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.
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
shows real GDP per
Capita (per person):
25,000 10.5 - Hockey stick effect
(Unit 1)
- Growth not smooth
Real GDP per capita (£, factor cost)

20,000 10.0 - Cannot effectively

showcase growth
rate
15,000 9.5

Log of Real GDP per capita Right hand side Graph

shows log real GDP per
10,000 9.0
Capita:
- Shows economic
8.5 growth rate more
5,000
effectively
- Dashed line (slope)
0 8.0 shows average
annual growth rate
1875

1911
1923
1935

1959

2007
1887
1899

1947

1971
1983
1995

9
 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
1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

2016
10
 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
1976
1946

1951

1956

1961

1966

1971

1981

1986

1991

1996

2001

2006

2011

2016
11
 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)

12
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
• What is produced and consumed in the economy is
determined jointly by the economy’s productive
capacity and the preferences of consumers.
• In free market economies, strong forces tend to
produce socially efficient economic outcomes.
• Unemployment is painful for individuals, but it is a
necessary evil in modern economies.
• 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
• A tax cut is not a free lunch.
• Credit markets, banks play key roles in the
macroeconomy.
• 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
• 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.
• Business cycles are similar, but they can have many
causes.
What Do We Learn From
Macroeconomic Analysis? Part IV
• Countries gain from trading goods and assets with each
other, but trade is also a source of shocks to the
domestic economy.
• In the long run, inflation is caused by growth in the
money supply.
• 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