MACROECONOMICS

Looking at the Bigger Picture, in Broad Strokes

From Micro to Macro

• Microeconomics: individual markets or industries

• Demand

• Supply

• Prices

• Macroeconomics: the economy as a whole

• Aggregate demand

• Aggregate supply

• Overall price level

A study in contrasts.

Government

Rest of the World

HouseholdsFirms

The Circular Flow (Ver. 2)A glimpse of the macroeconomy.

Studying the Economy

• Macroeconomics is concerned the long-run trends and

short-term variations in the economy’s performance.

• Variables of interest:

• Productivity

• Growth

• Employment

• Inflation

Taking a snapshot of the economy.

Economic Management

• Even in a free-market setting, government has a significant

role to play beyond providing a level playing field.

• Policy instruments:

• Fiscal: Taxation and spending.

• Monetary: Control over the money supply.

• Other “supply-side” policies that encourage production.

A note on government’s role in the economy.

3,750

7,500

11,250

15,000

1950 1960 1970 1980 1990 2000

GDP ($ Billions)

US ANNUAL GDP (1950-2007)

Source: IMF International Financial Statistics

GDP Growth Inflation Unemployment Rate

1950 1960 1970 1980 1990 2000-5

0

5

10

15

20

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

GDP Growth Inflation Unemployment Rate

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

This illustrates that the

economy exhibits cyclical

behavior.

Upward trends are called

expansions or booms.

Downward trends are called

contractions, slumps or

recessions.

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

GDP Growth Inflation Unemployment Rate

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

GDP Growth Inflation Unemployment Rate

High growth after WWII.

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

GDP Growth Inflation Unemployment Rate

Government policies curb inflation and unemployment (demand-driven).

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

GDP Growth Inflation Unemployment RateStagflation:

High Inflation +

High Unemployment

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics

-5

0

5

10

15

20

1950 1960 1970 1980 1990 2000

GDP Growth Inflation Unemployment Rate

“Boom” years: strong economic performance, low inflation and low

unemployment.

YEAR-ON-YEAR COMPARISON (PERCENTAGE)

Source: IMF International Financial Statistics