Macro-Introduction

Macroeconomics
Macroeconomics is the study of:
the structure and performance of national
economies and
of the policies that governments use to try to
affect economic performance.
 Macroeconomics-Introduction

Macroeconomics deals with the

economy as a whole; it examines the
behavior of economic aggregates such
as aggregate income, consumption,
investment, and the overall level of
prices.
Aggregate behavior refers to the behavior
of all households and firms together.
 Macroeconomics-Introduction

Macroeconomists often reflect

on the microeconomic principles
underlying macroeconomic
analysis, or the microeconomic
foundations of
macroeconomics.
 Until the 1930s most economic analysis did not
separate out individual economics behavior from
aggregate behavior.
With the Great Depression of the 1930s and the
development of the concept of national income and
product statistics, the field of macroeconomics
began to expand.
 Macroeconomics-Introduction

The Roots of Macroeconomics

The Great Depression was a period of severe
economic contraction and high
unemployment that began in 1929 and
continued throughout the 1930s.
 Macroeconomics-Introduction

Change in economic indicators 192932

United Great
France Germany
States Britain
Industrial
46% 23% 24% 41%
production
Wholesale
32% 33% 34% 29%
prices
Foreign trade 70% 60% 54% 61%
Unemployment +607% +129% +214% +232%
 Macroeconomics-
Introduction
1.Demand for goods fell
2.Businesses cut production
3.Workers suffered from wage cuts and lay
offs
4.people had little or no money to spend.
 Macroeconomics-
Introduction
Classical economists applied microeconomic
models, or market clearing models, to
economy-wide problems.
However, simple classical models failed to
explain the prolonged existence of high
unemployment during the Great Depression.
This provided the impetus for the
development of macroeconomics
 Particularly influential were the ideas of John
Maynard Keynes, who formulated theories to
try to explain the Great Depression.
Before that time, comprehensive national
accounts, as we know them today, did not
exist.
 Macroeconomics-
Introduction
In 1936, John Maynard Keynes published
The General Theory of Employment, Interest,
and Money.
Keynes believed governments could
intervene in the economy and affect the level
of output and employment.
During periods of low private demand, the
government can stimulate aggregate demand
to lift the economy out of recession.
 Macroeconomics-
Introduction
Three of the major concerns of
macroeconomics are:
Inflation
Output growth
Unemployment
 Macroeconomics-
Introduction
Inflation is an increase in the overall price level.
Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations are rare, but have been used to
study the costs and consequences of even
moderate inflation.
Deflation is a decrease in the overall price level.
Prolonged periods of deflation can be just as
damaging for the economy as sustained
inflation.
 Macroeconomics-
Introduction
The business cycle is the cycle of short-term
ups and downs in the economy.
The main measure of how an economy is
doing is aggregate output:
Aggregate output is the total quantity of goods
and services produced in an economy in a given
period.
 Macroeconomics-
Introduction
A recession is a period during which aggregate
output declines. Two consecutive quarters of
decrease in output signal a recession.
A prolonged and deep recession becomes a
depression.
Policy makers attempt not only to smooth
fluctuations in output during a business cycle
but also to increase the growth rate of output in
the long-run.
 Macroeconomics-
Introduction
The unemployment rate is the percentage of
the labor force that is unemployed.
The unemployment rate is a key indicator of
the economys health.
The existence of unemployment seems to
imply that the aggregate labor market is not
in equilibrium. Why do labor markets not
clear when other markets do?
 Macroeconomics-
Introduction
There are three kinds of policy that the
government has used to influence the
macroeconomy:
1. Fiscal policy
2. Monetary policy
3. Growth or supply-side policies
 Macroeconomics-
Introduction
Fiscal policy refers to government policies
concerning taxes and spending.
Monetary policy consists of tools used by the
Federal Reserve to control the quantity of
money in the economy.
Growth policies are government policies that
focus on stimulating aggregate supply instead
of aggregate demand.
 Macro-Introduction

What Macroeconomics is about

What determines a nation's long-run economic growth?
What causes a nation's economic activity to fluctuate?
What causes unemployment?
What causes prices to rise?
How does being part of a global economic system affect
nations' economies?
Can government policies be used to improve a nation's
economic performance?
 Macro-Introduction

What determines a nation's long-run economic growth?

