Ch 1: The Science of
Macroeconomics
Macroeconomics (2007)
By Gregory Mankiw
6th edition
Micro vs. Macro

Microeconomics


the study of how individual households and firms
make decisions and how they interact with one
another in markets.
Macroeconomics


the study of the economy as a whole.
The primary topics involve the causes of long-run
growth and business cycles, and the appropriate
role for government policy in influencing the
performance of the economy
Learning Objectives
the issues macroeconomists study
 the tools macroeconomists use
 some important concepts in macroeconomic
analysis

Important issues in Macro






Economic Growth
Business Cycle:
boom or recession
the cost of living
Unemployment
Gov’t Deficit
Policy implication
U.S. Real GDP per capita
(2000 dollars)
40,000
9/11/2001
First oil price
shock
30,000
long-run upward trend…
20,000
Great
Depression
Second oil
price shock
10,000
World War II
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Taiwan Data: Real GDP:1951-2007
(P2001=100)
Real GNP and Real GDP
FIGURE 1-1
16,000,000
14,000,000
Millions NT$
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1951
1956
1961
1966
1971
1981
1976
Year
real GNP
real GDP
1986
1991
1996
2001
2006
Natural Log of Per Capita GNP and Trend
FIGURE 1-1b Ln (Per Capita Real GDP) and Trend
13.0000
12.0000
11.0000
10.0000
1952
1957
1962
1967
1972
1977
1982
1987
1992
Year
ln(Per Capita Real GNP)
Trend in ln(Per Capita Real GNP)
1997
2002
2007
FIGURE 1-1c Percentage Deviations from Trend in ln(Per Capita Real GDP)
0.008
Percentage Deviation from Trend
0.006
0.004
0.002
0.000
1952
1957
1962
1967
1972
1977
1982
-0.002
-0.004
-0.006
Year
1987
1992
1997
2002
2007
U.S. inflation rate (% per year)
25
20
15
10
5
0
-5
-10
-15
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
50
FI GUR E 1 - 2
I n f latio n R ate C alcu lated f r o m th e I m p licit GDP
Pr ic e De f la to r a n d C a lc u la te d f r o m th e C PI
40
Annual Inflation Rate (%)
30
20
10
0
1960
1964
1968
1972
1976
1980
1984
-10
Year
GDP deflator
CPI
1988
1992
1996
2000
2004
U.S. unemployment rate (% of labor force)
30
25
20
15
10
5
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
FIGURE 1-3 The Unemployment Rate in Taiwan, 1978-2007
6
5
％
4
3
2
1
0
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
整體失業率
自然失業率
Year
Why learn macroeconomics?
1. The macroeconomy affects society’s wellbeing.
2. The macroeconomy affects your well-being.
3. The macroeconomy affects politics.
change from 12 mos earlier
5
In most years, wage growth falls
when unemployment is rising.
4
5
3
3
1
2
1
-1
0
-3
-1
-5
-2
-3
1965
-7
1970
1975
unemployment rate
1980
1985
1990
1995
2000
2005
inflation-adjusted mean wage (right scale)
percent change from 12 mos earlier
Why learn macroeconomics?
Economic models
simplified versions of a more complex reality
used to



explain the economy’s behavior
show relationships between variables
devise policies to improve economic performance
Eg, Demand and Supply for Cars
Demand equation:
Q d = D (P,Y )
Supply equation:
Q s = S (P,Ps )
s
The market for cars: Equilibrium
P
Price
of cars
S
equilibrium
price
D
Q
equilibrium
quantity
Quantity
of cars
Comparative Statics:
The effects of an increase in Income
P
Price
of cars
S
P2
P1
D1
Q1 Q 2
D2
Q
Quantity
of cars
The effects of a steel price increase
P
S2
Price
of cars
S1
P2
P1
D
Q 2 Q1
Q
Quantity
of cars
Endogenous vs. exogenous variables

The values of endogenous variables
are determined in the model.

The values of exogenous variables
are determined outside the model:
the model takes their values & behavior
as given.

In the model of supply & demand for cars,
endogenous:
exogenous:
P , Qd , Qs
Y , Ps
A multitude of models
No one model can address all the issues we
care about.
 e.g., our supply-demand model of the car
market…


can tell us how a fall in aggregate income affects
price & quantity of cars.

cannot tell us why aggregate income falls.
A multitude of models
learn different models for studying different
issues (e.g., unemployment, inflation, longrun growth).
 For each new model, you should keep track of




its assumptions
which variables are endogenous,
which are exogenous
the questions it can help us understand,
and those it cannot
Prices: flexible vs. sticky



Market clearing:
An assumption that prices are flexible, adjust to
equate supply and demand.
In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand.
For example,


many labor contracts fix the nominal wage
for a year or longer
many magazine publishers change prices
only once every 3-4 years
Prices: flexible vs. sticky

Short-run: the issue of business cycle
Possible that the prices are sticky, then
demand won’t always equal supply.
This helps explain



unemployment (excess supply of labor)
why firms cannot always sell all the goods
they produce (excess supply of goods)
Long-run: prices flexible, markets clear,
the focus in on economic growth.
Outline of this book:
Introductory material (Chaps. 1 & 2)
 Classical Theory (Chaps. 3-6)
How the economy works in the long run, when
prices are flexible
 Growth Theory (Chaps. 7-8)
The standard of living and its growth rate over
the very long run
 Business Cycle Theory (Chaps. 9-13)
How the economy works in the short run,
when prices are sticky

Outline of this book:

Policy debates (Chaps. 14-15)
Should the government try to smooth
business cycle fluctuations? Is the
government’s debt a problem?

Microeconomic foundations (Chaps. 16-19)
Insights from looking at the behavior of
consumers, firms, and other issues from a
microeconomic perspective
Chapter Summary
Macroeconomics is
the study of the economy as a whole.
 Macroeconomists attempt
to explain the economy and
to devise policies to improve its performance.

CHAPTER 1
The Science of Macroeconomics
slide 27
Chapter Summary
Different models to examine different issues.
 Models with flexible prices describe the
economy in the long run;
models with sticky prices describe the
economy in the short run.

CHAPTER 1
The Science of Macroeconomics
slide 28