CHAPTERJ1
INTRODUCTION
1
,ChapterJOutline
• IntroductionJtoJmacroeconomics
• TheJlongJrunJandJshortJrun
• EconomicJmodelsJandJtheJrealJworld
• AJfirstJlookJatJtheJAD-ASJframework
• UnemploymentJandJinflation
• ActualJandJpotentialJGDP
• EconomicJcycles
• RecessionsJandJeconomicJslumps
ChangesJfromJtheJPreviousJEdition
AJfewJminorJmodificationsJhaveJbeenJmadeJtoJChapterJ1.JAllJfiguresJinvolvingJdataJhaveJbeenJup
dated,JasJhaveJTableJ1-1JandJSectionJ1-3J(theJpreviewJofJtheJtext).JNewJFigureJ1-
10JandJtwoJnewJparagraphsJexplainingJtheJdistinctionJbetweenJaJrecessionJandJaJslumpJhaveJbee
nJaddedJtoJSectionJ1-
2.JAllJofJtheJsubsequentJfiguresJhaveJbeenJrenumbered.JFinally,JhereJandJthroughoutJtheJrestJofJt
heJtextbookJeachJboxJhasJbeenJlabeledJeitherJ"HistoryJSpeaks"JorJ"WhatJMoreJDoJWeJKnow?"JtoJle
tJstudentsJknowJwhatJtheyJcanJexpectJtoJlearnJfromJtheseJmaterials.
IntroductionJtoJtheJMaterial
ChapterJ1JprovidesJanJoverviewJofJtheJkeyJconceptsJcoveredJinJtheJtextbook.JItJalsoJoutlinesJtheJd
ifferentJtimeJframesJthatJareJusedJtoJdescribeJtheJeconomyJinJtheJaggregate.JTheJveryJlong-
runJmodelJfocusesJonJtheJgrowthJofJproductiveJcapacityJandJignoresJfluctuationsJinJemploymentJa
ndJoutput.JThisJisJimportantJwhenJtryingJtoJexplainJwhyJsomeJcountriesJhaveJhigherJaverageJgrowt
hJratesJ(andJthusJhigherJlivingJstandards)JthanJothers.JInJtheJlongJrun,JfluctuationsJinJdemandJrela
tiveJtoJtheJlevelJofJproductiveJcapacityJdetermineJtheJlevelJofJprices.JButJinJtheJveryJshortJrun,JtheJl
evelJofJoutputJisJdeterminedJbyJaggregateJdemandJalone,JwhileJpricesJareJnotJaffectedJbyJchange
sJinJaggregateJdemand.JTheJmediumJrunJdescribesJtheJtransitionJbetweenJtheJshortJrunJandJtheJl
ongJrun.JInJthisJcase,JeconomicJpoliciesJorJdisturbancesJaffectJtheJratesJofJinflationJandJunemploy
mentJsimultaneously,JandJtheJspeedJatJwhichJpricesJadjustJisJcriticalJforJanalyzingJtheJeffectsJofJt
heJdisturbancesJorJpolicyJchanges.
TheJbehaviorJofJtheJeconomyJcanJbeJanalyzedJusingJtheJAD-ASJmodel.JThreeJdifferentJAS-
JcurvesJareJpresentedJhere,JeachJdescribingJaJdifferentJtimeJframe:JtheJverticalJAS-
curveJdescribesJtheJ veryJ longJ run,J theJ horizontalJ AS-
2
,curveJ describesJ theJ veryJ shortJ run,J andJ theJ upward-sloping
3
, AS-curveJdescribesJtheJmediumJrun.JTheJAD-
ASJframeworkJisJaJveryJsimplifiedJrepresentationJofJtheJrealJworldJthatJcannotJdescribeJtheJbehavi
orJofJallJpeopleJandJenterprisesJinJanJeconomy.JHowever,JitJservesJveryJwellJtoJexplainJhowJecono
micJdisturbancesJaffectJoutput,Jemployment,JandJprices,JandJhowJpoliciesJcanJbeJusedJtoJmitigateJ
economicJdisturbances.
