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CHAPTER 1
INTRODUCTION
Chapter Outline
Introduction to macroeconomics
The long run and short run
Economic models and the real world
A first look at the AD-AS framework
Unemployment and inflation
Actual and potential GDP
Economic cycles
Changes from the Previous Edition
Only minor modifications have been made to Chapter 1. All figures involving actual data have
been updated, as has been Table 1-1, and a paragraph has been added to indicate how the NBER
defines a recession.
Introduction to the Material
Chapter 1 provides an overview of the key concepts covered in the textbook. It also outlines the
different time frames that are used to describe the economy in the aggregate. The very long-run
model focuses on the growth of productive capacity and ignores fluctuations in employment and
output. This is important when trying to explain why some countries have higher average growth
rates (and thus higher living standards) than others. In the long run, fluctuations in demand
relative to the level of productive capacity determine the level of prices. But in the very short
run, the level of output is determined by aggregate demand alone, while prices are not affected
by changes in aggregate demand. The medium run describes the transition between the short run
and the long run. In this case, economic policies or disturbances affect the rates of inflation and
unemployment simultaneously, and the speed at which prices adjust is critical for analyzing the
effects of the disturbances or policy changes.
The behavior of the economy can be analyzed using the AD-AS model. Three different AS-
curves are presented here, each describing a different time frame: the vertical AS-curve describes
the very long run, the horizontal AS-curve describes the very short run, and the upward-sloping
AS-curve describes the medium run. The AD-AS framework is a very simplified representation
of the real world that cannot describe the behavior of all people and enterprises in an economy.
However, it serves very well to explain how economic disturbances affect output, employment,
and prices, and how policies can be used to mitigate economic disturbances.
To understand the behavior of the economy as a whole, students must learn some basic
concepts. Among the concepts presented in Chapter 1 is GDP, that is, the market value of all
final goods and services currently produced in a country over a certain time period. A nation's
Full download please contact or qidiantiku.com
, Full download please contact or qidiantiku.com
GDP changes as the amount of available resources and the efficiency with which these resources
are used changes. Since the level of nominal GDP can change simply due to inflation or a change
in population, real GDP per capita is often used as a measure for the standard of living in a
country. But even real GDP per capita is not a perfect measure for people's welfare since it does
not take into consideration such things as changes in the distribution of income, environmental
quality, or leisure activities.
The performance of the economy is generally judged by three broad measures: the growth
rate of output, the unemployment rate, and the inflation rate. The trend path of output is the path
that real GDP would take if all factors of production were fully employed (also known as
potential GDP). Actual GDP generally tends to be below this trend path, since in most years the
factors of production are not fully employed. The output gap measures the size of these cyclical
deviations and is defined as the gap between potential GDP and actual GDP. This gap grows
during recessions when unemployment increases. In periods of exceptional growth, like in the
late 1990s, actual GDP can become larger than potential GDP, so the GDP gap can actually
become negative. Section 1-2 discusses how inflation, growth, and unemployment are related
through economic cycles, that is, patterns of expansion and contraction in economic activity
around the trend path of GDP.
Knowing the speed with which prices adjust is critical in understanding the workings of the
economy, and much economic research is devoted to this subject. The Phillips curve shows an
empirical relationship between changes in inflation and the unemployment rate in the medium
run. The question of whether there is a useful trade-off between unemployment and inflation is
of considerable importance for the implementation of macroeconomic stabilization policies, and
there is much controversy among economists about the usefulness of the Phillips-curve.
Suggestions for Lecturing
Most students won’t have opened the textbook before coming to the first class session. However,
as upper-level students of economics, they should not be ignorant of current economic issues and
their elected officials’ views on them. The first day of class is a good time to remind students to
pay attention to the economic news in newspapers and other media. One way to start a course in
macroeconomics is to ask students to define and list the current levels of some key economic
variables. It is important for students to have at least an idea of the approximate magnitude of
variables such as nominal and real GDP, the rates of inflation and unemployment, the sizes of the
national debt, the budget deficit and the trade deficit, money supply (M1 and M2), the discount
rate and the prime rate. Starting the course this way indicates to students that it is important to
follow the current state of the economy. This approach has the additional advantage that students
will have the definitions and values of these variables as the very first entry in their notes and can
easily refer back to them as needed for class discussions.
