a. Text Figure 1.1: Output of United States since 1869
2. Sources of growth—population, average labor productivity growth
This may be a good place to introduce students to the calculation of a growth rate, which is used
throughout the textbook. You can write it first in general terms, as
%X [(Xt+1 Xt)/Xt] 100% [(Xt+1/Xt) 1] 100%.
3. Average labor productivity
a. Average labor productivity: output produced per unit of labor input
b. Text Figure 1.2: Average labor productivity of United States since 1900
c. Average labor productivity growth:
1. Business cycle: Short-run contractions and expansions in economic activity
2. Downward phase is called a recession
C. Unemployment
1. Unemployment: the number of people who are available for work and actively seeking work
but cannot find jobs
2. U.S. experience shown in text Fig. 1.3
3. Recessions cause unemployment rate to rise
Analytical Problem 1 asks students to think about average labor productivity and unemployment
1. U.S. experience shown in text Fig. 1.4
2. Deflation: when prices of most goods and services decline
3. Inflation rate: the percentage increase in the level of prices
4. Hyperinflation: an extremely high rate of inflation
You may wish to discuss how to calculate the inflation rate, which is just the growth rate of the
1. Open vs. closed economies
a. Open economy: an economy that has extensive trading and financial relationships with
2. Trade imbalances
a. U.S. experience shown in text Fig. 1.5
1. Fiscal policy: government spending and taxation
a. Effects of changes in federal budget
2. Monetary policy: growth of money supply; determined by central bank; the Fed in U.S.
G. Aggregation
1. Aggregation: summing individual economic variables to obtain economy wide totals
2. Distinguishes microeconomics (disaggregated) from macroeconomics (aggregated)
II. What Macroeconomists Do (Sec. 1.2)
1. Relatively few economists make forecasts
Data Application
There are many firms that provide forecasts for some macroeconomic variables, but only a few
firms have complete, large-scale macroeconomic models that include details on every sector of
the economy. The main forecasting firms in the United States are Global Insight and
2. Forecasting is very difficult
Data Application
Alan Meltzer gives a graphic example of how difficult it is to forecast the macroeconomy in his
article, “Limits of Short-Run Stabilization Policy,” Economic Inquiry, January 1987, pp. 1–14.
1. Private and public sector economists—analyze current conditions
Data Application
2. Does having many economists ensure good macroeconomic policies? No, since politicians,
not economists, make most major decisions
1. Goal: to make general statements about how the economy works
2. Theoretical and empirical research are necessary for forecasting and economic analysis
3. Economic theory: a set of ideas about the economy, organized in a logical framework
4. Economic model: a simplified description of some aspect of the economy
This is a good point for you to talk about your own research interests. Students are very
5. Usefulness of economic theory or models depends on reasonableness of assumptions,
possibility of being applied to real problems, empirically testable implications, and
6. Box 1.1: Developing and Testing an Economic Theory
a. Step 1: State the research question
b. Step 2: Make provisional assumptions
c. Step 3: Work out the implications of the theory
d. Step 4: Conduct an empirical analysis to compare the implications of the theory with
In 1996 the national income accounts underwent a major revision, changing how its price
indexes are calculated (moving to a chain-weighted index) and changing how government
purchases are measured (accounting more accurately for government capital formation). These
changes are discussed in Chapter 2.
Also in 1996, a major controversy arose over the calculation of the consumer price index
1. Positive analysis: examines the economic consequences of a policy
2. Normative analysis: determines whether a policy should be used
Analytical Problem 4 gives students practice in distinguishing positive from normative analysis.
