Macro-Economics Notes
Chapter 1
Introduction and Measurement Issues
The learning objectives for this chapter are:
State the two focuses of study in macroeconomics, the key differences between
microeconomics and macroeconomics, and the similarities between microeconomics and
macroeconomics; Explain the key features of trend growth and deviations from trend in per
capita gross domestic product in the United States from 1900 to 2014; Explain why models
are useful in macroeconomics; Discuss how microeconomic principles are important in
constructing useful macroeconomic models; Explain why there is disagreement among
macroeconomists, and what they disagree about; List the 12 key ideas that will be covered
in this book; List the key observations that motivate questions we will try to answer in this
book.
However, the second learning objective is not as important for this module, as we will not be
focusing on American trends, but it is still important to understand trends and deal with data
given to us.
What is macroeconomics?
It is important to understand that when we consider macroeconomics, we are considering a
large number of macroeconomic agents. These agents refer to consumers and firms, as well
as government. Initially, we only deal with governments and consumers, and government is
introduced into the mix at a later stage.
It differs from micro in that it considers the over all effects of these agents on the economy.
The single, consumer/firm/industry is not the primary focus here. We consider all agents, all
firms, all consumers, all industries and all governments at the same time. We are interested
in the effects that these agents have on the overall economy. Therefore, it is important to
build a model to explain all macroeconomic phenomenon. It is critical to understand that we
will build macro model on micro foundation (e.g. PPC; utility functions). We will distinguish
between long run growth and cost cycles. Long run growth refers to the increase in a
nation’s productive capacity and average standard of living that occurs over a period of time,
where as business cycles are the short run ups and downs (booms and recessions) in
aggregate economic activity.
Gross Domestic Product, Economic Growth and Business Cycle
Here we consider some definitions.
GDP: this refers to the quantity of goods and services produced within a country’s boarders
over a particular period of time. The time series of GDP is usually split into the trend and
business cycle component.
Figure 1.1: Per Capita Real GDP for USA
Per Capita refers to the GDP divided by the total population and real GDP is GDP that has
been adjusted for inflation. Looking at this graph, we can see that it is in level terms and
leads us to several questions regarding the economy. Firstly, what causes sustained
, economic growth? What drove the
economy to grow as it did as show in 1.1.
Does economic growth always continue or
is there a limit to growth? Can the
government stimulate economic growth?
In the short run we have business cycles.
What causes business cycles? Cans
business cycles be moderated. Can we
see events like the great depression and
WW2 repeated (which were great shocks
to countries all over the world)? Should
governments intervene to smooth the
business cycle.
Figure 1.2: Natural Logarithm or Per Capita Real GDP
This gives us a similar outcome as a growth rate formula
as applied to per capita GDP. We will be using either a
natural logarithm to identify a trend, or time series
changes. A helpful approach is to take the natural
logarithm of the time series. This is useful for most (but
not all) economic time series. The transformation is
useful as then the slope of the graph is close to the
growth rate. Then, it’s easy to eyeball the chart and see
changes in the growth rate over time.
Figure 1.3: Natural Logarithm of Per Capita Real
GDP and Trend
This graph shows the different between the actual and
trend GDP. The trend is calculated using some kind of
filter (not required to know how to calculate this). It
simply allows us to determine the business cycle from
the actual growth. The chart shows a time-varying trend
fit to the data. The trend is called a “Hodrick-Prescott filter.” In principle, this does a better job
than just fitting a straight line to the data to uncover the trend.
Macroeconomic Models
These models are used to highlight and capture essential features of an economy, and it is
done in order to analyse a particular economic problem. They should be simple and need
Chapter 1
Introduction and Measurement Issues
The learning objectives for this chapter are:
State the two focuses of study in macroeconomics, the key differences between
microeconomics and macroeconomics, and the similarities between microeconomics and
macroeconomics; Explain the key features of trend growth and deviations from trend in per
capita gross domestic product in the United States from 1900 to 2014; Explain why models
are useful in macroeconomics; Discuss how microeconomic principles are important in
constructing useful macroeconomic models; Explain why there is disagreement among
macroeconomists, and what they disagree about; List the 12 key ideas that will be covered
in this book; List the key observations that motivate questions we will try to answer in this
book.
However, the second learning objective is not as important for this module, as we will not be
focusing on American trends, but it is still important to understand trends and deal with data
given to us.
What is macroeconomics?
It is important to understand that when we consider macroeconomics, we are considering a
large number of macroeconomic agents. These agents refer to consumers and firms, as well
as government. Initially, we only deal with governments and consumers, and government is
introduced into the mix at a later stage.
It differs from micro in that it considers the over all effects of these agents on the economy.
The single, consumer/firm/industry is not the primary focus here. We consider all agents, all
firms, all consumers, all industries and all governments at the same time. We are interested
in the effects that these agents have on the overall economy. Therefore, it is important to
build a model to explain all macroeconomic phenomenon. It is critical to understand that we
will build macro model on micro foundation (e.g. PPC; utility functions). We will distinguish
between long run growth and cost cycles. Long run growth refers to the increase in a
nation’s productive capacity and average standard of living that occurs over a period of time,
where as business cycles are the short run ups and downs (booms and recessions) in
aggregate economic activity.
Gross Domestic Product, Economic Growth and Business Cycle
Here we consider some definitions.
GDP: this refers to the quantity of goods and services produced within a country’s boarders
over a particular period of time. The time series of GDP is usually split into the trend and
business cycle component.
Figure 1.1: Per Capita Real GDP for USA
Per Capita refers to the GDP divided by the total population and real GDP is GDP that has
been adjusted for inflation. Looking at this graph, we can see that it is in level terms and
leads us to several questions regarding the economy. Firstly, what causes sustained
, economic growth? What drove the
economy to grow as it did as show in 1.1.
Does economic growth always continue or
is there a limit to growth? Can the
government stimulate economic growth?
In the short run we have business cycles.
What causes business cycles? Cans
business cycles be moderated. Can we
see events like the great depression and
WW2 repeated (which were great shocks
to countries all over the world)? Should
governments intervene to smooth the
business cycle.
Figure 1.2: Natural Logarithm or Per Capita Real GDP
This gives us a similar outcome as a growth rate formula
as applied to per capita GDP. We will be using either a
natural logarithm to identify a trend, or time series
changes. A helpful approach is to take the natural
logarithm of the time series. This is useful for most (but
not all) economic time series. The transformation is
useful as then the slope of the graph is close to the
growth rate. Then, it’s easy to eyeball the chart and see
changes in the growth rate over time.
Figure 1.3: Natural Logarithm of Per Capita Real
GDP and Trend
This graph shows the different between the actual and
trend GDP. The trend is calculated using some kind of
filter (not required to know how to calculate this). It
simply allows us to determine the business cycle from
the actual growth. The chart shows a time-varying trend
fit to the data. The trend is called a “Hodrick-Prescott filter.” In principle, this does a better job
than just fitting a straight line to the data to uncover the trend.
Macroeconomic Models
These models are used to highlight and capture essential features of an economy, and it is
done in order to analyse a particular economic problem. They should be simple and need
