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CHAPTER 1
Introduction to Macroeconomics
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Questions
• How much richer are we than our
parents?
• How much richer will our children be
than our grandparents were?
• Will changing jobs be easy or hard in
five years?
• How many of us will have jobs in five
years?
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Questions
• Will the businesses we work for
vanish as demand for the products
they make dries up?
• Will inflation make us poor by
destroying our savings or rich by
eliminating our debts?
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Macroeconomics...
• is the subdiscipline of economics
that tries to answer these six
questions
• is the branch of economics related
to the economy as a whole
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Macroeconomists...
• try to figure out why overall economic
activity rises and falls
• try to understand what determines
the level and rate of change of the
price level
• study other variables that play a
major role in determining the overall
levels of production, income,
employment, and prices
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Why Macroeconomics Matters
• Cultural Literacy
– ability to follow and participate in public
debates and discussions
– understanding of news reports on
changes in the economy
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Figure 1.1 - The Daily Flow of Economic
News
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Why Macroeconomics Matters
• Self-Interest
– effects of macroeconomy on our daily
lives
– understanding of changing opportunities
as the economy fluctuates
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Why Macroeconomics Matters
• Civic Responsibility
– more informed voting
– more responsible macroeconomic policy
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Macroeconomic Policy
• Growth Policy
– policies to accelerate or decelerate longrun economic growth
– most important policies for the long-run
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Figure 1.2 - Long-Run Economic Growth:
Sweden and Argentina, 1900-2000
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Macroeconomic Policy
• Stabilization Policy
– policies to smooth out the business cycle
by diminishing the depth of recessions
and depressions
– business cycles are fluctuations in
production and employment
• booms or expansions occur when
production grows and unemployment falls
• recessions or depressions occur when
production falls and unemployment rises
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Figure 1.3 - The American Business Cycle:
Fluctuations in Total Production Relative to the
Long-Run Growth Trend
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Macroeconomics versus
Microeconomics
• Macroeconomists
– examine the economy as a whole
– focus on the feedback from one
component of the economy to another
– study the total level of production and
employment
– believe that imbalances between supply
and demand may be resolved by changes
in quantities rather than prices
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Macroeconomics versus
Microeconomics
• Microeconomists
– study the markets for single commodities
and the behavior of individual households
and firms
– focus on how competitive markets allocate
resources to create consumer and producer
surplus
– assume that imbalances between demand
and supply are resolved by changes in
prices
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Economic Statistics and
Economic Activity
• Economic activity is the pattern of
transactions in which things of real,
useful value are created, transformed,
and exchanged.
• National Income and Product Accounts
(NIPA)
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– reported by the U.S. Commerce
Department’s Bureau of Economic
Analysis
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Table 1.2 - The Flow of Economic Data,
2000-2001
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Six Key Economic Variables
• Real Gross Domestic Product (GDP)
– is corrected for changes in the price level
(real)
– includes the replacement of worn-out
and obsolete equipment and structures
as well as new investment (gross)
– counts economic activity that happens in
the United States (domestic)
– represents the production of final goods
and services (product)
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Six Key Economic Variables
• Real Gross Domestic Product
– often divided by the number of workers
in the economy
– measures how well the economy
produces goods and services that people
find useful
– does not indicate the relative distribution
of the nation’s economic product
– is an imperfect measure of economic
well-being
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Figure 1.4 - Officially Measured Real GDP
per Worker in the United States
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Six Key Economic Variables
• The Unemployment Rate
– to be unemployed, a person must want
to work and be actively looking for a job
(but have not yet found one)
– the labor force consists of those who
are employed and those who are
unemployed
– the unemployment rate is equal to the
number of unemployed people divided by
the labor force
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Figure 1.5 - The U.S. Unemployment Rate
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Six Key Economic Variables
• The Unemployment Rate
– frictional unemployment occurs because
workers and firms spend time searching
for the best match
– cyclical unemployment occurs during
recessions and depressions
– the unemployment rate is the best
indicator of how well the economy is
doing relative to its productive potential
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Six Key Economic Variables
• The Inflation Rate
– is a measure of how fast the overall price
level is rising
– hyperinflation occurs when the price
level is rising by more than 20% per
month
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Figure 1.6 - Inflation in the United States
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Six Key Economic Variables
• The Interest Rate
– is important because it governs the
redistribution of purchasing power across
time
– the many different interest rates in the
economy vary by duration and degree of
risk
• often move up and down together
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Six Key Economic Variables
• The Interest Rate
– nominal interest rate is the interest rate
in terms of money
• does not take into account the effects of
inflation
– real interest rate is the interest rate in
terms of goods and services
• does take into account the effects of inflation
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Figure 1.7 - U.S. Real Interest Rates,
1960-1999
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Six Key Economic Variables
• The Stock Market
– is heard about most often (every day)
– is an index of expectations for the future
• a high value means that investors expect
economic growth to be rapid, profits to be
high, and unemployment to be low
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Figure 1.8 - Real Stock Index Prices
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Six Key Economic Variables
• The Exchange Rate
– governs the terms on which international
trade and investment take place
– nominal exchange rate is the rate at
which monies of different countries can
be exchanged for one another
– real exchange rate is the rate at which
the goods and services produced in
different countries can be exchanged for
one another
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Six Key Economic Variables
• The Exchange Rate
– if domestic currency appreciates
• its value in terms of other currencies
increases
• foreign-produced goods are relatively cheap
for domestic buyers
– imports are likely to be high
• domestic-made goods are relatively
expensive for foreigners
– exports are likely to be low
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Six Key Economic Variables
• The Exchange Rate
– if domestic currency depreciates
• its value in terms of other currencies declines
• domestic-produced goods are relatively cheap
for foreign buyers
– exports are likely to be high
• foreign-made goods are relatively expensive
for domestic buyers
– imports are likely to be low
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Figure 1.9 - The U.S. Real Exchange Rate:
The Dollar against a Composite Index
of Foreign Currencies
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The Current
Macroeconomic Situation
• The United States - 2001
– economic growth has slowed to a very
weak pace
• forecast for 2001 is that real GDP will grow by
no more than 1.8%
– interest rates lowered through Fed policy
• due to lags, effects of lower interest rates will
not be felt until end of 2001 (at the earliest)
– inflation continues to be low
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The Current
Macroeconomic Situation
• The United States - recent past
– from early 1990s to 2000, there was an
economic boom
– unemployment fell during the 1990s
• lowest unemployment rate in two decades
(4%)
– real wages increased only slightly
• helped to keep inflation low
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The Current
Macroeconomic Situation
• Europe
– economic growth in countries belonging
to the European Monetary Union slowing
– low inflation
• less than 2% per year
– relatively high unemployment
• near 10%
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The Current
Macroeconomic Situation
• Japan
– slow growth rate
• real GDP grew only 1.8% in 2000
• real GDP is expected to grow only by 1.4% in
2001
– deflation is occurring
• the overall price level fell by 0.7% in 2000
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Summary
• Macroeconomics is the study of the
overall economy.
• There are three key reasons to
study macroeconomics
– to gain cultural literacy
– to understand how economic trends
affect you personally
– to exercise your responsibility as a
voter and citizen
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Summary
• The key indicators in macroeconomics
are
– real GDP
– the unemployment rate
– the inflation rate
– the interest rate
– the level of the stock market
– the exchange rate
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Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.