1

Intermediate Macroeconomics
Chapter 1
An Overview of Macroeconomics
Intermediate Macroeconomics
An Overview of Macroeconomics
1. What is Macroeconomics
2. Macroeconomic Goals
3. Economic Theory in Practice
Intermediate Macroeconomics
1. What Is Macroeconomics?
Microeconomics - study of behavior of
individual economic agents.
Macroeconomics - study of aggregate
measures of the economy
Intermediate Macroeconomics
2. Macroeconomic Goals
Low Unemployment
Price Stability
Economic Growth
Complementary and Conflicting Goals
Intermediate Macroeconomics
2. Macroeconomic Goals
Low Unemployment
0%
5%
10%
15%
20%
25%
1930 1940 1950 1960 1970 1980 1990 2000
A
v
e
r
a
g
e

a
n
n
u
a
l

u
n
e
m
p
l
o
y
m
e
n
t

r
a
t
e
,

%
U.S.
Fairfax Co., VA.
1973 - 1975
recession
1981 - 1982
recession
1990 - 1991
recession
Great Depression
(1929 - 1933)
World War II
(1941 - 1945)
Source: Bureau of Labor Statistics (www.bls.gov)
Intermediate Macroeconomics
2. Macroeconomic Goals
Price Stability
Average Annual U.S.Inflation Rate
Consumer Price Index
-15%
-10%
-5%
0%
5%
10%
15%
20%
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003
A
n
n
u
a
l

C
h
a
n
g
e
,

p
e
r
c
e
n
t
Great Depression
1929 - 1933
World War 1
1917 - 1918
World War 2
1941 - 1945
Arab oil
Embargo
1973 - 1974
Iranian
Revolution
and Oil Price
Increase
Source: Bureau of Labor Statistics (www.bls.gov)
2
Intermediate Macroeconomics
2. Macroeconomic Goals
Economic Growth
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
1930 1940 1950 1960 1970 1980 1990 2000
P
e
r
c
e
n
t

a
n
n
u
a
l

c
h
a
n
g
e
Source: Bureau of Economic Anal ysis (www.bea.gov)
Nominal GDP
Real GDP (chained 1996 dollars)
Annual change in U.S. GDP per capita
Intermediate Macroeconomics
2. Macroeconomic Goals
Economic Growth
$0
$10,000
$20,000
$30,000
$40,000
1930 1940 1950 1960 1970 1980 1990 2000
R
e
a
l

G
D
P

p
e
r

c
a
p
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t
a
c
h
a
i
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e
d

(
1
9
9
6
)

d
o
l
l
a
r
s
Long termtrend 2.4% per year
Intermediate Macroeconomics
2. Macroeconomic Goals
Complementary and Conflicting Goals
Complementary Goals
Low unemployment and high economic
growth
Conflicting Goals
Low unemployment and low inflation
Intermediate Macroeconomics
3. Economic Theory in Practice
Economic Theory and Models
Empirical Applications
Intermediate Macroeconomics
3. Economic Theory in Practice
Economic theory and models
What makes a good model?
Accurately explains history
Makes reasonable predictions
about the future
Intermediate Macroeconomics
3. Economic Theory in Practice
Economic theory and models
Keep models simple
Occams Razor - eliminate
complicating details that dont
significantly contribute to the model
Ceteris Paribus - other things being
equal
3
Intermediate Macroeconomics
3. Economic Theory in Practice
Empirical time series applications
Use Real rather than Nominal values
Compare Per Capita rather than
Totals
Compare Growth Rates rather than
Levels
Intermediate Macroeconomics
3. Economic Theory in Practice
Compare real rather than nominal
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1929 1939 1949 1959 1969 1979 1989 1999
C
h
a
i
n
e
d

2
0
0
0

d
o
l
l
a
r
s
Real GDP Nominal GDP
Source: Bureau of Economic Anal ysis, www.bea.gov
Percent increase 1929 2003
Nominal GDP: 10,522 %
Real GDP: 1,100 %
Intermediate Macroeconomics
3. Economic Theory in Practice
Compare per capita rather than aggregates
$0
$10,000
$20,000
$30,000
$40,000
1929 1939 1949 1959 1969 1979 1989 1999
P
e
r

c
a
p
i
t
a

c
h
a
i
n
e
d

2
0
0
0

d
o
l
l
a
r
s
$0
$10,000
$20,000
$30,000
$40,000
b
i
l
l
i
o
n
s

o
f

c
h
a
i
n
e
d

2
0
0
0

d
o
l
l
a
r
s
Total Real
GDP
Real GDP
per capita
Source: Bureau of Economic Anal ysis, www.bea.gov
Percent increase 1929 2003
Total Real GDP: 1,100 %
Real GDP per capita: 402%
Intermediate Macroeconomics
3. Economic Theory in Practice
Compare growth rates rather than levels
2.0%
4.1%
1.7%
2.9%
2.1%
2.3%
2.0%
0%
1%
2%
3%
4%
5%
A
n
n
u
a
l

g
r
o
w
t
h

r
e
a
l

G
D
P

p
e
r

c
a
p
i
t
a
1930-
1940
1940-
1950
1950-
1960
1960-
1970
1970-
1980
1980-
1990
1990-
2000
Source: Bureau of Economic Anal ysis, www.bea.gov