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Chapter 1
Introduction to
Macroeconomics
Copyright © 2011 Pearson Education. All rights reserved.
Chapter Outline
• What Macroeconomics Is About
• What Macroeconomists Do
• Why Macroeconomists Disagree
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What Macroeconomics Is About
• Macroeconomics:
the study of structure and performance of national economies
and government policies that affect economic performance
• Issues addressed by macroeconomists:
– Long-run economic growth
– Business cycles
– Unemployment
– Inflation
– The international economy
– Macroeconomic policy
• Aggregation: from microeconomics to macroeconomics
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Long-run economic growth
Figure 1.1 Output of the U.S. economy, 1869-2008
Sources: Real GNP 1869–1928 from Christina D. Romer, “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product,
1869–1908,” Journal of Political Economy, 97, 1 (February 1989), pp. 22–23; real GDP 1929 onward from FRED database, Federal Reserve Bank
of St. Louis, research.stlouisfed.org/fred2/series/GDPCA. Data from Romer were rescaled to 2005 prices.
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Fig 1.1 台灣實質國內生產毛額(RGDP)
Fig 1.1 台灣實質國內生產毛額(RGDP)
160000
140000
實質產出(億）
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0
195119531955195719591961196319651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009
年度
實質國內生產毛額(RGDP)
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What Macroeconomics Is About
• Long-run economic growth
decline in output in recessions;
increase in output in booms (even in some wars)
– Two main sources of growth
• Population growth
• Increases in average labor productivity
(Output produced per unit of labor input)
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Figure 1.2 Average labor productivity in the United
States, 1900-2008
Sources: Employment in thousands of workers 14 and older for 1900–1947 from Historical Statistics of the United States, Colonial Times to 1970, pp. 126–127; workers
16 and older for 1948 onward from FRED database, Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/CE16OV. Average labor productivity is output
divided by employment, where output is from Fig. 1.1.
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Fig 1.2 台灣平均勞動生產力(基期：2006)
Fig 1.2 台灣平均勞動生產力(基期：2006)
1400000
1200000
新台幣（元）
1000000
800000
600000
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200000
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年度
平均勞動生產力
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What Macroeconomics Is About
• Average labor productivity growth:
– About 2.5% per year from 1949 to 1973
– 1.1% per year from 1973 to 1995
– 1.7% per year from 1995 to 2008
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What Macroeconomics Is About
• Business cycles
– Business cycle:
Short-run contractions and expansions
in economic activity
– Downward phase is called a recession
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Figure 1.3 The U.S. unemployment rate, 1890-2008
Sources: Civilian unemployment rate (people aged 14 and older until 1947, aged 16 and older after 1947) for 1890–1947 from Historical Statistics of the United States,
Colonial Times to 1970, p. 135; for 1948 onward from FRED database Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/UNRATE.
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Fig 1.3 台灣失業率（%）
Fig 1.3 台灣失業率（%）
7
6
5
4
3
2
1
0
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
20082010(1~6月)
失業率 %
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Figure 1.4 Consumer prices in the United States,
1800-2008
Sources: Consumer price index, 1800–1946 (1967 = 100) from Historical Statistics of the United States, Colonial Times to 1970, pp. 210–211; 1947 onward (1982–
1984 = 100) from FRED database, Federal Reserve Bank of St. Louis, research. stlouisfed.org/fred2/series/CPIAUCSL. Data prior to 1971 were rescaled to a base
with1982–1984 = 100.
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Fig 1.4 消費者物價指數 (2006=100)
Fig 1.4 消費者物價指數 (2006=100)
120
100
80
60
40
20
0
1981
1986
1991
1996
2001
2006
消費者物價指數 2006=100
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Figure 1.5 U.S. exports and imports, 1869-2008
Sources: Imports and exports of goods and services: 1869–
1959 from Historical Statistics of the United States, Colonial
Times to 1970, pp. 864–865; 1960 onward from FRED
database, Federal Reserve Bank of St. Louis,
research.stlouisfed.org/fred2/series/BOPX and BOPM;
output is from Fig. 1.1.
