Chapter 1
Introduction to Macroeconomics
◼ Learning Objectives
I. Goals of Part I
A. Introduce students to the main concepts in macroeconomics (Ch. 1)
II. Section Goals
A. Summarize the primary issues addressed in macroeconomics (Sec. 1.1)
III. Notes to Eighth Edition Users: This chapter is little changed; the data were updated.
2 Abel/Bernanke/Croushore • Macroeconomics, Ninth Edition
◼ Teaching Notes
I. What Macroeconomics Is About (Sec. 1.1)
Macroeconomics: the study of structure and performance of national economies and government
policies that affect economic performance. Macroeconomists study:
A. Long-run economic growth
1. Growth of output in United States over time
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
3. Average labor productivity
a. Average labor productivity: output produced per unit of labor input
b. Text Fig. 1.2: Average labor productivity of United States since 1900
c. Average labor productivity growth:
(1) 2.6% per year from 1949 to 1973
B. Business cycles
1. Business cycle: short-run contractions and expansions in economic activity
C. Unemployment
1. Unemployment: the number of people who are available for work and actively seeking work
but cannot find jobs
Chapter 1 Introduction to Macroeconomics 3
D. Inflation
Analytical Problem 2 asks students to think about the welfare consequences of having a higher
price level.
1. U.S. experience shown in text Fig. 1.4
You may wish to discuss how to calculate the inflation rate, which is just the growth rate of the
price level. It can be expressed as
= [(Pt+1/Pt) − 1] 100%. Numerical Problem 1 gives students
E. The international economy
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
F. Macroeconomic policy
1. Fiscal policy: government spending and taxation
a. Effects of changes in federal budget
Numerical Problem 2 serves two purposes: (1) to get students to look at some real data on the
economy and (2) to give them some idea about how large the trade deficit and government budget
deficit are.
2. Monetary policy: growth of money supply; determined by central bank; the Fed in United
States
G. Aggregation
II. What Macroeconomists Do (Sec. 1.2)
A. Macroeconomic forecasting
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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
B. Macroeconomic analysis
1. Private and public sector economists—analyze current conditions
Data Application
Wall Street hires a large number of economists, most of whom are engaged in data analysis on
2. Public sector employs many macroeconomic analysts who provide policy advice
C. Macroeconomic research
1. Goal: to make general statements about how the economy works
This is a good point for you to talk about your own research interests. Students are very interested
Chapter 1 Introduction to Macroeconomics 5
5. Usefulness of economic theory or models depends on reasonableness of assumptions,
possibility of being applied to real problems, empirically testable implications, and
theoretical results consistent with real-world data
6. In Touch with Data and Research: Developing and Testing an Economic Theory
a. Step 1: State the research question
Theoretical Application
The classic discussion of research issues by Milton Friedman is, “The Methodology of Positive
Economics,” Essays in Positive Economics, Chicago: University of Chicago Press, 1953.
D. Data development—very important for making data more useful
Data Application
As head of the Council of Economic Advisers in the Bush presidency, Michael Boskin led an
effort to get more accurate and timely statistics in the United States. See “Improving the Quality
of Economic Statistics” in the Economic Report of the President, 1990.
A good example of data development came in early 1994, when the Commerce Department
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.
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III. Why Macroeconomists Disagree (Sec. 1.3)
A. Positive vs. normative analysis
1. Positive analysis: examines the economic consequences of a policy
B. Classicals vs. Keynesians
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
Theoretical Application
At this point in the discussion, you may want to talk about philosophies of economics. Students
are often fascinated by how philosophical differences arise and what they mean, especially for
2. The Keynesian approach
a. The Great Depression: Classical theory failed because high unemployment was persistent
Policy Application
In a speech discussing what economists have learned from the financial crisis in 2008, Fed
Chairman Ben Bernanke suggested that the financial crisis was the result of a failure of economic
engineering or economic management, rather than economic science (“On the Implications of the
Chapter 1 Introduction to Macroeconomics 7
Analytical Problem 5 asks students to distinguish between how a classical economist and a
Keynesian economist would think about the same issue.