ToJunderstandJtheJbehaviorJofJtheJeconomyJasJaJwhole,JstudentsJmustJlearnJsomeJbasicJconc
epts.JAmongJtheJmajorJconceptsJpresentedJinJChapterJ1JisJGDP,JthatJis,JtheJmarketJvalueJofJallJfin
alJgoodsJandJservicesJcurrentlyJproducedJinJaJcountryJoverJaJcertainJtimeJperiod.JAJnation'sJGDPJc
hangesJasJtheJamountJofJavailableJresourcesJandJtheJefficiencyJwithJwhichJtheseJresourcesJareJuse
dJchanges.JSinceJtheJlevelJofJnominalJGDPJcanJchangeJsimplyJdueJtoJinflationJorJaJchangeJinJpopul
ation,JrealJGDPJperJcapitaJisJoftenJusedJasJaJmeasureJforJtheJstandardJofJlivingJinJaJcountry.JButJevenJ
realJGDPJperJcapitaJisJnotJaJperfectJmeasureJforJpeople'sJwelfareJsinceJitJdoesJnotJtakeJintoJconsid
erationJsuchJthingsJasJchangesJinJtheJdistributionJofJincome,JenvironmentalJquality,JorJleisureJactiv
ities.
TheJperformanceJofJanJeconomyJisJgenerallyJjudgedJbyJthreeJbroadJmeasures:JtheJgrowthJrat
eJofJoutput,JtheJunemploymentJrate,JandJtheJinflationJrate.JTheJtrendJpathJofJoutputJisJtheJpathJt
hatJrealJGDPJwouldJtakeJifJallJfactorsJofJproductionJwereJfullyJemployedJ(alsoJknownJasJpotentialJ
GDP).JActualJGDPJgenerallyJtendsJtoJbeJbelowJthisJtrendJpath,JsinceJinJmostJyearsJtheJfactorsJofJp
roductionJareJnotJfullyJemployed.JTheJoutputJgapJmeasuresJtheJsizeJofJtheseJcyclicalJdeviationsJa
ndJisJdefinedJasJtheJgapJbetweenJpotentialJGDPJandJactualJGDP.JThisJgapJgrowsJduringJrecessionsJw
henJunemploymentJincreases.JInJperiodsJofJexceptionalJgrowth,JlikeJinJtheJlateJ1990s,JactualJGDP
JcanJbecomeJlargerJthanJpotentialJGDP,JsoJtheJGDPJgapJcanJactuallyJbecomeJnegative.JSectionJ1-
2JdiscussesJhowJinflation,Jgrowth,JandJunemploymentJareJrelatedJthroughJeconomicJcycles,JthatJ
is,JpatternsJofJexpansionJandJcontractionJinJeconomicJactivityJaroundJtheJtrendJpathJofJGDP.JAJdi
stinctionJisJmadeJbetweenJaJrecessionJasJitJisJofficiallyJdefinedJandJanJeconomicJslump.
KnowingJtheJspeedJwithJwhichJpricesJadjustJisJcriticalJinJunderstandingJtheJworkingsJofJtheJec
onomy,JandJmuchJeconomicJresearchJisJdevotedJtoJthisJsubject.JTheJPhillipsJcurveJshowsJanJempi
ricalJrelationshipJbetweenJchangesJinJinflationJandJtheJunemploymentJrateJinJtheJmediumJrun.JT
heJquestionJofJwhetherJthereJisJaJusefulJtrade-
offJbetweenJunemploymentJandJinflationJisJofJconsiderableJimportanceJforJtheJimplementationJo
fJmacroeconomicJstabilizationJpolicies,JandJthereJisJmuchJcontroversyJamongJeconomistsJaboutJt
heJusefulnessJofJtheJPhillips-curve.
SuggestionsJforJLecturing
4
INTRODUCTION
1
,ChapterJOutline
• IntroductionJtoJmacroeconomics
• TheJlongJrunJandJshortJrun
• EconomicJmodelsJandJtheJrealJworld
• AJfirstJlookJatJtheJAD-ASJframework
• UnemploymentJandJinflation
• ActualJandJpotentialJGDP
• EconomicJcycles
• RecessionsJandJeconomicJslumps
ChangesJfromJtheJPreviousJEdition
AJfewJminorJmodificationsJhaveJbeenJmadeJtoJChapterJ1.JAllJfiguresJinvolvingJdataJhaveJbeenJup
dated,JasJhaveJTableJ1-1JandJSectionJ1-3J(theJpreviewJofJtheJtext).JNewJFigureJ1-
10JandJtwoJnewJparagraphsJexplainingJtheJdistinctionJbetweenJaJrecessionJandJaJslumpJhaveJbee
nJaddedJtoJSectionJ1-
2.JAllJofJtheJsubsequentJfiguresJhaveJbeenJrenumbered.JFinally,JhereJandJthroughoutJtheJrestJofJt
heJtextbookJeachJboxJhasJbeenJlabeledJeitherJ"HistoryJSpeaks"JorJ"WhatJMoreJDoJWeJKnow?"JtoJle
tJstudentsJknowJwhatJtheyJcanJexpectJtoJlearnJfromJtheseJmaterials.