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Fig 1.5 台灣進出口佔GDP比例（%）
Fig 1.5 台灣進出口佔GDP比例（%）
80
70
60
%
50
40
30
20
10
0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
年度
商品及服務輸出占GDP %
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商品及服務輸入占GDP %
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What Macroeconomics Is About
• Macroeconomic Policy
– Fiscal policy: government spending and taxation
• Effects of changes in federal budget
• U.S. experience in Fig. 1.6
• Relation to trade deficit?
– Monetary policy: growth of money supply;
determined by central bank; the Fed in U.S.
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Figure 1.6 U.S. Federal government spending and
tax collections, 1869-2008
Sources: Federal spending and receipts: 1869–1929 from Historical Statistics of the United States, Colonial Times to 1970, p. 1104; 1930 onward from Historical
Tables, Budget of the U.S. Government, Table 1.2; Output, 1869–1928 (GNP) from Christina D. Romer, “The Prewar Business Cycle Reconsidered: New Estimates of
Gross National Product, 1869–1908,” Journal of Political Economy, 97, 1 (February 1989), pp. 22–23; 1929 onward (GDP) from BEA Web site, www.bea.gov.
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Fig 1.6 台灣政府支出及稅收佔GDP比例(%)
Fig 1.6 台灣政府支出及稅收佔GDP比例(%)
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30
25
%
20
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10
5
0
1967196919711973197519771979198119831985198719891991199319951997199920012003200520072009
年度
稅收占GDP %
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支出占GDP %
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What Macroeconomics Is About
• Aggregation
– Aggregation: summing individual economic
variables to obtain economy-wide totals
– Distinguishes microeconomics (disaggregated)
from macroeconomics (aggregated)
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What Macroeconomists Do
• Macroeconomic forecasting
– Relatively few economists make forecasts
– Forecasting is very difficult
• Macroeconomic analysis
– Private and public sector economists—analyze
current conditions
– Politicians, not economists, make major decisions
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What Macroeconomists Do
• Macroeconomic research
– Goal: to make general statements about how the economy
works
– Theoretical and empirical research are necessary for
forecasting and economic analysis
– Economic theory: a set of ideas about the economy,
organized in a logical framework
– Economic model: a simplified description of some aspect of
the economy
– Usefulness of economic theory or models depends on
reasonableness of assumptions, possibility of being applied
to real problems, empirically testable implications,
theoretical results consistent with real-world data
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What Macroeconomists Do
• In Touch with Data and Research:
Developing and Testing an Economic Theory
– Step 1: State the research question
– Step 2: Make provisional assumptions
– Step 3: Work out the implications of the theory
– Step 4: Conduct an empirical analysis to compare
the implications of the theory with the data
– Step 5: Evaluate the results of your comparisons
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Why Macroeconomists Disagree
• Positive vs. normative analysis
– Positive analysis:
examines the economic consequences of a policy
– Normative analysis:
determines whether a policy should be used
• Classicals vs. Keynesians
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Why Macroeconomists Disagree
• The classical approach
• The economy works well on its own
• The “invisible hand”: the idea that if there are free
markets and individuals conduct their economic affairs
in their own best interests, the overall economy will
work well
• Wages and prices adjust rapidly to get to equilibrium
– Equilibrium: a situation in which the quantities
demanded and supplied are equal
– Changes in wages and prices are signals that
coordinate people’s actions
• Result: Government should have only a limited role in
the economy
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Why Macroeconomists Disagree
• The Keynesian approach
• The Great Depression: Classical theory failed
because high unemployment was persistent
• Keynes: Persistent unemployment occurs
because wages and prices adjust slowly, so
markets remain out of equilibrium for long
periods
• Conclusion: Government should intervene to
restore full employment
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Why Macroeconomists Disagree
• The evolution of the classical-Keynesian debate
• Keynesians dominated from WWII to 1970
• Stagflation led to a classical comeback in the
1970s
• Last 30 years: excellent research with both
approaches
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Why Macroeconomists Disagree
• A unified approach to macroeconomics
– Textbook uses a single model to present both
classical and Keynesian ideas
– Three markets: goods, assets, labor
– Model starts with micro-foundations:
individual behavior
– Long run: wages and prices are perfectly flexible
– Short run:
Classical case—flexible wages and prices;
Keynesian case—wages and prices slow to adjust
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