3. The evolution of the classical–Keynesian debate
a. Keynesians dominated from World War II to 1970
b. Stagflation led to a classical comeback in the 1970s
c. Last 30 years: excellent research with both approaches
Theoretical Application
You may wish to add a discussion of the recent progression of research. You could start by a brief
overview of how the failure of Keynesian models in the stagflation of the 1970s led to the growth
of rational-expectations modeling, with its focus on the importance of microfoundations. Then
C. A unified approach to macroeconomics
1. Textbook uses a single model to present both classical and Keynesian ideas
2. Three markets: goods, assets, labor
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◼ Additional Issues for Classroom Discussion
1. What Are Society’s Major Economic Problems Today?
In the first class session, it may be interesting to discuss students’ perceptions of the major economic
problems facing the economy today. Public-opinion polls show that Americans’ views on the importance
2. Let’s Forecast!
Here’s an exercise that will surprise both you and your students. On the first day of class, before they even
know much about the macroeconomic variables that will be studied in the course, ask them to forecast
3. Formulating a Model
Here’s an exercise in formulating an economic model that will help students learn how to think about
economic issues and how to model them. The idea is for you (or them) to pick a current topic like CPI
bias, the basis of the business cycle, the effect of government deficits, the effect of trade deficits, or
Chapter 1 Introduction to Macroeconomics 9
◼ Answers to Textbook Problems
Review Questions
1. Both total output and output per worker have risen strongly over time in the United States. Output
2. The business cycle refers to the short-run movements (expansions and recessions) of economic
3. A period of inflation is one in which prices (on average) are rising over time. Deflation occurs when
4. The budget deficit is the annual excess of government spending over tax collections. The U.S. federal
government has been most likely to run deficits during wars or recessions. From the early 1980s to
5. The trade deficit is the amount by which imports exceed exports; the trade surplus is the amount by
6. Macroeconomists engage in forecasting, macroeconomic analysis, macroeconomic research, and data
development. Macroeconomic research can be useful in investigating forecasting models to improve
7. The following are the steps in developing and testing an economic model or theory: (1) state the
research question; (2) make provisional assumptions that describe the economic setting and the
8. Yes, it is possible for economists to agree about the effects of a policy (that is, to agree on the positive
analysis of the policy), but to disagree about the policy’s desirability (normative analysis). For example,
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9. Classicals see wage and price adjustment occurring rapidly, while Keynesians think that wages and
prices adjust only slowly when the economy is out of equilibrium. The classical theory implies that
10. Stagflation was a combination of stagnation (high unemployment) and inflation in the 1970s. It
changed economists’ views because the Keynesian approach couldn’t explain stagflation
Chapter 1 Introduction to Macroeconomics 11
Numerical Problems
1. (a) Average labor productivity is output divided by employment:
2014: 12,000 tons of potatoes divided by 1000 workers = 12 tons of potatoes per worker
2. The answers to this problem will vary depending on the current date. The answers here are based on
the data as of May 2015. Numbers are at annual rates in billions of dollars.
2012
2013
2014
GDP
16,163.2
16,768.1
17,418.9
Exports
2,194.2
2,262.2
2,337.0
Imports
2,762.5
2,770.4
2,875.2
3,113.0
3,302.6
3,762.1
3,883.1
Federal Receipts/GDP
12 Abel/Bernanke/Croushore • Macroeconomics, Ninth Edition
Analytical Problems
1. Yes, average labor productivity can fall even when total output is rising. Average labor productivity
is total output divided by employment. So average labor productivity can fall if output and
employment are both rising but employment is rising faster.
2. Just because prices were lower in 1890 than they are in 2015 does not mean that people were better
3. There are many possible theories. One possibility is that people whose last names begin with the
letters A through M vote Democratic, while those whose names begin with the letters N through
Z vote Republican. You could test this theory by taking exit polls or checking the lists of registered
4. (a) Positive. This statement tells what will happen, not what should happen.
(b) Positive. Even though it is about income-distribution issues, it is a statement of fact, not opinion.
5. A classical economist might argue that the economy would work more efficiently without the
government trying to influence trade. The imposition of tariffs increases trade barriers, interfering
with the invisible hand. The tariffs simply protect an industry that is failing to operate efficiently and
Chapter 1 Introduction to Macroeconomics 13
Working with Macroeconomic Data
1. The data as they existed in May 2015 were as follows:
Year
PAYEMS
1949
43,517
1959
54,175
1969
71,240
1979
90,673
1989
1999
Based on these data, average labor productivity at the end of each decade is as follows:
Year
Average Labor
Productivity
1949
46.1
1959
56.4
1969
66.2
1979
71.7
1989
81.3
1999
94.2
2009
The growth rate of average labor productivity in each decade is as follows:
Year
Average Labor
Productivity
Growth Rate
1950s
2.0%
1970s
0.8%
1990s
1.5%
2000s
1.8%
2. The rise in the unemployment rate was greatest during the 2007–2009 recession compared with
3. The inflation rate was highest in the 1970s. The inflation rate was the most stable in the 1990s.