MACROECONOMICS 1

MACROECONOMIC ISSUES

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MACROECONOMICS
• Macroeconomics: the study of the structure and
performance of national economies and government
policies that affect economic performance
• Behaviour of the economy as a whole.
• Differences amongst schools of macroeconomists:
Classical versus Keynesians.

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MACROECONOMICS
• Issues addressed by macroeconomists:
• Long-run economic growth
• Business cycles
• Unemployment
• Inflation
• The international economy
• Macroeconomic policy
• Aggregation: from microeconomics to
macroeconomics

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KEY VARIABLES
• Gross Domestic Product (GDP) – A measure of all
currently produced final goods and services.

• Unemployment rate – The number of unemployed

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KEY VARIABLES
• Inflation rate – The percentage rate of change in the
price index (measures the aggregate price level
relative to a base year) over a given period.
• Consumer price index (CPI) – A measure of the retail
prices of a fixed “market basket” of several thousand
goods and services purchased by households.
• Federal budget deficit – Federal government tax
revenues minus outlays.
• Trade deficit – The excess of imports over exports

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MACROECONOMICS ISSUES
• Short-term problems:
• Unemployment
• Inflation

• Long-term problems:
• Long-run economic growth
• Balance of payments

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MACROECONOMICS ISSUES
• Unemployment:
• the number of people who are available for work
and actively seeking work but cannot find jobs
• Recessions cause the unemployment rate to rise

• Inflation
• Deflation: when prices of most goods and services
decline
• Inflation rate: the percentage increase in the level
of prices
• Hyperinflation: an extremely high rate of inflation

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MACROECONOMICS ISSUES
• Long-run economic growth
• Two main sources of growth
• Population growth
• Increases in average labour productivity -
Output produced per employed worker

• Business cycles
• Business cycle: Short-run contractions and
expansions in economic activity
• Downward phase is called a recession

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MACROECONOMICS ISSUES
• The international economy
• Open vs closed economies
• Open economy: an economy that has extensive
trading and financial relationships with other
national economies
• Closed economy: an economy that does not
interact economically with the rest of the world
• Trade imbalances
• Trade surplus: exports exceed imports
• Trade deficit: imports exceed exports

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MACROECONOMICS ISSUES
• Macroeconomic Policy
• Fiscal policy: government spending and taxation
• Effects of changes in the federal budget

• Monetary policy: growth of money supply;

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MACROECONOMICS ISSUES
• Aggregation
• Aggregation: summing individual economic
variables to obtain economywide totals
• Distinguishes microeconomics (disaggregated)
from macroeconomics (aggregated)

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WHAT MACROECONOMISTS DO
• Macroeconomic forecasting
• Relatively few economists make forecasts
• Forecasting is very difficult

• Macroeconomic analysis
• Private and public sector economists—analyze
current conditions
• Public sector employs many macroeconomic
analysts who provide policy advice

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WHAT MACROECONOMISTS DO
• Macroeconomic research
• Goal: to make general statements about how the
economy works
• Theoretical and empirical research are necessary
for forecasting and economic analysis
• Economic theory: a set of ideas about the
economy, organized in a logical framework
• Economic model: a simplified description of some
aspect of the economy

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WHAT MACROECONOMISTS DO
• Usefulness of economic theory or models
depends on the reasonableness of assumptions,
the possibility of being applied to real problems,
empirically testable implications, theoretical
results consistent with real-world data
• Data development—very important for making
data more useful

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WHY MACROECONOMISTS
DISAGREE
• Positive vs normative analysis
• Positive analysis: examines the economic
consequences of a policy
• Normative analysis: determines whether a policy
should be used

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WHY MACROECONOMISTS
DISAGREE
• Classicals vs. Keynesians
• The classical approach
• The economy works well on its own
• The “invisible hand”: the idea that if there are free
markets and individuals conduct their economic affairs in
their own best interests, the overall economy will work
well
• Wages and prices adjust rapidly to get to equilibrium
• Equilibrium: a situation in which the quantities
demanded and supplied are equal
• Changes in wages and prices are signals that
coordinate people’s actions
• Result: Government should have only a limited role in the
economy

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WHY MACROECONOMISTS
DISAGREE
• Classicals vs Keynesians
• The Keynesian approach
• The Great Depression: Classical theory failed
because high unemployment was persistent
• Keynes: Persistent unemployment occurs
because wages and prices adjust slowly, so
markets remain out of equilibrium for long
periods
• Conclusion: Government should intervene to
restore full employment

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WHY MACROECONOMISTS
DISAGREE
• Classicals vs Keynesians
• The evolution of the classical–Keynesian debate
• Keynesians dominated from W WI I to 1970
• Stagflation led to a classical comeback in the
1970s
• Last 30 years: excellent research with both
approaches

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