Introduction to Macroeconomics
Preface
1
An Outline of the Course
1.1
Economics, Microeconomics, and Macroeconomics
1.2
Macroeconomics
I Macroeconomic Data
Macroeconomic Data
The Role of Data
2
Measuring a Nation’s Income
2.1
Introduction
2.2
Gross Domestic Product
2.2.1
Total Income
2.2.2
Income = Expenditure = Output
2.2.3
Gross Domestic Product: Definition
2.2.4
What productive activity is not counted in GDP?
2.3
Nominal and Real GDP
2.3.1
Gross Domestic Product, Nominal
2.3.2
Gross Domestic Product, Real
2.3.3
The GDP Deflator
2.4
The Growth Rate of GDP
2.5
GDP and the Components of GDP
2.5.1
The Four Components Of GDP
2.5.2
US data on GDP and its Components
2.6
International GDP comparisons
2.6.1
Market Exchange Rate Method
2.6.2
Purchasing Power Parity Method
2.6.3
Let’s Compare the Two Methods
2.7
Is GDP a good measure of economic well-being?
2.7.1
Income Inequality
2.7.2
Leisure Reduces GDP
2.7.3
GDP Doesn’t Count Illegal Work
2.7.4
GDP Doesn’t Count Work at Home
2.7.5
GDP Doesn’t Count Volunteer Work
2.7.6
GDP Ignores Environmental Damage
2.7.7
GDP Ignores Consumer Surplus
2.7.8
Disasters May Raise GDP
2.7.9
There’s a lot more to life than production
2.7.10
So, in the final analysis …
2.8
Historical note
3
Measuring the Cost of Living
3.1
The Consumer Price Index
3.2
How the CPI Is Calculated
3.2.1
How the CPI Is Calculated: Fix the Typical Consumer’s Basket (TCB)
3.2.2
How the CPI Is Calculated: Find the Prices
3.2.3
How the CPI Is Calculated: Compute the Basket’s Market Value
3.2.4
How the CPI Is Calculated: Choose a Base Year and Compute the CPI
3.2.5
How the CPI Is Calculated: Compute the inflation rate
3.2.6
Problems in Measuring the Cost of Living
3.2.7
The GDP Deflator Versus the Consumer Price Index
3.3
Correcting Economic Variables For The Effects Of Inflation
3.3.1
Comparing Dollar Figures Across Time
3.3.2
Comparing Dollar Figures Across Space
3.3.3
Correcting Economic Variables For The Effects Of Inflation: Real and Nominal Interest Rates
II Long-Run Macroeconomics of Real Variables
The Real World
4
Production and Growth
4.1
Introduction
4.2
The History of Economic Change
4.2.1
The History of Economic Change: Variation in Real GDP per Person across Countries
4.2.2
The History of Economic Change: Real GDP per Capita can Change a Lot over Time
4.2.3
The History of Economic Change: Growth Rates can vary significantly across countries
4.3
Productivity
4.3.1
Determinants of Productivity
4.4
Goverment Policy Regarding Productivity and Its Growth
4.4.1
Goverment Policy Regarding Productivity and Its Growth: Saving and Investment
4.4.2
Goverment Policy Regarding Productivity and Its Growth: Foreign Investment
4.4.3
Goverment Policy Regarding Productivity and Its Growth: Education
4.4.4
Goverment Policy Regarding Productivity and Its Growth: Health and Nutrition
4.4.5
Goverment Policy Regarding Productivity and Its Growth: Property Rights and Political Stability
4.4.6
Goverment Policy Regarding Productivity and Its Growth: Free Trade
4.4.7
Goverment Policy Regarding Productivity and Its Growth: Research and Development
4.4.8
Goverment Policy Regarding Productivity and Its Growth: Population Growth
4.4.9
Goverment Policy Regarding Productivity and Its Growth: It’s Crucial!
