Overview • This chapter introduces the major themes and
components of modern macroeconomics. It defines macroeconomics in terms of economic growth and economic fluctuations. It summarizes the recent historical record of a few key macroeconomic variables and emphasizes a set of key facts about economic growth and economic fluctuations. An overview of the major sources of macroeconomic theory is provided to explain these facts. Finally, the role of economic policy is introduced with a brief discussion of fiscal and monetary policy.
1. Economic Output Over Time • 1a. Real GDP is the starting point for studying macroeconomics. Figure 17.1 distinguishes economic growth trends from business cycles, or fluctuations. 1b. Economic growth can be measured in terms of
individual benefit by using real GDP per capita values, providing an indicator of average wellbeing in an economy.
1. Economic Output Over Time • 1c. The growth record of the United States over the past 40 years is based on real GDP growth of 3 percent and per capita growth of 1.7 percent. However, these growth rates cover two distinct periods. The first period (1955-1975) growth rate was about 3.25 percent, compared to the second period (1975-1994) rate of 2.5 percent. Explaining this growth slowdown has been a major challenge for economists.
2. Jobs, Inflation, and Interest Rates • 2a. Job creation, or the net increase in employment, along with measures of labor productivity, are two of several variables used to describe an economy's performance. • Figure 17.5 illustrates employment growth over the last 40 years. Labor productivity has increased at about 1.3 percent per year when measured in real GDP per hour. But again there are two periods of productivity growth, reflecting the productivity slowdown of the last 20 years: 2 percent for the period from the mid-1950s to the mid1970s, compared to 0.7 percent since. Small differences make for large differences over long periods of time.
Unemployment • 2b. The unemployment rate rises in a recession and falls in a recovery but with a delay, as shown in Figure 17.6. The contrast in the magnitude between recent rates and the Great Depression is provided by Figure 17.7. The labor force participation rate, although rising gradually over the last 40 years, also varies over the business cycle as workers are discouraged from further job search or decide to retire early, causing the rate to fall in a recession.
3. Macroeconomic Theory and Policy • 3a. Economic growth theory and economic fluctuations theory are the long- and short-term parts of macroeconomic theory, respectively. The trend line of Figure 19.1 is potential GDP, or the long-run tendency of GDP, and is an average-level GDP that reflects the long-term growth rate, the slope of the trend line.
Aggregate Supply • 3b. The term aggregate supply is used to describe potential GDP in the short-run setting of economic fluctuations. Aggregate supply is determined by the available labor, capital, and technology. • 3b.1 The concept of the aggregate production function is used to relate real GDP to the inputs: labor, capital, and technology. Because of this longterm relationship between inputs and output, any slowdown in economic growth must be due to a slowdown in the growth of one or more of the inputs.
Economic policies • 3c. Policy for long-term economic growth (sometimes called supply side policy) attempts to increase potential GDP, or aggregate supply. • Fiscal and monetary policy are other tools to improve economy.
Fiscal policy • 3c.1 Fiscal policy can affect aggregate supply through the use of tax changes or changes in spending or borrowing. These incentives alter labor, capital, and technology inputs to the production function.
• 3c.2 Monetary policy is concerned primarily with the control of the money supply in order to control inflation. A low and stable rate of inflation is desirable because it reduces the uncertainty associated with determining prices and future inflation when inflation is high or variable.