macro
CHAPTER ONE
The Science of
Macroeconomics
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
© 2002 Worth Publishers, all rights reserved
Learning objectives
This chapter introduces you to
ƒ the issues macroeconomists study
ƒ the tools macroeconomists use
ƒ some important concepts in
macroeconomic analysis
CHAPTER 1
The Science of Macroeconomics
slide 1
Important issues in macroeconomics
ƒ Why does the cost of living keep rising?
ƒ Why are millions of people unemployed,
even when the economy is booming?
ƒ Why are there recessions?
Can the government do anything to combat
recessions? Should it??
CHAPTER 1
The Science of Macroeconomics
slide 2
Important issues in macroeconomics
ƒ What is the government budget deficit?
How does it affect the economy?
ƒ Why does the U.S. have such a huge trade
deficit?
ƒ Why are so many countries poor?
What policies might help them grow out of
poverty?
CHAPTER 1
The Science of Macroeconomics
slide 3
U.S. Gross Domestic Product
in billions of chained 1996 dollars
10,000
9,000
8,000
7,000
6,000
5,000
lon
4,000
3,000
1970
1975
CHAPTER 1
1980
u
r
g
p
nu
1985
w
ard
t
d
ren
1990
…
1995
The Science of Macroeconomics
2000
slide 4
U.S. Gross Domestic Product
in billions of chained 1996 dollars
10,000
longest economic
expansion on record
9,000
8,000
7,000
Recessions
6,000
5,000
4,000
3,000
1970
1975
CHAPTER 1
1980
1985
1990
1995
The Science of Macroeconomics
2000
slide 5
Unemployment and social problems
Each one-point increase in the
unemployment rate is associated with:
ƒ 920 more suicides
ƒ 650 more homicides
ƒ 4000 more people admitted to state mental
institutions
ƒ 3300 more people sent to state prisons
ƒ 37,000 more deaths
ƒ increases in domestic violence and
homelessness
CHAPTER 1
The Science of Macroeconomics
slide 6
Unemployment and earnings growth
%%
55
44
33
22
11
00
-1-1
-2-2
-3-3
-4-4
-5-5
1965
1965
1970
1970
1975
1975
1980
1980
1985
1985
1990
1990
1995
1995
2000
2000
growth
growthrate
rateofofinflation-adjusted
inflation-adjustedhourly
hourlyearnings
earnings
change
changeininUnemployment
Unemploymentrate
rate
CHAPTER 1
The Science of Macroeconomics
slide 7
Inflation and Unemployment in Election Years
year
1976
1980
1984
1988
1992
1996
2000
U rate
7.7%
7.1%
7.5%
5.5%
7.5%
5.4%
4.0%
CHAPTER 1
inflation rate
5.8%
13.5%
4.3%
4.1%
3.0%
3.3%
3.4%
elec. outcome
Carter (D)
Reagan (R)
Reagan (R)
Bush I (R)
Clinton (D)
Clinton (D)
Bush II (R)
The Science of Macroeconomics
slide 8
Prices: Flexible Versus Sticky
ƒ Market clearing: an assumption that prices
are flexible and adjust to equate supply and
demand.
ƒ In the short run, many prices are sticky---
they adjust only sluggishly in response to
supply/demand imbalances.
For example,
– labor contracts that fix the nominal wage
for a year or longer
– magazine prices that publishers change
only once every 3-4 years
CHAPTER 1
The Science of Macroeconomics
slide 9
Prices: Flexible Versus Sticky
ƒ The economy’s behavior depends partly on
whether prices are sticky or flexible:
ƒ If prices are sticky, then demand won’t
always equal supply. This helps explain
– unemployment (excess supply of labor)
– the occasional inability of firms to sell what
they produce
ƒ Long run: prices flexible, markets clear,
economy behaves very differently.
CHAPTER 1
The Science of Macroeconomics
slide 10
Outline of this book:
ƒ Introductory material
ƒ Classical Theory
(chaps. 1 & 2)
(chaps. 3-6)
How the economy works in the long run,
when prices are flexible
ƒ Growth Theory
(chaps. 7-8)
The standard of living and its growth rate
over the very long run
ƒ Business Cycle Theory
(chaps 9-13)
How the economy works in the short run,
when prices are sticky.
CHAPTER 1
The Science of Macroeconomics
slide 11
Outline of this book:
ƒ Policy debates
(Chaps. 14-15)
Should the government try to smooth business
cycle fluctuations? Is the government’s debt a
problem?
ƒ Microeconomic foundations
(Chaps. 16-19)
Insights from looking at the behavior of
consumers, firms, and other issues from a
microeconomic perspective.
CHAPTER 1
The Science of Macroeconomics
slide 12
CHAPTER 1
The Science of Macroeconomics
slide 13