1. What Is Macroeconomics?
Chapter 1
What Is Macroeconomics?

2. The “Big Three” Concepts of Macroeconomics
Unemployment Rate
U = (# of Unemployed) / Labor Force
Inflation Rate
π = %ΔP = (P1 – P0) / P0
Productivity Growth
“Productivity” is the average output per hour of work that a nation produces in goods and services.
Productivity in 2008 = $55 per worker-hour
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3. Macroeconomics vs. Microeconomics
Macroeconomics deals with the totals, or aggregates, of the economy such as:
The unemployment rate (of all U.S. workers)
Inflation (i.e. the rise of all prices in the U.S.)
Microeconomics deals with parts of the economy like:
The unemployment rate of low-skilled workers in a certain state
The price of cars
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4. Gross Domestic Product (GDP)
Definition: (Nominal) GDP is the value of all currently produced goods and services sold on the market during a particular time interval.
Real GDP adjusts the value of total output to correct for changes in prices.
Sometimes referred to as Actual Real GDP
Natural Real GDP is the level of real GDP in which there is no tendency for inflation to rise or fall.
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5. Figure 1-1 The Relation Between Actual and Natural Real GDP and the Inflation Rate
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6. Unemployment: Actual and Natural
Actual Unemployment (U) is the unemployment rate observed in the economy.
The Natural Rate of Unemployment (U*) is the rate of unemployment at which there is no tendency for inflation to rise or fall.
If U > U*  π rises
If U < U*  π falls
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7. Figure The Behavior over Time of Actual and Natural Real GDP and the Actual and Natural Rates of Unemployment
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8. Short Run vs. Long Run
The “short run” lasts from 1-5 years and the main issue is the stability of the economy.
The ups and downs (or “economic fluctuations”) of an economy are part of the business cycle. The business cycle has the following phases:
Expansion
Contraction
The “long run” ranges from one to several decades and is concerned with economic growth.
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9. Figure 1-3 Business Cycles in Volatilia and Stabilia
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10. Figure 1-4 Basic Business-Cycle Concepts
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11. Figure 1-5 Economic Growth in Stag-Nation and Speed-Nation
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12. Figure 1-6 Actual and Natural GDP and Unemployment, 1900–2007 (1 of 2)
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Sources: See Appendix A-1 and C-4

13. Figure 1-6 Actual and Natural GDP and Unemployment, 1900–2007 (2 of 2)
Sources: See Appendix A-1 and C-4
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14. Figure 1-6 Actual and Natural GDP and Unemployment, 1900–2007
Sources: See Appendix A-1 and C-4
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15. Macroeconomics at the Extremes
Three examples of the breakdown of normal macroeconomic mechanisms:
The Great Depression of the 1930s
The German hyperinflation of the 1920s
South Korea vs. Philippines economic growth in the last 50 years
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16. Figure 1-7 The Unemployment Rate from 1929–41 Compared with 1992–2007
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Source: Bureau of Labor Statistics. See Appendix C-4

17. Figure 1-8 The German Price Level, 1920–23
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Source: Groningen Growth and Development Center. See Appendix C-4

18. Figure 1-9 Per-Capita Real GDP, South Korea and the Philippines, 1960–2008 in 2007 U.S. Dollars
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Source: Groningen Growth and Development Center. See Appendix C-4

19. Taming Business Cycles
Macroeconomic analysts have two main tasks:
Analyze the causes of changes in macroeconomic variables
Predict the consequences of alternative policy changes
Macroeconomic target variables important to analysts and policy makers include:
Inflation
Unemployment
Long-term growth of productivity
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20. The Role of Stabilization Policy
A Stabilization Policy is any policy that seeks to influence the level of aggregate demand.
Monetary policy tries to influence aggregate demand by changing the money supply and/or interest rates.
Fiscal policy tries to influence aggregate demand by changing government spending and/or tax rates.
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21. The “Internationalization” of Macroeconomics
A closed economy has no trade in goods, services, or financial assets with any other nations.
In the 1940s and 50s, the U.S. was relatively closed:
Trade was 5% of the U.S. economy
Exchange rates were fixed
Financial flows to and from the U.S. were restricted
An open economy exports and imports goods and services to and from other nations, and has financial flows to and from foreign nations.
Today the U.S. is increasingly open:
Imports equal 17% of U.S. GDP
Since 1973, the exchange rate of the $ has been flexible
International financial flows are massive and almost instantaneous
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22. Economic Performance of the U.S. vs. Europe
Europe outperformed the U.S. from 1960–1985.
But the U.S. has grown much more quickly than Europe since 1995.
Puzzle #1: Why has European unemployment risen so much?
Puzzle #2: Why has Europe not benefited from the adoption of computer and internet technology like the U.S?
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