An Introduction to Macroeconomics Where the telescope ends, the microscope begins. Which of the two has the grander view? VICTOR HUGO

Macroeconomics vs. Microeconomics Decisions of individual units No matter how large Example: GE’s pricing policy Macroeconomics Behavior of entire economies No matter how small Example: inflation in Monaco Economic aggregates: aggregate output, inflation, unemployment, …

Macroeconomics & Aggregation Combine many individual markets into one overall market Why can we aggregate? Composition of demand & supply In various markets Important for microeconomics issues Not important for macroeconomics issues During economic fluctuations, markets move up or down together

Macroeconomics & Microeconomics Assume most details Resource allocation & income distribution Relatively unimportant Microeconomics Ignore macroeconomics issues Focus – individual markets Allocate resources Distribute income

Supply & Demand in Macroeconomics Aggregate demand (AD) curve Quantity of domestic product – demanded Each possible value of price level Aggregate supply (AS) curve Quantity of domestic product – supplied

Figure 1 Two interpretations of a shift in the demand curve D1 Price Q0 Quantity Quantity (a) (b)

Supply & Demand in Macroeconomics Inflation Sustained increase in price level Outward shift of aggregate demand curve Recession – period of time Total output – declines Production falls People lose jobs Inward shift of aggregate demand curve

Figure 2 An economy slipping into a recession S E P0 Price Level B P2 D0 Price Level D2 E P0 Q0 B P2 Q2 Domestic Product

Supply & Demand in Macroeconomics Macroeconomists study Inflation Recession & unemployment (Business Cycles) Economic growth

Figure 3 Economic growth S0 S1 C Price Level E D1 D0 Q0 Q1 Domestic Product

Gross Domestic Product Gross domestic product (GDP) Sum: money values All final goods & services Produced - domestic economy (Toyota car produced in the US vs. Ford pick-up produced in Japan) Sold – organized markets (gambling in Vegas vs. gambling in Chicago) Specified period of time Usually a year

Gross Domestic Product Nominal GDP GDP in current dollars Value outputs – current prices Real GDP Value outputs of different years at common prices GDP in constant dollars

What Gets Counted in GDP? GDP - particular year Add up money value of things Goods & services Produced within the year Final goods & services Production: geographic boundaries of U.S. Organized markets

Gross Domestic Product Final goods and services Purchased by their ultimate users Intermediate good - purchased For resale For use in producing another good

Gross Domestic Product Limitations of GDP Not measure: nation’s economic well-being Includes only market activity Housework, yard work, … Places no value on leisure Counted: “Bads” and “Goods” Hurricane Katrina might increase GDP Ecological costs Not deducted from GDP Needed: “Green GDP”

Figure 7 The effects of an adverse supply shift S1 S0 A Price Level E Real GDP

Figure 8 The effects of a favorable supply shift S0 S1 S2 C B D1 S0 S1 Price Level D0 S2 C B E Real GDP