5
Saving, Investment, and the Financial System
5.1
Introduction
5.2
Saving, Investment, and the Financial System
5.3
The Financial System
5.3.1
Financial Institutions In The U.S. Economy
5.4
Saving And Investment In The National Income Accounts
5.4.1
Saving = Investment
5.5
Budget Surplus and Budget Deficit
5.6
The market for loanable funds
5.7
Government Policies can affect Saving and Investment
5.7.1
Policy 1: Saving Incentives
5.7.2
Policy 2: Investment Incentives
5.7.3
Policy 3: Government Budget Deficits and Surpluses
5.8
Should a Nation’s Government Try to Change Its Levels of Saving and Investment?
6
Unemployment and Its Natural Rate
6.1
Introduction
6.2
The Data on Unemployment
6.2.1
The Data on Unemployment: How Is Unemployment Measured?
6.2.2
The Data on Unemployment: Does the Unemployment Rate Measure What We Want It To?
6.2.3
The Data on Unemployment: How Long Are the Unemployed without Work?
6.3
Why Are There Always Some People Unemployed?
6.3.1
The Ideal Labor Market
6.3.2
Frictional unemployment
6.3.3
Structural unemployment
III Long-Run Macroeconomics of Nominal Variables
The Nominal World
7
The Monetary System
7.1
THE MEANING OF MONEY
7.1.1
The Meaning of Money: The Functions of Money
7.1.2
The Meaning of Money: Kinds of Money
7.1.3
The Meaning of Money: Money in the U.S. Economy
7.2
THE FEDERAL RESERVE SYSTEM
7.2.1
The Federal Reserve System: Helicopter and Vacuum Cleaner
7.3
BANKS AND THE MONEY SUPPLY
7.3.1
Banks, in brief
7.3.2
Banks and the money supply
7.3.3
Banks and the Money Supply: Fractional-Reserve Banking
7.3.4
Banks and the Money Supply: The Money Multiplier
7.4
THE FED’S TOOLS OF MONETARY CONTROL
7.4.1
Open-market operations
7.4.2
Central bank’s lending to banks
7.4.3
Tools of Monetary Control: Reserve requirements
7.4.4
Tools of Monetary Control: Paying interest on reserves
7.4.5
Tools of Monetary Control: Difficulties in Controlling the Money Supply
7.4.6
Fed’s Tools of Monetary Control: The Federal Funds Rate
8
Money Growth and Inflation
8.1
Things You Need to Know to Understand This Chapter:
8.2
Introduction
8.3
The Classical Theory of Inflation
8.3.1
THE CLASSICAL THEORY OF INFLATION: Money Supply, Money Demand, and Monetary Equilibrium
8.3.2
THE CLASSICAL THEORY OF INFLATION: The Effects of Monetary Injection
8.3.3
THE CLASSICAL THEORY OF INFLATION: The Classical Dichotomy and Monetary Neutrality
8.3.4
THE CLASSICAL THEORY OF INFLATION: Velocity and the Quantity Equation
8.3.5
CASE STUDY: Money and Prices during Four Hyperinflations
8.3.6
THE CLASSICAL THEORY OF INFLATION: The Fisher Effect
8.4
The Costs of Inflation
8.4.1
THE COSTS OF INFLATION: A Common Fallacy
8.4.2
THE COSTS OF INFLATION: Shoeleather Costs
8.4.3
THE COSTS OF INFLATION: Shoeleather Costs
8.4.4
THE COSTS OF INFLATION: Menu Costs
8.4.5
THE COSTS OF INFLATION: Relative-Price Variability and the Misallocation of Resources
8.4.6
THE COSTS OF INFLATION: Relative-Price Variability and the Misallocation of Resources
8.4.7
THE COSTS OF INFLATION: Inflation-Induced Tax Distortion
8.4.8
THE COSTS OF INFLATION: Confusion and Inconvenience
8.4.9
THE COSTS OF INFLATION: A Special Cost of Unexpected Inflation: Arbitrary Redistribution of Wealth
8.4.10
THE COSTS OF INFLATION: If Inflation is Bad, is Deflation Good?
