Chapter 1

The Policy and

Practice of
Macroeconomics

Class overview
Review Syllabus.
Questions?

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Preview of chapter 1
To understand the practice of
macroeconomics
To understand what concerns
macroeconomists
To understand the role of macroeconomic
policy

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The Practice of Macroeconomics

Macroeconomics is the study of economic
activity and prices in the overall economy of
a nation or a region
Macroeconomic research draws heavily on
microeconomics, which looks at the
behavior of individual firms, households, or
markets

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Your turn

Form groups of 2-3 people

Learn each other names
Why are you taking this course?
Prepare a group answer to the following
question:
How macroeconomic conditions, issues and
events can affect your future?

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The Process: Developing

Macroeconomic Models
Macroeconomists explain how the overall
economy works by using an economic
theorya logical framework to explain a
particular economic phenomenon
Economic theory involves developing an
economic modela simplified
representation of the economic
phenomenon that takes a mathematical or
graphical form

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The Purpose: Interpreting

Macroeconomic Data
Macroeconomists focus in particular on
three economic data series:
real GDP
unemployment rate
inflation rate

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The Purpose: Interpreting

Macroeconomic Data (contd)
Real Gross Domestic Product (GDP)
measures the output of actual goods and
services produced in an economy over a fixed
period, usually a year

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FIGURE 1.2 U.S. Real GDP Per Capita,

1900-2013

Sources: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/; and for data before
1960, Maddison, Angus. Historical statistics. http://www.ggdc.net/maddison/

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FIGURE 1.3 Cross-Country Comparison of

Real GDP Per Capita in 2012

Source: World Bank. World development indicators. http://data.worldbank.org/indicator/

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Business Cycle
Business cycles are recurrent up and
down movements in economic activity that
differ in how regular they are
A recession occurs when economic activity
declines and real GDP per person falls
A depression occurs when the decline in
real GDP is severe

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Unemployment Rate
The unemployment rate measures the
percentage of workers looking for work, but
who do not have jobs, at a particular point
in time

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FIGURE 1.4 U.S. Unemployment Rate,

1929-2013

Sources: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/; and
data prior to 1948, National Bureau of Economic Research. Macro history database, income and
employment. www.nber.org/databases/macrohistory/contents/chapter08.html
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FIGURE 1.5 Cross-Country Comparison of

Average Unemployment Rates, 2003-2013

Source: International Monetary Fund. http://www.imf.org/external/data.htm

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Inflation
The inflation rate tells us how rapidly the
overall level of prices is rising
Deflation occurs when the inflation rate is
negative
Hyperinflation refers to the situation of
super high inflation

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FIGURE 1.6 U.S. Inflation Rate,

1910-2013

Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/

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FIGURE 1.7 Cross-Country Comparison of

Average Inflation Rates, 2003-2013

Source: International Monetary Fund. http://www.imf.org/external/ data.htm

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Macroeconomic Policy
The goal of developing models is to determine what
policies can produce better macroeconomic
outcomes:
How Can Poor Countries Get Rich?
Is Saving Too Low?
Do Government Budget Deficits Matter?
How Costly Is It to Reduce Inflation?
How Can We Make Financial Crises Less Likely?
How Active Should Stabilization Policy Be?
Should Macroeconomic Policy Follow Rules?
Are Global Trade Imbalances a Danger?

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Fiscal and Monetary Policy

Fiscal policy deals with government
spending and taxation
Government budget deficit is the excess of
government spending over tax revenues for a
particular year

Monetary policy is the management of the

money supply and interest rates
Conducted by central banks, e.g., the Federal
Reserve of the U.S.

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FIGURE 1.10 U.S. Government

Budget Deficits, 1930-2013

Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/

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How We Will Study

Macroeconomics
This book will emphasize the policy and
practice of macroeconomics, both by using
the models developed here and with the
policy and practice cases
This exposure to real-world examples will
help you appreciate that economics is far
more than abstract theories

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Next class:
Start Chapter 2
Read ahead of time (optional, recommended)
Review PPT before class (optional,
recommended)
PPT are uploaded the night before

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