The point of Chapter 1 • Macro economics and its uses • Historical performance of the US economy • Explaining the basic framework used in this text • Some agreed-upon facts in practical macro economics
Macroeconomics • Fundamental concern of macroeconomics is the overall performance of the economy. • Output (Income) and output per capita are the usual barometers of performance. • Gross domestic product (GDP) is most comprehensive measure of output. • The central focus of our study is the level and growth of GDP and GDP per capita.
Other barometers of performance • Employment and unemployment • The price level • The interest rate • The exchange rate • The trade balance and the balance of payments • Note that income (revenue) and expenditure (output) are two sides of the same ledger
9/11/2001 First oil price shock Great Depression Second oil price shock World War II U.S. Real GDP per capita (2000 dollars) long-run upward trend…
Stylized facts about recent history • GDP grew a 3.73% per annum in 1929-73 and at 2.95% in 1973-2006. • GDP per capita grew 2.44% in 1929–73 and at 1.87% in 1973-2006. • Output and employment moved together; employment percentage seems to be a leading indicator. • Unemployment peaks at the end of a recession.
Inflation seems to increase before a recession hits. • Nominal and real interest rates also increases before the recession occurs.
Three models • Long-run growth • Fluctuations • Macroeconomic policy
Core of practical macro economics • the long-run growth rate • Inflation and unemployment in the long run • Inflation and unemployment in the short run • Rational expectations • Monetary policy rules