-2005© 2008 Pearson Addison-Wesley. All rights reserved1-9What Macroeconomics Is About•Average labor productivity growth:–About 2.5% per year from 1949 to 1973–1.1% per year from 1973 to 1995–2.0% per year from 1995 to 2005© 2008 Pearson Addison-Wesley. All rights reserved1-10What Macroeconomics Is About•Business cycles –Business cycle: Short-run contractions and expansions in economic activity–Downward phase is called a recession© 2008 Pearson Addison-Wesley. All rights reserved1-11What Macroeconomics Is About•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–Recessions cause unemployment rate to rise© 2008 Pearson Addison-Wesley. All rights reserved1-12Figure 1.3 The U.S. unemployment rate, 1890-2005© 2008 Pearson Addison-Wesley. All rights reserved1-13What Macroeconomics Is About•Inflation–U.S. experience shown in Fig. 1.4© 2008 Pearson Addison-Wesley. All rights reserved1-14Figure 1.4 Consumer prices in the United States, 1800-2005© 2008 Pearson Addison-Wesley. All rights reserved1-15What Macroeconomics Is About•Inflation–Deflation: when prices of most goods and services decline–Inflation rate: the percentage increase in the level of prices–Hyperinflation: an extremely high rate of inflation© 2008 Pearson Addison-Wesley. All rights reserved1-16What Macroeconomics Is About•The international economy–Open vs. closed economies•Open economy: an economy that has extensive trading and financial relationships with other national economies•Closed economy: an economy that does not interact economically with the rest of the world–Trade imbalances•U.S. experience shown in Fig. 1.5•Trade surplus: exports exceed imports•Trade deficit: imports exceed exports© 2008 Pearson Addison-Wesley. All rights reserved1-17Figure 1.5 U.S. exports and imports, 1869-2005© 2008 Pearson Addison-Wesley. All rights reserved1-18What Macroeconomics Is About•Macroeconomic Policy–Fiscal policy: government spending and taxation•Effects of changes in federal budget •U.S. experience in Fig. 1.6•Relation to trade deficit?–Monetary policy: growth of money supply; determined by central bank; the Fed in U.S.© 2008 Pearson Addison-Wesley. All rights reserved1-19Figure 1.6 U.S. Federal government spending and tax collections, 1869-2005© 2008 Pearson Addison-Wesley. All rights reserved1-20What Macroeconomics Is About•Aggregation–Aggregation: summing individual economic variables to obtain economywide totals–Distinguishes microeconomics (disaggregated) from macroeconomics (aggregated)© 2008 Pearson Addison-Wesley. All rights reserved1-21What Macroeconomists Do•Macroeconomic forecasting–Relatively few economists make forecasts–Forecasting is very difficult •Macroeconomic analysis–Private and public sector economists—analyze current conditions–Does having many economists ensure good macroeconomic policies? No, since politicians, not economists, make major decisions© 2008 Pearson Addison-Wesley. All rights reserved1-22What Macroeconomists Do•Macroeconomic research–Goal: to make general statements about how the economy works–Theoretical and empirical research are necessary for forecasting and economic analysis–Economic theory: a set of ideas about the economy, organized in a logical framework–Economic model: a simplified description of some aspect of the economy–Usefulness of economic theory or models depends on reasonableness of assumptions, possibility of being applied to real problems, empirically testable implications, theoretical results consistent with real-world data© 2008 Pearson Addison-Wesley. All rights reserved1-23What Macroeconomists Do•Box 1.1: Developing and Testing an Economic Theory–Step 1: State the research question–Step 2: Make provisional assumptions–Step 3: Work out the implications of the theory–Step 4: Conduct an empirical analysis to compare the implications of the theory with the data–Step 5: Evaluate the results of your comparisons© 2008 Pearson Addison-Wesley. All rights reserved1-24What Macroeconomists Do•Data development—very important for making data more useful© 2008 Pearson Addison-Wesley. All rights reserved1-25Why Macroeconomists Disagree•Positive vs. normative analysis–Positive analysis: examines the economic consequences of a policy–Normative analysis: determines whether a policy should be used© 2008 Pearson Addison-Wesley. All rights reserved1-26Why Macroeconomists