Macroeconomics versus Microeconomics? Micro: Greek for small Microeconomics: the study of the parts of the economy. Macro: Greek for large Macroeconomics: the study of the whole economy 1 2 Macroeconomics deals with issues like: The unemployment rate The inflation rate Productivity growth Interest rates The government budget deficit The foreign trade deficit Economic Theory A process of simplification Focuses on a few key relationships 3 4 Real Gross Domestic Product (GDP) The official measure of the economy s total output. Includes all currently produced goods and services sold on the market within a given time period. Excludes certain types of economic activity Real means the measure is adjusted for inflation 5 Business Cycles Components (Figure 1-1) Peak Recession Trough Recovery and expansion Features pervasive nature recurrent but not periodic expansions longer than recessions differ in length 6 1
Figure 1-1 Basic Business Cycle Concepts Stabilization Policy Goal is to tame the business cycle stability versus volatility» Figure 1-5 versus Economic Growth short-term versus long-term goals» Figure 1-6 7 8 Figure 1-5 Business Cycles in Volatila and Stabilia Figure 1-6 Economic Growth in Stag-Nation and Speed-Nation 9 10 Framework Target variables Policy instruments» Monetary policy» Fiscal policy» Miscellaneous policies Regulatory policies Wage and Price policies Employment policies Problems Lags Impact uncertainty 11 12 2
Theory versus Policy Positive Economics:» explains the behavior of the economy Normative Economics:» recommends changes in economic policy» major focus of disagreement among economists The internationalization of macroeconomics Closed economy Open economy» Changes in positive economics» Changes in effectiveness of policy instruments» Changes in normative economics 13 14 Figure 1-2 The Relation Between Actual and Natural Real GDP and the Inflation Rate The Nature of Business Cycles Business Cycles and Inflation Natural real GDP Level of real GDP at which the inflation rate is constant» Figure 1-2 15 16 Figure 1-3 The Behavior over Time of Actual and Natural Real GDP and the Actual and Natural Rates of Unemployment The Nature of Business Cycles (continued) Business Cycles and Unemployment Natural Rate of Unemployment Level of unemployment at which the inflation rate is constant» Figure 1-3 neither optimal nor immutable 17 18 3
The Nature of Business Cycles (continued) Relationship between real GDP, Inflation, & Unemployment Is there a natural rate of inflation? Highlights the importance of trade-offs Six Macroeconomic Puzzles Why has the unemployment rate been so high and so variable? (Figure 1-7) Why has the inflation rate (at times) been so high and so variable? (Figure 1-8) Why has productivity grown so slowly? (Figure 1-9) Why have real interest rates been so high? (Figure 1-10) Why has the government budget deficit persisted?» Figure 1-11 Why has the US s international trade dropped in persistent deficit? (Figure 1-12) 19 20 Figure 1-7 The U.S. Unemployment Rate, 1960 96 Figure 1-8 The U.S. Inflation Rate, 1960 96 21 22 Figure 1-9 Labor Productivity Growth, 1948 96 Figure 1-10 The Nominal and Real Corporate Bond Rate, 1960 96 23 24 4
Figure 1-11 The U.S. Budget Surplus as a Percent of GDP, 1960 96 Figure 1-12 The U.S. Foreign Trade Surplus as a Percent of GDP, 1960 96 25 26 5