CHAPTER 1: INTRODUCTION TO MACROECONOMICS
LEARNING OBJECTIVES
I. Goals of Part I: Introduction
A. Introduce students to the main concepts in macroeconomics (Ch. 1)
B. Introduce national income accounting and major economic magnitudes (Ch.
2)
II. Goals of Chapter 1
A. Major economic issues—growth, business cycles, unemployment, inflation,
TEACHING NOTES
I. What Macroeconomics Is About (Sec. 1.1)
A. Long-run economic 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] x 100%.
Then you might use an example with something you’re talking about, such as real GDP
B. Business cycles
C. Unemployment; Canadian experience
Analytical Problem 1 asks students to think about average labour productivity and
unemployment and their relationship to output.
2 Chapter 1
2. Deflation (falling prices)
3. Inflation rate
You may wish to note here that the inflation rate is just the growth rate of the price level,
E. The international economy
1. Open vs. closed economies
F. Macroeconomic policy
1. Fiscal policy
a. Effects of large federal deficits
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 how large are the trade deficit and
government budget deficit or surplus.
2. Monetary policy; the Bank of Canada
Data Application
There are many firms that provide forecasts for macroeconomic variables in Canada,
2. Forecasting is very difficult
Data Application
Francis X. Diebold presents a comprehensive survey of the development of structural
B. Macroeconomic analysis
1. Private and public sector economists—analyze current conditions
Introduction to Macroeconomics 3
Data Application
The Canadian financial sector hires a large number of economists, most of whom are
2. Does having lots of economists ensure good macroeconomic policies?
No, since politicians, not economists, make major decisions
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. It has been found
that students are very interested in learning about the kind of research their instructors
5. Usefulness of economic theory or models depend on reasonableness
of assumptions, possibility of being applied to real problems,
empirically testable implications, and theoretical results consistent with
real-world data
Theoretical Application
The classic discussion of research issues by Milton Friedman is, “The Methodology of
D. Data development—very important for making data more useful
Ill. Why Macroeconomists Disagree (Sec. 1.3)
A. Positive vs. normative analysis
Analytical Problem 4 gives students practice in distinguishing positive from normative
analysis.
B. Classicals vs. Keynesians
1. The classical approach
a. The economy works well on its own; the “invisible hand” leads
4 Chapter 1
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 policy. This helps to reinforce the idea that the Keynesian and
2. The Keynesian approach
a. The Great Depression: Classical theory didn’t appear to work
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 WWII to 1970
Theoretical Application
You may wish to add a discussion of the recent progression of research. You could start
by a brief discussion 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 you could discuss New Keynesian
macroeconomics (discussed in greater detail in Chapter 13) and its attempts to provide
some microfoundations for wage and price stickiness in Keynesian models.
C. A unified approach to macroeconomics
1. Textbook uses a single model to present both classical and Keynesian
ideas
2. Three markets: goods and services, assets, labour
Introduction to Macroeconomics 5
ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION
1. How Has Increasing Productivity Changed Life in Canada?
Increases in labour productivity allow people to consume more goods and services.
How have rising consumption levels affected daily life—and people’s expectations—
over the last few generations?
Even over relatively short periods of time, such as 30 years, living standards for
Canadians have changed dramatically. In the 1981-2011 period, average labour
2. Are Canadians Better Off Today?
Canadians have more material goods today than they had in the 1950s. Does this mean
that life in the 2000s is better than it was in the 1950s and 1960s?
Do more goods and services compensate adequately for the environmental problems
and rapid changes of life today?
Although the average house has more square feet and more appliances than it had 40
3. Is Economics a Science?
What is a science? Does the term science apply to economics? If economists cannot
predict accurately what will happen in the future, can we claim that economics is a
science?
If one defines as a body of knowledge gained by investigation that will allow one to
6 Chapter 1
4. Is Macroeconomics Linked to the Modern Industrial Society?
Many topics in macroeconomics are closely linked to our urban money-based economy.
Inflation, unemployment, business cycles, growth, and the balance of trade have all
5. Do Economic Conditions Change the Outcome of Elections?
Many commentators believe that the condition of the economy with respect to
unemployment and growth influence the outcome of general elections.
Introduction to Macroeconomics 7
ANSWERS TO TEXTBOOK PROBLEMS
Review Questions
1. Both total output and output per worker have risen strongly over time in Canada.
Output itself has grown by a factor of 80 in the last 125 years. Output per worker is
now five times as great as it was in 1921. These changes have led to a much
higher standard of living today.
2. The business cycle refers to the short-run movements (expansions and
recessions) of economic activity. The unemployment rate rises in recessions and
5. Aggregation refers to the process of adding together individual economic variables
to obtain economy-wide totals. Aggregation distinguishes microeconomics from
macroeconomics. It allows us to study the economy as a whole, rather than looking
at its individual parts.
6. Macroeconomists engage in macroeconomic forecasting, macroeconomic
analysis, basic research, and data development. Macroeconomic research can be
7. The steps in developing and testing an economic model or theory are: (1) State the
research question; (2) make provisional assumptions that describe the economic
setting and the behaviour of the economic actors; (3) work out the implications of
the theory; (4) conduct an empirical analysis to compare the implications of the
8 Chapter 1
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, suppose economists agreed that
9. Classicals see wage and price adjustment occurring rapidly, while Keynesians
think that wages and prices adjust only slowly to shocks. The classical theory
Numerical Problems
1. a. Average labour productivity is output divided by employment:
2011: 12 000 tonnes of potatoes per 1000 workers = 12 tonnes of potatoes per
worker
d. The inflation rate is [(2.5/2) – 1] × 100% = 25%.
2. The answers to this problem will vary depending on the current date. Numbers are
at annual rates in billions of current dollars.
2009 2010
GDP 1,529.0 1,624.6
Exports 439.5 478.1
Imports 465.3 508.7
Federal Revenues 223.3 228.6
Introduction to Macroeconomics 9
Analytical Problems
1. Yes, average labour productivity can fall even when total output is rising. Average
labour productivity is total output divided by employment (of workers sixteen years
old and over). So average labour productivity can fall if output and employment are
2. Just because prices were lower in 1914 than they were in 2009 does not mean that
3. There are many possible theories. One possibility is that people whose last names
begin with the letters A through M vote Liberal while those whose names begin
with the letters N through Z vote Conservatives You could test this theory by taking
exit polls or checking the lists of registered voters by party. However, this theory
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
5. A classical economist might argue that the economy would work more efficiently
with NAFTA because it reduces trade barriers, making the invisible hand work
even better. Workers could specialize even more than before, so that more total
output would be produced by all three countries. Though the industrial mix might
10 Chapter 1
6. Keynes was responding to the suggestion of classical economists that there was
no need for a response to the Great Depression from government policymakers