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