1. The classical approach
a. The economy works well on its own
b. The “invisible hand”: the idea that if there are free markets and individuals conduct their
economic affairs in their own best interests, the overall economy will work well
c. Wages and prices adjust rapidly to get to equilibrium
2. The Keynesian approach
a. The Great Depression: Classical theory failed because high unemployment was
persistent
b. Keynes: Persistent unemployment occurs because wages and prices adjust slowly, so
3. The evolution of the classical-Keynesian debate
a. Keynesians dominated from WWII to 1970
b. Stagflation led to a classical comeback in the 1970s
c. Last 30 years: excellent research with both approaches
Theoretical Application
1. Textbook uses a single model to present both classical and Keynesian ideas
2. Three markets: goods, assets, labor
3. Model starts with microfoundations: individual behavior
4. Long run: wages and prices are perfectly flexible
5. Short run: Classical case—flexible wages and prices; Keynesian case—wages and prices are
slow to adjust
3. Average labor productivity
a. Average labor productivity: output produced per unit of labor input
b. Text Figure 1.2: Average labor productivity of United States since 1900
c. Average labor productivity growth:
1. Business cycle: Short-run contractions and expansions in economic activity
2. Downward phase is called a recession
C. Unemployment
1. Unemployment: the number of people who are available for work and actively seeking work
but cannot find jobs
2. U.S. experience shown in text Fig. 1.3
3. Recessions cause unemployment rate to rise
Analytical Problem 1 asks students to think about average labor productivity and unemployment
1. U.S. experience shown in text Fig. 1.4
2. Deflation: when prices of most goods and services decline
3. Inflation rate: the percentage increase in the level of prices
4. Hyperinflation: an extremely high rate of inflation
You may wish to discuss how to calculate the inflation rate, which is just the growth rate of the
1. Open vs. closed economies
a. Open economy: an economy that has extensive trading and financial relationships with
2. Trade imbalances
a. U.S. experience shown in text Fig. 1.5
1. Fiscal policy: government spending and taxation
a. Effects of changes in federal budget
2. Monetary policy: growth of money supply; determined by central bank; the Fed in U.S.
G. Aggregation
1. Aggregation: summing individual economic variables to obtain economy wide totals
2. Distinguishes microeconomics (disaggregated) from macroeconomics (aggregated)
II. What Macroeconomists Do (Sec. 1.2)
1. Relatively few economists make forecasts
Data Application
There are many firms that provide forecasts for some macroeconomic variables, but only a few
firms have complete, large-scale macroeconomic models that include details on every sector of
the economy. The main forecasting firms in the United States are Global Insight and
2. Forecasting is very difficult
Data Application
Alan Meltzer gives a graphic example of how difficult it is to forecast the macroeconomy in his
article, “Limits of Short-Run Stabilization Policy,” Economic Inquiry, January 1987, pp. 1–14.
1. Private and public sector economists—analyze current conditions
Data Application
2. Does having many economists ensure good macroeconomic policies? No, since politicians,
not economists, make most major decisions
1. Goal: to make general statements about how the economy works
2. Theoretical and empirical research are necessary for forecasting and economic analysis
3. Economic theory: a set of ideas about the economy, organized in a logical framework
4. Economic model: a simplified description of some aspect of the economy
This is a good point for you to talk about your own research interests. Students are very
5. Usefulness of economic theory or models depends on reasonableness of assumptions,
possibility of being applied to real problems, empirically testable implications, and
6. Box 1.1: Developing and Testing an Economic Theory
a. Step 1: State the research question
b. Step 2: Make provisional assumptions
c. Step 3: Work out the implications of the theory
d. Step 4: Conduct an empirical analysis to compare the implications of the theory with
In 1996 the national income accounts underwent a major revision, changing how its price
indexes are calculated (moving to a chain-weighted index) and changing how government
purchases are measured (accounting more accurately for government capital formation). These
changes are discussed in Chapter 2.
Also in 1996, a major controversy arose over the calculation of the consumer price index
1. Positive analysis: examines the economic consequences of a policy
2. Normative analysis: determines whether a policy should be used
Analytical Problem 4 gives students practice in distinguishing positive from normative analysis.
1. The classical approach
a. The economy works well on its own
b. The “invisible hand”: the idea that if there are free markets and individuals conduct their
economic affairs in their own best interests, the overall economy will work well
c. Wages and prices adjust rapidly to get to equilibrium
2. The Keynesian approach
a. The Great Depression: Classical theory failed because high unemployment was
persistent
b. Keynes: Persistent unemployment occurs because wages and prices adjust slowly, so
3. The evolution of the classical-Keynesian debate
a. Keynesians dominated from WWII to 1970
b. Stagflation led to a classical comeback in the 1970s
c. Last 30 years: excellent research with both approaches
Theoretical Application
1. Textbook uses a single model to present both classical and Keynesian ideas
2. Three markets: goods, assets, labor
3. Model starts with microfoundations: individual behavior
4. Long run: wages and prices are perfectly flexible
5. Short run: Classical case—flexible wages and prices; Keynesian case—wages and prices are
slow to adjust