Introduction to Macroeconomics


Measuring the economy

The need for measurement

Problems with measurement

height, what is it? How to best measure it? Errors in measurement.


what are they

why do we use them

what problems do they present, as aggregates

averages can be highly misleading

Stock market returns

Construct and example of misleading average

Measuring economic output


Market value

adding apples and oranges

New versus Used

Final vs. Intermediate

double counting problem

Set Time Period

Location of production


same except for location of production

Mathematical Formula for Nominal GDP




In this formula there are n final goods produced in an economy. Each of these n goods has a market price, Pi and a quantity produced, Qi, Pi times Qi is the market value of good i. The sum of the market values for all the n goods in the economy is equal to the GDP.


Income = Expenditure


Every time a buyer makes a purchase that expenditure becomes income for the seller. The totality of Income is therefore equal to the totality of Expenditure. We can find the value of GDP by adding up all the expenditures on final goods in the economy, alternatively we can find the value of GDP by adding up all the income received by the various factors of production in the economy.


Income Approach

It should be simple: Rent + Interest + Wages + Profit

That would account for all the income earned by each resource.

Not that simple in the real world because of government, taxes and accounting rules.


Expenditure Approach

Consumption Expenditure + Gross Private Domestic Investment + Government Expenditure on Goods and Services + Net Exports


Aggregate Income = Aggregate Expenditure = GDP


Problems with GDP

Price Changes

Mathematical Note-Index


Simple Price Index

Base period

"Current" period

Value in relation to base period

Index value

Value of index in base period

Real GDP\\%20\textrm{Nominal%20GDP}=\sum%20P_i^{current}\times%20Q_i^{current}%20\\%20\\%20\textrm{Real%20GDP}=\sum%20P_i^{base}%20\times%20Q_i^{current}

Real GDP is the value of current output at base year market prices. Real GDP thereby measures output at constant dollar value.

Household Production


Underground Economy



Problems comparing GDP across countries

Different mix of market/non-market work

Size of country

Per-capita GDP

Per-capita Real GDP

Measuring the Economy - Unemployment

What is unemployment?

Problems caused by unemployment.

Economic problems caused by unemployment


Measuring Unemployment-Part 1

Classifying the population

Total Population

"Adult" Population

Labor Force



Not Working





Total Population = A + B + C + D

Adult Population = B + C + D

Labor Force = B + C

Unemployed = C

Not-in-Labor-Force = D

Not Working = C + D


Measuring Unemployment - Part 2


Unemployment Rate

Labor Force Participation Rate


Problems with unemployment rate

discouraged workers

Unemployment rate decreases when no new people have jobs


Using two different measures to see what is happening in labor markets


Types of Unemployment







Full-employment rate of unemployment

Natural Rate of Unemployment


Changes in the NRU


Measuring the Economy - Inflation






Measuring Inflation

Price Index

What is a "rate"\\%20\textrm{Inflation%20Rate}=\frac{\textrm{NewerYears%20Price%20Index}}{\textrm{Older%20Years%20Price%20Index}}-1%20\\%20\\%20\textrm{Inflation%20Rate}=\frac{\textrm{Newer%20Years%20Price%20Index%20-%20Older%20Years%20Price%20Index}}{\textrm{Older%20Years%20Price%20Index}}\\%20\textrm{Inflation%20Rate}=\frac{PI_2-PI_1}{PI_1}=\frac%20{\Delta{PI}}{PI_1}


Price Indices

Consumer Price Index

Market Basket

CPI keeps the quantities of goods constant and allows the prices to vary. The CPI tells us how much more or less expensive it is to buy the same goods over time.\\%20CPI=\frac{\textrm{Current%20Value%20of%20Market%20Basket}}{\textrm{Base%20Year%20Value%20of%20Market%20Basket}}\times100%20\\%20\\%20CPI=\frac{\sum{P_i^{current}}\times%20Q_i^{base}}{\sum{P_i^{base}\times%20Q_i^{base}}}\times100


GDP Deflator

All goods instead of a selection of goods. Goods vary over time, the GDP deflator uses the actual amount of goods produced in each year. What is fixed in the GDP Deflator are the prices, it uses the prices from the base year so that the dollar value is constant over time.\\%20\textrm{GDP%20Deflator}=\frac{\textrm{Nominal%20GDP}}{\textrm{Real%20GDP}}\times%20100





Note: Real Value



For example,


Causes of inflation

Ultimately, 'inflation is always and everywhere a monetary phenomenon' but in the models we will shortly be using inflation can be shown as an result of increasing demand or decreasing supply.

Cost-Push inflation

Demand-Pull inflation


What's wrong with inflation?

Expected inflation

Unexpected inflation

Benefits: borrowers

Hurts: Lenders

See the 19th century battles over the Bank of the United States as well as the Gold vs Silver Standard

1983-2008 "The Great Moderation" Fed tried to keep inflation steady at around 3%

Since 2008 Fed has dumped hundreds of Billions of Dollars into economy, little measured inflation so far...


Economic Growth


Classical Model of the Economy (Filtered through the Keynesians)

Credit Market

Labor Market

Classical Macro-equilibrium (AD/AS)


Keynesian Model

Income-Expenditure Model



Money & Banking


Economic Policy: Fiscal and Monetary