Introduction to Macroeconomics

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Introduction toMacroeconomics
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The Objective of Macroeconomics

• To develop and test theories about how the
  economy as a whole works
• Explain
• Predict
• The focus of macroeconomics is the performance of
  national and international economies.
• It also looks at how the government can influence
  the macroeconomic performance of the economy.

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Macroeconomics Issues

• 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 economy affect a
  nations' economies?
• Can government policies be used to improve a
  nation's economic performance?

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Economic Fluctuations

• The economy is always going through periods of
  growth followed by periods of decline.
• Usually, periods of growth last longer than
  periods of decline.

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Gross Domestic Product (GDP)

• Total value of all final goods and services,
  measured in current market prices, produced in
  the economy during a given year.

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GDP vs GNP

• Gross National Product is the total value of all
  final goods and services, measured in current
  market prices, produced by an economys resources
  during a given year.

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Real GDP
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Real GDP
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The Business Cycle
Aggregate
output
Long-term trend line
The Business Cycle is the alternating periods
between growth and decline relative to the
long-term growth trend of the economy
Peak
Trough
Time
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A Complete Phase of the Business Cycle

• A complete phase of the business cycle goes from
  trough to trough or peak to peak.
• Peak
• Recovery phase follows a recession
• Trough
• Downturn

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Depression and Recession

• A recession is a decline in an economys total
  production lasting six months or longer
• A depression is a severe recession lasting more
  than one year

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Economic Expansion

• An expansion is an increase in the economys
  total production lasting six months or longer

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Leading Economic Indicators

• Leading economic indicators are economic
  statistics, such as housing starts, stock prices,
  and consumer expectations, that foreshadow future
  changes in economic activity

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Aggregate Demand

• The total quantity of goods and services that
  households, firms, foreigners, and the government
  demand at varying price levels in a given time
  period, ceteris paribus.
• Aggregate demand is the key concept in
  understanding demand-side or Keynesian economic
  theories

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The Price Level

• The price level in the economy is a composite
  measure reflecting the prices of all goods and
  services in the economy
• Consumer Price Index
• Producer Price Index

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Aggregate Demand (cont.)

• Constants along AD curve
• Interest rates
• foreign price level
• exchange rate
• foreign incomes
• Aggregate Demand curve is downward sloping
• Real Wealth effect
• Interest Rate effect
• International trade effect

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The Aggregate Demand Curve

• A curve showing the relation between the
  economys price level and the amount of aggregate
  output demanded per period of time, other things
  held constant

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Aggregate Supply (AS)

• The total quantity of goods and services that
  firms in the economy are willing to supply at
  varying price levels in a given time period,
  ceteris paribus.
• Constants along AS curve
• Technology
• Resources or factor of production
• Wages
• Economic Institutions or rules of the game

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The Aggregate Supply Curve

• A curve representing the relation between the
  economys price level and the amount of aggregate
  output supplied per period of time, other things
  held constant

Price level
AS
Real GDP
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Macroeconomic Equilibrium
Price level
AS
AD
Q
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A Short Economic History of the U.S. Economy
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The Great Depression

• Aggregate demand was reduced because of,
• Poor business expectations
• Poor consumer confidence
• Drop in the money supply
• Restrictions on world trade

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The Age of Keynes

• In 1936 John Maynard Keynes (1883-1946), of
  Cambridge University in England, published The
  General Theory of Employment, Interest, and
  Money, a book that questioned the classical view
  of the economy
• Keynesian theory emphasizes the demand side of
  the economy, the instability of the private
  sector, and the role of fiscal policy
• Keynesian theories grew in their importance from
  the 1930s and met with their golden age during
  the 1960s

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Demand-Side Economics

• Macroeconomic policy that focuses on changes in
  aggregate demand as a way of promoting full
  employment and price stability

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Supply-Side Economics (1980s)

• Supply-side economics
• Macroeconomic policy that focuses on the use of
  tax cuts to stimulate production so as to
  increase aggregate supply