Macroeconomics

Chapter 1:
Introduction to Macroeconomics

ECON2220 Intermediate Macroeconomics

Wataru Miyamoto
Spring 2024

Copyright © 2024 Pearson Education Ltd. 1

Chapter Outline
• Introduction to Macroeconomics

• What Macroeconomics Is About

• What Macroeconomists Do
• Why Macroeconomists Disagree

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What Macroeconomics Is About
• Macroeconomics deals with the aggregate economy (=national
economy)
• Better called aggregate economics
• Studies the overall behavior of aggregate economy and the impacts of policies
on the economy

• Microeconomics studies the behavior of individual people, firms or

markets (disaggregated)
• The aggregate economy includes all the different individual markets we study
in micro so everything we learn about micro still applies here

• Aggregation: from microeconomics to macroeconomics

• Different focuses, the same approach
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What Macroeconomics Is About
• Topics
• Long-run economic growth
• Business cycles
• Unemployment
• Inflation
• (The international economy)
• Macroeconomic policy

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What Macroeconomics Is About
• How this course is organized: Two main parts

• The long run

• What happens to the economy in decades or longer
• Long-run economic growth

• The short run

• What happens to the economy from year to year (less than a decade)
• Business cycles (=short-run economic fluctuations)
• Output, unemployment, inflation

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Figure 1.1: Output of the U.S. economy, 1869–2021

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What Macroeconomics Is About
• What can we learn from the figure?

• Long-run economic growth

• Despite short-run fluctuations, total output grows in the long run

• Note decline in output in recessions; increase in output in some wars

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What Macroeconomics Is About
• Two main sources of growth
• Population growth
• Output per capita

• Which one do you care about more, total vs output per capita?

• Note: Sometimes average labor productivity is used instead of output per

capita
• Average labor productivity = Output produced per worker (=(𝑇𝑜𝑡𝑎𝑙
𝑂𝑢𝑡𝑝𝑢𝑡)/(# 𝑜𝑓 𝑊𝑜𝑟𝑘𝑒𝑟𝑠))
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Figure 1.2: Average labor productivity in the United
States, 1900–2021

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Figure: Output per capita of HK and other countries
(constant 2011 USD)
60000

50000

40000

30000

20000

10000

0
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
USA HKG UK Germany Japan Argentina China Ethiopia
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What Macroeconomics Is About
• What is the speed of growth?
• Growth rate of variable 𝑌 in year 𝑡 (≡ 𝑌𝑡 )
𝑌𝑡 − 𝑌𝑡−1
𝑌𝑡−1
• e.g. 𝑌 =Output
• Y2000 = 1.02 million HKD
• Y1999 = 1 million HKD
Growth rate of Y in 2000
Y2000 − Y1999
≡
Y1999
= 0.02 i. e. 2% growth rate

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What Macroeconomics Is About
• Average labor productivity growth:
• 2.6% per year from 1949 to 1973
• 1.1% per year from 1973 to 1995
• 1.9% per year from 1995 to 2007
• 1.3% per year from 2007 to 2021
• Small differences over time? Not really.

• How long does it take to double average labor productivity?

• 1% per year: 70 years
• 2% per year: 36 years
• 3% per year: 24 years

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What Macroeconomics Is About
• US historical average income growth rate
• 1.9% between 1951 and 2016. This means
• Income doubles in 36 years
• Your income will be 2.1 times higher in 40 years

• HK historical average income growth rate

• 4.4% between 1951 and 2016. This means
• Income doubles in 16 years
• Your income will be 5.4 times higher in 40 years

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 -5
10
15

-10
0
5
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
(constant 2011 USD)

1973
1975
1977

US
1979
1981
1983
HK 1985
1987
UK
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Figure: Output per capita growth rate of US, HK, and UK

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What Macroeconomics Is About
• Business cycles
• Business cycle: Short-run contractions and expansions in economic activity

• Downward phase is called a recession

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Figure: US business cycles

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What Macroeconomics Is About
• Why do we care about business cycles?
• At best about 7% drop in annual income in Hong Kong between 1951 and
2018

• Long-run effect

• Unemployment

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What Macroeconomics Is About
• Unemployment
• Unemployment: the number of people who are available for work and
actively seeking work but cannot find jobs

