Introductory Materials

Chapter 1

Professor Steve Cunningham

Intermediate Macroeconomics
ECON 219
What is Macroeconomics?

• Macroeconomics is the study of the structure

and performance of large-scale economies
(typically national) and of the policies that
governments use to try to affect economic
performance.

• An economy is a collection of people viewed in

terms of the ways they organize themselves in
efforts to produce and/or acquire the things
they value.
Gross Domestic Product (GDP)
 GDP is the measure:
– Of all goods and services within the
boundaries of the country,
– Currently produced,
– Evaluated at market prices,
– In final sales.
Real GDP and Growth
 Real GDP is the GDP valued at the
prices of a base year.
 GDP given in current prices is called
nominal GDP or money GDP.
 The economic growth rate is the
percentage change in real GDP.
Macroeconomic Issues
 Growth
 Business Cycles and Unemployment
 Inflation
 Trade Deficits
 Budget Deficits and
Government Spending
 Taxes
 Output and Employment in the United States,
1959–Present

Sources: Economic Report of the President, 2002; Economic Indicators (various issues). Figure 1–1
Growth is important
 Provides jobs
 Provides a higher average standard
of living (or at least maintain the
same standard in the face of a
growing population)
 Provides more opportunities and
mobility
What causes growth?
 Population (workforce) growth
 Technology growth, education, and
training provide higher productivity:
– each worker to produce more per period
(higher average labor productivity)
– the production of more goods for the
same level of raw materials
 Per Capita Output Comparisons
for Selected Nations

Source: World Bank, World Development Indicators, 2003. Figure 1–6

 Output Growth Comparisons

Source: International Monetary Fund, World Economic Outlook, April 2002. Figure 1–7
 World
real GDP
($ billions)
World Output
and the Declining
Predominance of
the United States

U.S. real GDP

as percent of
world real GDP

Sources: International Monetary Fund, World Economic

Outlook, April 2002; Economic Report of the President,
2002; Economic Indicators (various issues). Figure 1–9
Business Cycles
 Refers to short-run, sometimes severe,
contractions and expansions in economic
activity. Business cycles result in changes in the
levels of employment.
 Unemployment is the number of people who are
available for employment, and actively seeking
employment, but who cannot find jobs.
 The unemployment rate is the number
unemployed divided by the total labor force,
expressed as a percentage.
 U.S. Unemployment, 1959–Present

Sources: Economic Report of the President, 2002; Economic Indicators (various issues). Figure 1–2
Inflation
 The Consumer Price Index (CPI)
measures the average level of prices
of the goods and services that the
typical urban family buys.
 The Bureau of Labor Statistics (BLS)
calculates the CPI monthly.
 Often inflation is measure by the rate
of change of the CPI.
 Annual Money Growth Rates and Inflation Rates
in the United States, 1960–Present

Sources: Economic Report of the President, 2002; Economic Indicators (various issues). Figure 1–3
 Average Inflation Rates for
Selected Nations and Regions of the World

Source: International Monetary Fund, World Economic Outlook, April 2002. Figure 1–8
Open vs. Closed Economy
 An economy is open if it engages in
a significant amount of trade
(importing and exporting) with the
rest of the world.
 An economy is closed if it does not
interact economically with the rest of
the world.
 The U.S. Balance of Trade, 1949–Present

Sources: Economic Report of the President, 2002; Economic Indicators (various issues). Figure 1–4
Budget Deficit
 Government Purchases (G) of goods and
services (gross).
 Net Taxes (T ) are equal to the taxes paid to the
government less the transfer payments
received from the government less interest
payments made by the government on its debt
(T = taxes - transfers - gov’t interest)
 A Budget Deficit is G > T
 A Budget Surplus is G < T
 Annual Hours Worked Per Person in Selected Nations

Source: International Labor Organization. Figure 1–10

 The Relative Size of the Shadow Economy and the
Total Tax and Social Security Burden
in Selected Nations
Shadow economy activity as a
percentage of official economic activity

Shadow economy activity as a

percentage of official economic activity

Figure 1–12

Source: Friedrich Schneider, “The Increase of the Size of the Shadow

Economy of Eighteen OECD Countries:Some Preliminary Explanations,”
CESifo Working Paper no. 306, June 2000.
Why Economists Disagree
 Different assumptions
 Different worldview or vision
 Different normative view
Conservatives vs. Liberals
(Given in Extreme Characterizations)
Conservative
(Constrained Vision)
Individual vs. The individual and his/her
Society freedom is more important
than the collective.
Decision-making De-centralize. Individual
knowledge and judgment
are imperfect.
Organization of Uncoordinated processes
Social Processes are best. This maximizes
freedom, flexibility, use of
proximity.
Equality Equality means “parity of
privileges.” It is process
equality.
Liberal
(Unconstrained Vision)
The collective is more
important than the individual.
Society shapes the individual.
Centralized. Some individuals
are better able to decide for
others.
Coordinated processes. Why
act without reason?
Equality means nothing
outside of social outcomes. It
is “end-state equality.”
Classicals vs. Keynesians
Classical Liberals
Liberals & Conservatives
 Keynesians  Classicals
 Marxists/Socialists  Neoclassicals
 Institutionalists  New Classicals
 New Keynesians  Supply-siders
 Monetarists
 Austrians