Chapter 1 Introduction and Measurement Issues Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

1-2 © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 1 Topics What is macroeconomics? GDP, economic growth, business cycles. Macroeconomic models. Understanding recent and current macroeconomic events.

1-3 © 2011 Pearson Addison-Wesley. All rights reserved. What is Macroeconomics? Models built to explain macroeconomic phenomena. The important pheonomena are long-run growth and business cycles. Approach in this book is to build up macroeconomic analysis from microeconomic principles.

1-4 © 2011 Pearson Addison-Wesley. All rights reserved. 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.

1-5 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.1 Per Capita Real GDP (in 2000 dollars) for the United States, 1900–2008

1-6 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.2 Natural Logarithm of Per Capita Real GDP

1-7 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.3 Natural Logarithm of Per Capita Real GDP and Trend

1-8 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.4 Percentage Deviations from Trend in Per Capita Real GDP

1-9 © 2011 Pearson Addison-Wesley. All rights reserved. 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.

1-10 © 2011 Pearson Addison-Wesley. All rights reserved. Basic Structure of a Macroeconomic Model Consumers and firms The set of goods that consumers consume Consumers’ preferences The production technology Resources available

1-11 © 2011 Pearson Addison-Wesley. All rights reserved. Understanding Recent and Current Macroeconomics Events Aggregate productivity Taxes, Government Spending and the Government Deficit Interest Rates Business Cycles in the United States Credit Markets and the Financial Crisis The Current Account Surplus and the Government Surplus Inflation Unemployment

1-12 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.5 Natural Logarithm of Average Productivity

1-13 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.6 Total Taxes and Total Government Spending

1-14 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.7 The Total Government Surplus in the United States as a Percentage of GDP

1-15 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.8 The Nominal Interest Rate and the Inflation Rate

1-16 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.9 Real Interest Rate

1-17 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.10 Percentage Deviation from Trend in Real GDP, 1947–2009

1-18 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.11 Interest Rate Spread

1-19 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.12 Relative Price of Housing

1-20 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.13 Exports and Imports of Goods and Services as Percentages of GDP

1-21 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.14 The Current Account Surplus and the Government Surplus

1-22 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.15 The Inflation Rate and the Money Growth Rate

1-23 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.16 The Unemployment Rate in the United States, 1948–2009

1-24 © 2011 Pearson Addison-Wesley. All rights reserved. Figure 1.17 Deviations from Trend in the Unemployment Rate (black line) and Percentage Deviations from Trend in Real GDP (colored line).