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Intermediate Macroeconomics
Chapter 1
An Overview of Macroeconomics
An Overview of Macroeconomics
1. What is Macroeconomics
2. Macroeconomic Goals
3. Economic Theory in Practice
Intermediate Macroeconomics
1. What Is Macroeconomics?
• Microeconomics - study of behavior of
individual economic agents.
• Macroeconomics - study of aggregate
measures of the economy
Intermediate Macroeconomics
2. Macroeconomic Goals
•
•
•
•
Low Unemployment
Price Stability
Economic Growth
Complementary and Conflicting Goals
Intermediate Macroeconomics
2. Macroeconomic Goals
Low Unemployment
Average annual unemployment rate, %
25%
Great Depression
(1929 - 1933)
20%
World War II
(1941 - 1945)
1981 - 1982
recession
15%
1973 - 1975
recession
1990 - 1991
recession
10%
U.S.
5%
Fairfax Co., VA.
0%
1930
1940
1950
1960
1970
1980
1990
Source: Bureau of Labor Statistics (www.bls.gov)
Intermediate Macroeconomics
2000
2. Macroeconomic Goals
Price Stability
Average Annual U.S.Inflation Rate
Consumer Price Index
Annual Change, percent
20%
World War 1
1917 - 1918
15%
World War 2
1941 - 1945
Arab oil
Embargo
1973 - 1974
Iranian
Revolution
and Oil Price
Increase
10%
5%
0%
-5%
-10%
-15%
Great Depression
1929 - 1933
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003
Source: Bureau of Labor Statistics (www.bls.gov)
Intermediate Macroeconomics
2. Macroeconomic Goals
Economic Growth
Annual change in U.S. GDP per capita
Percent annual change
0.3
0.2
Nominal GDP
0.1
0
Real GDP (chained 1996 dollars)
-0.1
-0.2
-0.3
1930
1940
1950
1960
1970
1980
1990
Source: Bureau of Economic Analysis (www.bea.gov)
Intermediate Macroeconomics
2000
2. Macroeconomic Goals
Economic Growth
Real GDP per capita
chained (1996) dollars
$40,000
$30,000
$20,000
$10,000
Long term trend 2.4% per year
$0
1930 1940 1950 1960 1970 1980 1990 2000
Intermediate Macroeconomics
2. Macroeconomic Goals
Complementary and Conflicting Goals
• Complementary Goals
– Low unemployment and high economic
growth
• Conflicting Goals
– Low unemployment and low inflation
Intermediate Macroeconomics
3. Economic Theory in Practice
• Economic Theory and Models
• Empirical Applications
Intermediate Macroeconomics
3. Economic Theory in Practice
Economic theory and models
What makes a good model?
• Accurately explains history
• Makes reasonable predictions
about the future
Intermediate Macroeconomics
3. Economic Theory in Practice
Economic theory and models
Keep models simple
• Occam’s Razor - eliminate
complicating details that don’t
significantly contribute to the model
• Ceteris Paribus - other things being
equal
Intermediate Macroeconomics
3. Economic Theory in Practice
Empirical time series applications
• Use Real rather than Nominal values
• Compare Per Capita rather than
Totals
• Compare Growth Rates rather than
Levels
Intermediate Macroeconomics
3. Economic Theory in Practice
Compare real rather than nominal
Percent increase 1929 – 2003
Nominal GDP: 10,522 %
Real GDP:
1,100 %
$12,000
Chained 2000 dollars
$10,000
$8,000
$6,000
Real GDP
$4,000
Nominal GDP
$2,000
$0
1929
1939
1949
1959
1969
1979
1989
Source: Bureau of Economic Analysis, www.bea.gov
Intermediate Macroeconomics
1999
3. Economic Theory in Practice
Compare per capita rather than aggregates
Percent increase 1929 – 2003
Total Real GDP:
1,100 %
Real GDP per capita:
402%
$40,000
$30,000
$30,000
Real GDP
per capita
$20,000
$20,000
Total Real
GDP
$10,000
$0
1929
$10,000
$0
1939
1949
1959
1969
1979
1989
Source: Bureau of Economic Analysis, www.bea.gov
Intermediate Macroeconomics
1999
billions of chained 2000 dollars
Per capita chained 2000 dollars
$40,000
3. Economic Theory in Practice
Compare growth rates rather than levels
Annual growth real GDP
per capita
5%
4.1%
4%
2.9%
3%
2.1%
2.0%
2.3%
2.0%
1.7%
2%
1%
0%
19301940
19401950
19501960
19601970
19701980
Source: Bureau of Economic Analysis, www.bea.gov
Intermediate Macroeconomics
19801990
19902000