Macroeconomics

Sixth Edition, Global Edition

Chapter 1
Introduction and
Measurement Issues

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Learning Objectives, Part I
1.1 State the two focuses of study in macroeconomics, the key differences
between microeconomics and macroeconomics, and the similarities
between microeconomics and macroeconomics.

1.2 Explain the key features of trend growth and deviations from trend in
per capita gross domestic product in the United States from 1900 to
2014.
Learning Objectives, Part II
1.3 Explain why models are useful in macroeconomics.

1.4 Discuss how microeconomic principles are important in constructing

useful macroeconomic models.

1.5 Explain why there is disagreement among macroeconomists, and what

they disagree about.
Learning Objectives, Part III
1.6 List the 12 key ideas that will be covered in this book.

1.7 List the key observations that motivate questions we will try to answer
in this book.
https://businesstech.co.za/news/finance/671091/all-signs-point-to-recession-in-south-africa/#:~:text=South%20Africa%
20is%20on%20the,on%20Tuesday%20(7%20March) Copyright © 2018 Pearson Education, Ltd. All rights reserved.
 What is Macroeconomics?
• Models built to explain macroeconomic phenomena.
• The important phenomena are long-run growth and business cycles.
• Approach in this book is to build up macroeconomic analysis from
microeconomic principles.
 Gross Domestic Product, Economic
Growth, and Business Cycles
• Gross Domestic Product (GDP): the quantity of goods and
services produced within a country’s borders over a particular
period of time.
• The time series of GDP can be separated into:
- trend and
- business cycle components.
Figure 1.1
Per Capita Real GDP (in 2009 dollars)
for the United States, 1900–2014
Figure 1.2
Natural Logarithm of Per Capita Real GDP
 From CORE:
GDP Per Capita
Figure 13.2. UK GDP per capita (1875-2014).
Left hand side Graph
25,000
shows real GDP per Capita
(per person):
- Hockey stick effect (Unit
20,000 10.5
1)
Real GDP per capita (£, factor cost)

- Growth not smooth

10.0 - Cannot effectively
15,000
showcase growth rate

9.5

Log of Real GDP per capita

10,000 Right hand side Graph
shows log real GDP per
9.0 Capita:
5,000 - Shows economic growth
rate more effectively
8.5 - Dashed line (slope)
0 shows average annual
growth rate
1875
1886
1897

1919
1930
1941

1963

1985
1908

1952

1974

1996
2007

8.0
10
 From CORE:
South African Real GDP Per Capita

60000

55000

50000 Graph shows real GDP

per Capita (per person):
Impact of - Hockey stick effect
Real GDP per capita (Rand)

45000
COVID (Unit 1) not clearly
visible
40000
- Growth not smooth
- Cannot effectively
35000 showcase growth
rate
30000

25000

20000

1991
1946

1951

1956

1961

1966

1971

1976

1981

1986

1996

2001

2006

2011

2016
11
 From CORE:
Natural log of South African Real GDP Per Capita

11

10.9
Graph shows log real
10.8 GDP per Capita:
Impact of - Shows economic
Natural log of Real GDP per capita

10.7
COVID growth rate more
10.6
effectively
- Dashed line (slope)
10.5 shows average
annual growth rate
10.4 - Long-run growth in
unit 16 & 17. This
10.3
unit focuses on
10.2 fluctuations.

10.1

10
1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

2016
12
 SA real GDP per capita (2015 prices)
90000 6

80000 4

70000
2

60000
0
50000
-2
40000
-4
30000

-6
20000

10000 -8

0 -10
1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

Real GDP per capita Linear (Real GDP per capita)

% change in real GDP per capita Linear (% change in real GDP per capita)

14
Figure 1.3
Natural Logarithm of Per Capita Real GDP and
Trend
Figure 1.4
Percentage Deviations from Trend in
Per Capita Real GDP
 Macroeconomic Models
• A macroeconomic model captures the essential features of the world
needed to analyze a particular macroeconomic problem.
• Macroeconomic models should be simple, but they need not be realistic.
 Basic Structure of a Macroeconomic
Model
• Consumers and Firms
• The Set of Goods that Consumers Consume
• Consumers’ Preferences
• The Production Technology
• Resources Available
 What Do We Learn From
Macroeconomic Analysis? Part I
1. What is produced and consumed in the economy is determined jointly by
 the economy’s productive capacity and the preferences of consumers.

2. In free market economies, strong forces tend to produce socially efficient
economic outcomes.
3. Unemployment is painful for individuals, but it is a necessary evil in
modern economies.
4. Improvements in a country’s standard of living are brought about in the
long run by technological progress.
 What Do We Learn From
Macroeconomic Analysis? Part II

5. A tax cut is not a free lunch.
6. Credit markets, banks play key roles in the macroeconomy.


7. What consumers and firms anticipate for the future has an important
bearing on current macroeconomic events.
 What Do We Learn From
Macroeconomic Analysis? Part III
8. Money takes many forms, and society is much better off with it than
without it. Once we have it, however, changing its quantity ultimately
does not matter.

9. Business cycles are similar, but they can have many causes.
 What Do We Learn From
Macroeconomic Analysis? Part IV
10. Countries gain from trading goods and assets with each other, but trade is
also a source of shocks to the domestic economy.
11. In the long run, inflation is caused by growth in the money supply.
12. If there is a short-run tradeoff between output and inflation, that has very
different implications relative to the relationship between nominal
interest rates and inflation.
 Understanding Recent and Current
Macroeconomics Events
• Aggregate Productivity
• Unemployment and Vacancies
• Taxes, Government Spending, and the Government Deficit
• Inflation
• Interest Rates
• Business Cycles in the United States
• Credit Markets and the Financial Crisis
• The Current Account Surplus
Figure 1.5
Natural Logarithm of Average Labour
Productivity
Figure 1.6
The Unemployment Rate for the United States
Figure 1.7
The Beveridge Curve
Figure 1.8
Total Taxes and Total Government
Spending
Figure 1.9
Total Government Surplus
Figure 1.10
The Inflation Rate
Figure 1.11
The Nominal Interest Rate and the
Inflation Rate
Figure 1.12
Real Interest Rate
Figure 1.13
Percentage Deviation From Trend in
Real GDP
Figure 1.14
Interest Rate Spread
Figure 1.15
Relative Price of Housing
Figure 1.16
Exports and Imports of Goods and
Services
Figure 1.17
The Current Account Surplus
Chapter 2 Assignment (deadline 11 April 09:00)
Read chapter 2 and prepare an infographic/mind map/concept
map/diagram (i.e visual representation) of the content regarding
measurement in macroeconomics. It needs to be uploaded on
SUNLearn BEFORE 09:00am on 11 April 2023. The best submission
will receive a cash prize of R500. (Indicate clearly whether you are
attending lectures in group 1 or 2.) / Lees hoofstuk 2 en berei 'n
infografika/breinkaart/konsepkaart/diagram (d.i. visuele
voorstelling) voor van die inhoud rakende meting in makro-
ekonomie. Dit moet voor 09:00vm op 11 April 2023 op SUNLearn
opgelaai word. Die beste voorlegging sal 'n kontantprys van R500
ontvang. (Dui duidelik aan of jy lesings in groep 1 of 2 bywoon.)