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

2. 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, …

3. 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

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

5. 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

6. Figure 1 Two interpretations of a shift in the demand curve D1 PriceQ0
Quantity
Quantity
(a)
(b)

7. 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

8. Figure 2 An economy slipping into a recession S E P0 Price Level B P2D0
Price Level D2 E P0 Q0 B P2 Q2
Domestic Product

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

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

11. 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

12. 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

13. 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

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

15. 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”

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

17. Figure 8 The effects of a favorable supply shift S0 S1 S2 C BD1 S0 S1
Price Level D0 S2 C B E
Real GDP