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Intro to Macroeconomics
Micro vs. Macro
Micro: study individual economic
actors (households, firms, gov’t)
 Macro: study of economic systems
 Diff of perspective, same basic ideas
(with caveats)
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• E.g. the economy is not the same as
your family
Circular flow: let’s all tighten our belts to
save money during these hard times!
 If we all cut wages, the economy will grow!
 The world can grow its way out of the
recession by increasing exports!
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GDP
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Gross Domestic Product (measurement
of national economic activity):
Dollar value (nominal vs. real GDP=
nominal/price index)
of all final goods and services (vs.
intermediate goods)
Produced within a country (vs. Gross
National Product/GNP)
In a calendar year (avoid double
counting)
4 Main Types GDP
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Nominal GDP (prices; how much money
from selling donuts?)
Real GDP (adjusted for inflation; how
many donuts?)
GDP per capita: stuff/# people;
• problem for developing countries w/rapid pop
growth

Potential/full-employment GDP: if
resources fully employed efficiently, what
is possible to produce (think production
possibilities curve) w/o increasing inflation
Measuring GDP
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Output-Expenditures Model
GDP= C + I + G + (x-m)
Consumption (households, 2/3 US
economy)
Investment (only capital goods, not
stocks; most volatile)
Government
eXports – iMports (domestic production;
slightly misleading)
Income Approach
GDP= Income generated from
production
 Must equal Output-Expenditure:
circular-flow what is spent is
earned
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Short- and Long-run
Short-run: period when input prices
(e.g. wages) don’t change in
response price changes (inflation)
 Long-run: sufficiently long period
when input prices can change in
response to price changes

• Slight diff. Micro
Aggregate Supply/Demand
AD: total quantity of goods and
services demanded at different price
levels
 AS: total quantity of goods and
services in the economy

Keynesian AS-AD Graph
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“Mainstream” view: developed in response
to Great Depression
Q= real GDP
Price Level: weighted average of all final
g+s in economy
3 ranges: horizontal, intermediate, vertical
(at full-capacity/employment level of
output)
Intersection AS-AD= equilibrium price and
output
AS
Vertical
Price
Level
Intermediate
At fullcapacity/employment,
any increase AD lost
entirely to inflation
(can’t produce more)
Some increase
output
“dissipated” as
inflation (PL up)
Horizontal:
Excess capacity
increase output w/o
increase price
Qf
Q= real
GDP
AS
Price
Level
AD2= recession
AD3=
depression
Qd
AD1= fullemployment
production
Qr
Qf
Q= real
GDP
Ratchet?
Prices + wages “downwardly
inflexible”: decline AD firms can’t
(labor contracts)/ don’t want to
(efficiency wages) decrease wages 
price level doesn’t fall w/decrease AD
 Recessions depressions
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AS
Price
Level
AD1
AD2
Qd
Qr
Qf
Q= real
GDP
Keynesian Assumptions
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1) Input prices (wages, rent, etc.)
downwardly inflexible (hard to lower
wages)
2) Changes in Investment esp. important
affecting GDP (“animal spirits”)
3) “In the long-run we’re all dead”:
Unemployment equilibrium economy can
get stuck in recession/depression w/o
external force (G)
Neo-Classical AS-AD
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Assumes v/ efficient markets (including
labor market)
Distinction Short-run AS and Long-run AS
Long-run AS vertical at fullcapacity/employment GDP
Long-run equilibrium only at intersection
ASsr-AD-ASlr economy will by itself
return to ASlr (self-regulating)
No long-run trade-off inflation +
unemployment: just inflation
ASlr
ASsr
Price
Level
AD2
Long-run
equilibrium
Short-run
equilibrium
AD
Q= real
GDP
Business Cycle

Cyclical not periodic
• Regression to the mean
Contraction > 2 consecutive quarters
(6 months) = recession
 Deep, long recession = depression
 Stagflation: stagnation + inflation
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Factors Affecting Business Cycle
1) Investment (prob. excess
capacity)
 2) Availability $ and credit (interest
rates)
 3) Expectations future economy
 4) Capital deepening (increase labor
productivity; often result I)
 5) External shocks (supply shock)
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Indicators
Leading: where we’re going (housing
starts)
 Lagging: where we’ve been;
confirms change in cycle
(unemployment)
 Coincident: where we are (income)
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Limitations of GDP
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1) estimate: slow to gather,
sampling/surveys
2) Underground/ nonmarket transactions
3) National: hard at local level
4) Changes in quality: can’t track change
Apple IIG Alienware
5) Distribution of income/goods
6) Blind: doesn’t differentiate uses of g+s
(externalities)
 Green GDP: + happiness, sustainability,
etc.; - pollution, crime, etc.