• U.S. experience shown in Fig. 1.3, showing unemployment rate

(unemployment as a fraction of labor force)

• Recessions cause unemployment rate to rise

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Figure 1.3: The U.S. unemployment rate, 1890–2021

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Figure: The U.S. employment

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What Macroeconomics Is About
• Inflation
• Inflation rate: the percentage increase in the level of prices
• i.e. growth rate of (average) price level

• Deflation: when prices of most goods and services decline

• Hyperinflation: an extremely high rate of inflation

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Figure 1.4: Consumer prices in the United States, 1800–
2021

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What Macroeconomics Is About
• 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 (exports – imports)

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Figure 1.5: U.S. exports and imports, 1869–2021

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What Macroeconomics Is About
• Macroeconomic Policy
• Fiscal policy: government spending and taxation

• Monetary policy: growth of money supply; determined by central bank

• The Fed (The Federal Reserve System) in the United States
• Hong Kong Monetary Authority

• Support for long run income growth

• Stabilization of short run economic fluctuations (income, unemployment,
inflation, etc.)

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Figure 1.6: U.S. Federal government spending and tax
collections, 1869–2021

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What Macroeconomics Is About
• Our approach to discuss these issues
• Model starts with microfoundation: individual (optimal) behaviour
• More rigorous analysis than introductory macro

• Aggregation: summing individual economic variables to obtain economy-wide

totals
• Focus on individuals then aggregate

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What Macroeconomists Do
• Where do they work?
• Government, central banks, international organizations, academic
institutions, think tanks, etc.

• Macroeconomic forecasting
• Relatively few economists make forecasts
• Forecasting is very difficult (especially forecasting a recession)
• Weather forecast: Hard to predict weather a year later
• Doctors: Do not predict who catches a cold
• Predicting the Great Recession starting in 2008

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Figure: Predicting the recession of 2008-2009 in the U.S.
(Annualized quarterly GDP growth rate)

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Figure: Predicting the recession of 2008-2009 in the U.S.
(Annualized quarterly GDP growth rate)

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What Macroeconomists Do
• Macroeconomic analysis
• Private and public sector economists—analyze current conditions

• Why? We need to understand what was going on to think about a desirable

policy

• Public sector employs many macroeconomic analysts who provide policy

advice

• But how? We need to use a model because we can use it as a lab to try an
experimental policy
• E.g. The effect of income tax cut on output

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What Macroeconomists Do
• Macroeconomic research
• Most professors do this

• Goal: To make general statements about how the economy works

• E.g. Does government spending increase private consumption?

• Often, we build a model to understand what is going on and think about the
effect and the desirability of policy

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What Macroeconomists Do
• Difficulty of macroeconomics research
• Limitation of data
• Most of the time, we cannot conduct experiments repeatedly
• The effect of medicine/vaccine
• Need to build a model to do experiments

• People change their behaviour in response to economic conditions/policies

• Need to understand what people think
• control problem in engineering (e.g. rocket control)
• Do income tax cuts decrease tax revenue?

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What Macroeconomists Do
• Data development—very important for making data more useful

• Education
• Useful for everyday life (economic decisions)

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Why Macroeconomists Disagree
• Sometimes economists disagree
• Two types of analyses: Positive vs. normative analysis
• Positive analysis: examines the economic consequences of a policy
• E.g. The effect of income tax cuts
• E.g. The effect of smoking

• Normative analysis: determines whether a policy should be used

• E.g. Whether income tax should be cut
• E.g. Whether people should smoke

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Why Macroeconomists Disagree
• Macroeconomists disagree with each other for normative analysis

• Even for positive analysis, sometimes macroeconomists disagree

• Why?
• Two popular frameworks
• Classical vs Keynesian view
• Especially for the short run analysis
• Classical view
• The economy works well on its own. Government should have only a limited
role in the economy.
• Keynesian view
• The Great Depression: Classical theory failed because high unemployment
was persistent. Government should intervene to restore full employment.
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Summary
• Two main topics
• Long-run economic growth
• Short-run economic fluctuations

• Role of macroeconomists
• Macroeconomic analysis/research
• Forecasting/Data construction

• Typical approach
• Individual optimal behavior to aggregate

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