IV Long-Run Macroeconomics of Globalization
The Global World
9
Open-Economy Macroeconomics: Basic Concepts
9.1
Prerequisites
9.2
Definitions
9.2.1
Definitions: Closed Economy
9.2.2
Definitions: Open Economy
9.2.3
Definitions: Exports, Imports, Net Exports
9.2.4
Definitions: trade surplus, trade deficit, balanced trade
9.2.5
Definitions: Capital Outflow, Capital Inflow, Net Capital Outflow
9.3
An Accounting Identity:
\(NX = NCO\)
9.4
An Accounting Identity:
\(S = I + NCO\)
9.5
Definition: Exchange Rates, Nominal and Real
9.5.1
Definition: Nominal Exchange Rates
9.5.2
Definition: Real Exchange Rates
9.6
Theory: Effect of Real Exchange Rates on Net Exports
9.6.1
Theory: Purchasing-Power Parity
9.6.2
Implications of Purchasing-Power Parity
9.6.3
Limitations of Purchasing-Power Parity
9.7
What’s Next?
10
A Macroeconomic Theory of the Open Economy
10.1
Prerequisites
10.2
Loanable Funds Theory of the Real Interest Rate
10.3
The Market for Foreign-Currency Exchange
10.4
Simultaneous Equilibrium in Two Markets
10.5
Effects of Policy Changes and Unforeseen Events
10.5.1
A Tax Cut and/or an Increase in Government Spending
10.5.2
An Import Tariff or an Import Quota
10.5.3
Political Instability and Capital Flight
10.5.4
Summary of Predictions
10.5.5
The Unusual Case of Purchasing-Power Parity
V Short-Run Macroeconomics
The Volatile Economy
11
Aggregate Demand and Aggregate Supply
11.1
Short-Run Fluctuations in Real Gross Domestic Product
11.2
Long-Run Macroeconomics and Short-Run Macroeconomics
11.3
The Theory of Aggregate Demand and Aggregate Supply
11.3.1
The Aggregate Demand Curve: Why the Aggregate-Demand Curve Slopes Downward
11.3.2
The Aggregate Demand Curve: Why It Might Shift
11.3.3
The Aggregate Supply Curve
11.4
Two causes of economic fluctuations
11.4.1
Two causes of economic fluctuations: The Effects of a Shift in Aggregate Demand
11.4.2
Two causes of economic fluctuations: The Effects of a Shift in Aggregate Supply
John Maynard Keynes (1883-1946)
12
The Influence of Monetary and Fiscal Policy on Aggregate Demand
12.1
Introduction
12.2
Aggregate demand and the interest-rate effect
12.3
The Theory of Liquidity Preference
12.3.1
The Theory of Liquidity Preference: Money Supply
12.3.2
The Theory of Liquidity Preference: Money Demand
12.3.3
The Theory of Liquidity Preference: Equilibrium in the Money Market
12.3.4
The Downward Slope of the Aggregate Demand Curve: interest rate effect
12.4
The Downward Slope of the Aggregate Demand Curve
12.5
Monetary Policy, expansionary and contractionary
12.5.1
Changes in the Money Supply
12.5.2
The Role of Interest-Rate Targets in Fed Policy
12.5.3
Expansionary Monetary Policy: Criticisms
12.6
HOW FISCAL POLICY INFLUENCES AGGREGATE DEMAND
12.6.1
Fiscal policy: expansionary and contractionary
12.6.2
Changes in Government Purchases
12.6.3
The Crowding-Out Effect
12.6.4
Changes in Taxes
12.7
Stabilization policy: for and against
12.7.1
The Case for Active Stabilization Policy
12.7.2
What is the evidence that stabilization policy works?
12.7.3
The Case Against Active Stabilization Policy
12.7.4
Crisis of 2008: fiscal stimulus
12.7.5
Budget deficits and the national debt
Published with bookdown
Introduction to Macroeconomics
The Nominal World
The next few chapters consider the long-run behavior of nominal macroeconomic variables.