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REFERENCES1. N. Gregory Mankiw. 2013. Macroeconomics,

8th ed., Worth Publishers, New York.

2. Karl E. Case and Ray C. Fair. 2004. Principles of Macroeconomics. 7th ed., Pearson, New Jersey.

3. Paul Krugman and Robin Wells. 2006. Macroeconomics, Worth Publishers, New York.

4. Any standard text on macroeconomics available.

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N. Gregory Mankiw

Eighth Edition

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PART I

Introduction

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The scientific study of people and their institutions from the point of view of how they go about producing and consuming goods and services and how they face the problem of making choices in a world of scarce resources.

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1. To better understand the profound effect that economic issues have on the world

2. To understand what politicians are advocating, be they great or mad, we must understand the economic theory upon which they are acting (the effects that economic ideas and theories have on world leaders)

3. To better understand how the world and its people function

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Microeconomics is concerned with the production and consumption decisions of consumers and producers and with the allocation of scarce resources among industries. It focuses on how decisions are made by individuals and firms and the consequences of those decisions.

Macroeconomics,the area of economics that focuses on the behavior of the economy as a whole, examines the aggregate behavior of the economy—how the actions of all the individuals and firms in the economy interact to produce a particular economy wide level of economic performance.

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WHAT MACROECONOMISTS STUDY Rapid growth Absolute poverty Rate of inflation / Stable price Economic experience – recession /

depression Falling income / rising unemployment Public policy to reduce the severity

The state of the economy affects everyone – macroeconomic issues plat a central role in the national political debates

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HOW ECONOMISTS THINK Study politically charged issues Has its own set of tools - terminology, data, and

way of thinking Models – based on Microeconomic theory Models have two kinds of variables1. Endogenous variables – that a model tries to

explain2. Exogenous variables – a model takes as given (How the exogenous variables affect the

endogenous variables )

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1. explaining how the economy works 2. formulating economic policy

Macroeconomics is concerned with the behavior of the economy as a whole – with booms and recessions, the economy’s total output of goods and services and the growth of output, the growth of inflation and unemployment, the balance of payments, and the exchange rates.Macroeconomics deals both with long-run economic growth and with the short-run economic fluctuations that constitute the business cycle. Macroeconomists collect data, formulate general theories. They cannot conduct controlled experiments. Instead, they must make use of the data that history gives them.

TWO JOBS OF MACROECONOMICS

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THE ROOTS OF MACROECONOMICS The Great Depression was a period of

severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s.

Classical economists applied microeconomic models, or “market clearing” models, to economy-wide problems.

However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the impetus for the development of macroeconomics. 12

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THE ROOTS OF MACROECONOMICS In 1936, John Maynard Keynes

published The General Theory of Employment, Interest, and Money.

Keynes believed governments could intervene in the economy and affect the level of output and employment.

During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession. 13

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MACROECONOMIC CONCERNSThree of the major concerns of macroeconomics are:InflationOutput growthUnemployment

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INFLATION AND DEFLATION Inflation is an increase in the overall

price level.Hyperinflation is a period of very rapid

increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation.

Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.

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OUTPUT GROWTH:SHORT RUN AND LONG RUN The business cycle is the cycle of short-

term ups and downs in the economy. The main measure of how an economy is

doing is aggregate output:Aggregate output is the total quantity

of goods and services produced in an economy in a given period.

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OUTPUT GROWTH:SHORT RUN AND LONG RUN A recession is a period during which aggregate

output declines. Two consecutive quarters of decrease in output signal a recession.

A prolonged and deep recession becomes a depression.

Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.

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UNEMPLOYMENT The unemployment rate is the

percentage of the labor force that is unemployed.

The unemployment rate is a key indicator of the economy’s health.

The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium. Why do labor markets not clear when other markets do?

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GOVERNMENT IN THE MACROECONOMYThere are three kinds of policy

that the government has used to influence the macroeconomy:1. Fiscal policy2. Monetary policy3. Growth or supply-side policies

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GOVERNMENT IN THE MACROECONOMYFiscal policy refers to government

policies concerning taxes and spending.Monetary policy consists of tools used by

the Federal Reserve to control the quantity of money in the economy.

Growth policies are government policies that focus on stimulating aggregate supply instead of aggregate demand.

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THE COMPONENTS OF THE MACRO ECONOMY

The circular flow diagram shows the income received and payments made by each sector of the economy.

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THE COMPONENTS OFTHE MACROECONOMY

Everyone’s expenditure is someone else’s receipt. Every transaction must have two sides.

The circular flow diagram shows the income received and payments made by each sector of the economy.

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Measuring the overall performance of the economy (GDP)

Measuring the cost of living (CPI) Measuring joblessness (Unemployment Rate)I. The Gross Domestic Product (GDP) is the market

value of all final goods and services produced within an economy in a given period of time.

II. The consumer price index (CPI) measures the general level of prices.

III. The unemployment rate tells us the fraction of workers who are unemployed.

3 MAJOR STATSTICS IN MACROECONOMICS

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THAT’S ALL

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