In 1970, income per capita was smaller in
Norway than in Argentina. But today, income
per capita is more than twice as high in
Norway as in Argentina. Why do some
nations economies grow quickly, providing
their citizens with rapidly improving living
standards, while other nations' economies are
relatively stagnant?
 Macro-Introduction

What causes a nation's economic activity to fluctuate?

After nearly a decade of prosperity during the
1980s, the US. economy began to falter in 1990. By
the spring of 1991, output in the United States had
fallen by more than 1.5% from its level nine months
earlier. But then, for the remainder of the 1990s, the
U.S. economy grew rapidly. What do economies
sometimes experience sharp short-run fluctuations,
lurching between periods of prosperity and period
of hard times?
 Macro-Introduction

What causes unemployment?

During the 1930s, one quarter of the work
force in the United States was unemployed.
A decade later, during World War II, less
than 2% of the work force was unemployed.
Why does unemployment some times reach
very high levels? Why, even during times of
relative prosperity, in a significant fraction of
the work force unemployed?
 Macro-Introduction

What causes prices to rise?

The rate of inflation in the United States crept steadily
upward during the 1970s, and reached 10% per year in the
early 1980s before dropping to less than 4% per year in the
mid 1980s and dropping even further to less than 2% per
year in the late 1990s. Germany's inflation experience has
been much more extreme: Although Germany has earned a
reputation for low inflation in recent decades, following its
defeat in World War. Germany experienced an eighteen-
month period (July 1922-December 1923) during which
prices rose by a factor of several billion! What causes
inflation and what can be done about it?
 Macro-Introduction

How does being part of a global economic system affect

nations' economies?
In the summer of 1997, the currency of Thailand, the baht,
began to plummet in value, losing more than half of its value
in six months. Other Asian countries also suffered financial
rises and economic slumps. A year later, the Russian
government was unable to make promised interest payments
on its bonds, and financial markets around the world reacted.
How do economic links among nations, such as international
trade and borrowing, affect the performance of individual
economies and the world economy as a whole?
 Macro-Introduction

Can government policies be used to improve a nation's

economic performance?
In the late 1990s, the U.S. Federal government began to run
large budget surpluses for the first time in decades. Should
the funds made available by these surpluses be used to shore
up the Social Security system in preparation for the
retirement of the baby-boom generation? Or should the
funds be used for social programs, or to reduce taxes? This
debate reflects a fundamental question facing economic
policymakers: How should economic policy be conducted so
as to keep the economy as prosperous and stable as possible?
 Macro-Introduction

The Four Most Important Lessons of Macroeconomics

Lesson 1: In the long run, a country's capacity to produce
goods and services determines the standard of
living of its citizens.
Lesson 2: In the short run, aggregate demand influences
the amount of goods and services that country
produces.
Lesson 3: In the long run, the rate of money growth
determines the rate of inflation, but it does not
affect the rate of unemployment.
Lesson 4: In the short run, policymakers who control
monetary and fiscal policy face a tradeoff
between inflation and unemployment.
 Macro-Introduction

The Four Most Important Unresolved Questions of

Macroeconomics
Question 1: How should policymakers try to
raise the economy's natural rate of
output?
Question 2: Should policymakers try to
stabilize the economy?
Question 3: How costly is inflation, and how
costly is reducing inflation?
Question 4: How big a problem is government
debt?
 Macroeconomics is the study of whole
economic systems aggregating over the
functioning of individual economic units.
It is primarily concerned with variables that
follow systematic and predictable paths of
behavior and can be analyzed independently
of the decisions of the many agents who
determine their level.
 More specifically, it is a study of:
national economies and
the determination of national income.
It focuses on sectors of the economy not those that
function as separate units like the car production
sector but those that run across the entire
economy:
The industrial
Personal
Financial
Government and
Overseas sectors.
 In classical macroeconomics lay a
presumption of the efficiency and
effectiveness of free markets, and all
macroeconomic variables were seen as the
sum of the variables as they applied to
individual firms or consumers.
Macroeconomic mechanisms were largely
embedded in the theory of microeconomics.
 Since Keynes, however, economists have
allowed for disequilibrium in macroeconomic
variables as such, and therefore collective
outcomes distinct from those implied by
individual behavior .
The main topics covered by macroeconomics
are:
The determination of national income, prices,
and employment.
 The role of fiscal and monetary policy, analyzed through
different models, each containing its own assumption and
emphasis.
The determination of consumption and investment.
The balance of payments and
Economic growth.
In recent years, the tendency in academic economics
has been for macroeconomic models to be laid on
microeconomic foundations