1. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 1 Introduction

2. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-2 What is Macroeconomics? Macroeconomics is the study of the behavior of large collections of economic agents. It focuses on –The aggregate behavior of individuals and firms, –The behavior of governments –The overall level of economic activity in countries, –The economic interactions among nations, –The effects of monetary and fiscal policy.

3. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-3 Macroeconomic Models A macroeconomic model captures the essential features of the world needed to analyze a particular macroeconomic problem. Models need not be realistic. They should be simple and capable of correctly predicting and explaining real- world events. Validity of a model is tested by confronting its predictions by data. (So, empirical analysis is also very important.)

4. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-4 Basic Structure of a Macroeconomic Model Basic structure of a macroeconomic model describes –The interaction among consumers and firms –The set of goods that consumers consume –Consumers’ preferences –The production technology –The resources available The approach we will follow is to build up macroeconomic analysis from microeconomic principles.

5. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-5 Topics We will focus on long-run growth and business cycles. Other topic that will be covered include –Taxes, government spending and the government deficit –Interest rates –Inflation –Unemployment –The current account surplus and the government surplus etc.

6. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-6 Gross Domestic Product, Economic Growth, and Business Cycles Gross Domestic Product (GDP): the quantity of goods and services produced in a country over a particular period of time. Some fundamental questions: –What causes sustained growth? Is there some limit to growth? –What causes business cycles? –Can (or should) the government do anything about growth and business cycles? –Why do dramatic increases and decreases in output/growth occur?

7. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-7 Figure 1.1 Per Capita Real GDP (in 2000 dollars) for the United States, 1900–2005

8. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-8 Figure 1.2 Natural Logarithm of Per Capita Real GDP

9. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-9 Figure 1.3 Natural Logarithm of Per Capita Real GDP and Trend

10. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-10 Figure 1.4 Percentage Deviations from Trend in Per Capita Real GDP

11. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 1-11 Figure 1.10 Percentage Deviation from Trend in Real GDP, 1947–2006