Chapter 1 provides some tables and figures that show recent trends in output growth,
inflation, and unemployment. But students should also be encouraged to look at other sources of
economic data. For example, the Economic Report of the President provides an enormous
amount of historical data, including an assessment of the state of the economy in the Annual
Full download please contact or qidiantiku.com
CHAPTER 1
INTRODUCTION
Chapter Outline
Introduction to macroeconomics
The long run and short run
Economic models and the real world
A first look at the AD-AS framework
Unemployment and inflation
Actual and potential GDP
Economic cycles
Changes from the Previous Edition
Only minor modifications have been made to Chapter 1. All figures involving actual data have
been updated, as has been Table 1-1, and a paragraph has been added to indicate how the NBER
defines a recession.
Introduction to the Material
Chapter 1 provides an overview of the key concepts covered in the textbook. It also outlines the
different time frames that are used to describe the economy in the aggregate. The very long-run
model focuses on the growth of productive capacity and ignores fluctuations in employment and
output. This is important when trying to explain why some countries have higher average growth
rates (and thus higher living standards) than others. In the long run, fluctuations in demand
relative to the level of productive capacity determine the level of prices. But in the very short
run, the level of output is determined by aggregate demand alone, while prices are not affected
by changes in aggregate demand. The medium run describes the transition between the short run
and the long run. In this case, economic policies or disturbances affect the rates of inflation and
unemployment simultaneously, and the speed at which prices adjust is critical for analyzing the
effects of the disturbances or policy changes.
The behavior of the economy can be analyzed using the AD-AS model. Three different AS-
curves are presented here, each describing a different time frame: the vertical AS-curve describes
the very long run, the horizontal AS-curve describes the very short run, and the upward-sloping
AS-curve describes the medium run. The AD-AS framework is a very simplified representation
of the real world that cannot describe the behavior of all people and enterprises in an economy.
However, it serves very well to explain how economic disturbances affect output, employment,
and prices, and how policies can be used to mitigate economic disturbances.
To understand the behavior of the economy as a whole, students must learn some basic
concepts. Among the concepts presented in Chapter 1 is GDP, that is, the market value of all
final goods and services currently produced in a country over a certain time period. A nation's
Full download please contact or qidiantiku.com
, Full download please contact or qidiantiku.com
GDP changes as the amount of available resources and the efficiency with which these resources
are used changes. Since the level of nominal GDP can change simply due to inflation or a change
in population, real GDP per capita is often used as a measure for the standard of living in a
country. But even real GDP per capita is not a perfect measure for people's welfare since it does
not take into consideration such things as changes in the distribution of income, environmental
quality, or leisure activities.
The performance of the economy is generally judged by three broad measures: the growth
rate of output, the unemployment rate, and the inflation rate. The trend path of output is the path
that real GDP would take if all factors of production were fully employed (also known as
potential GDP). Actual GDP generally tends to be below this trend path, since in most years the
factors of production are not fully employed. The output gap measures the size of these cyclical
deviations and is defined as the gap between potential GDP and actual GDP. This gap grows
during recessions when unemployment increases. In periods of exceptional growth, like in the
late 1990s, actual GDP can become larger than potential GDP, so the GDP gap can actually
become negative. Section 1-2 discusses how inflation, growth, and unemployment are related
through economic cycles, that is, patterns of expansion and contraction in economic activity
around the trend path of GDP.
Knowing the speed with which prices adjust is critical in understanding the workings of the
economy, and much economic research is devoted to this subject. The Phillips curve shows an
empirical relationship between changes in inflation and the unemployment rate in the medium
run. The question of whether there is a useful trade-off between unemployment and inflation is
of considerable importance for the implementation of macroeconomic stabilization policies, and
there is much controversy among economists about the usefulness of the Phillips-curve.
Suggestions for Lecturing
Most students won’t have opened the textbook before coming to the first class session. However,
as upper-level students of economics, they should not be ignorant of current economic issues and
their elected officials’ views on them. The first day of class is a good time to remind students to
pay attention to the economic news in newspapers and other media. One way to start a course in
macroeconomics is to ask students to define and list the current levels of some key economic
variables. It is important for students to have at least an idea of the approximate magnitude of
variables such as nominal and real GDP, the rates of inflation and unemployment, the sizes of the
national debt, the budget deficit and the trade deficit, money supply (M1 and M2), the discount
rate and the prime rate. Starting the course this way indicates to students that it is important to
follow the current state of the economy. This approach has the additional advantage that students
will have the definitions and values of these variables as the very first entry in their notes and can
easily refer back to them as needed for class discussions.
Chapter 1 provides some tables and figures that show recent trends in output growth,
inflation, and unemployment. But students should also be encouraged to look at other sources of
economic data. For example, the Economic Report of the President provides an enormous
amount of historical data, including an assessment of the state of the economy in the Annual
Full download please contact or qidiantiku.com