IntroductionJtoJtheJMaterial
ChapterJ1JprovidesJanJoverviewJofJtheJkeyJconceptsJcoveredJinJtheJtextbook.JItJalsoJoutlinesJtheJd
ifferentJtimeJframesJthatJareJusedJtoJdescribeJtheJeconomyJinJtheJaggregate.JTheJveryJlong-
runJmodelJfocusesJonJtheJgrowthJofJproductiveJcapacityJandJignoresJfluctuationsJinJemploymentJa
ndJoutput.JThisJisJimportantJwhenJtryingJtoJexplainJwhyJsomeJcountriesJhaveJhigherJaverageJgrowt
hJratesJ(andJthusJhigherJlivingJstandards)JthanJothers.JInJtheJlongJrun,JfluctuationsJinJdemandJrela
tiveJtoJtheJlevelJofJproductiveJcapacityJdetermineJtheJlevelJofJprices.JButJinJtheJveryJshortJrun,JtheJl
evelJofJoutputJisJdeterminedJbyJaggregateJdemandJalone,JwhileJpricesJareJnotJaffectedJbyJchange
sJinJaggregateJdemand.JTheJmediumJrunJdescribesJtheJtransitionJbetweenJtheJshortJrunJandJtheJl
ongJrun.JInJthisJcase,JeconomicJpoliciesJorJdisturbancesJaffectJtheJratesJofJinflationJandJunemploy
mentJsimultaneously,JandJtheJspeedJatJwhichJpricesJadjustJisJcriticalJforJanalyzingJtheJeffectsJofJt
heJdisturbancesJorJpolicyJchanges.
TheJbehaviorJofJtheJeconomyJcanJbeJanalyzedJusingJtheJAD-ASJmodel.JThreeJdifferentJAS-
JcurvesJareJpresentedJhere,JeachJdescribingJaJdifferentJtimeJframe:JtheJverticalJAS-
curveJdescribesJtheJ veryJ longJ run,J theJ horizontalJ AS-
2
,curveJ describesJ theJ veryJ shortJ run,J andJ theJ upward-sloping
3
, AS-curveJdescribesJtheJmediumJrun.JTheJAD-
ASJframeworkJisJaJveryJsimplifiedJrepresentationJofJtheJrealJworldJthatJcannotJdescribeJtheJbehavi
orJofJallJpeopleJandJenterprisesJinJanJeconomy.JHowever,JitJservesJveryJwellJtoJexplainJhowJecono
micJdisturbancesJaffectJoutput,Jemployment,JandJprices,JandJhowJpoliciesJcanJbeJusedJtoJmitigateJ
economicJdisturbances.
ToJunderstandJtheJbehaviorJofJtheJeconomyJasJaJwhole,JstudentsJmustJlearnJsomeJbasicJconc
epts.JAmongJtheJmajorJconceptsJpresentedJinJChapterJ1JisJGDP,JthatJis,JtheJmarketJvalueJofJallJfin
alJgoodsJandJservicesJcurrentlyJproducedJinJaJcountryJoverJaJcertainJtimeJperiod.JAJnation'sJGDPJc
hangesJasJtheJamountJofJavailableJresourcesJandJtheJefficiencyJwithJwhichJtheseJresourcesJareJuse
dJchanges.JSinceJtheJlevelJofJnominalJGDPJcanJchangeJsimplyJdueJtoJinflationJorJaJchangeJinJpopul
ation,JrealJGDPJperJcapitaJisJoftenJusedJasJaJmeasureJforJtheJstandardJofJlivingJinJaJcountry.JButJevenJ
realJGDPJperJcapitaJisJnotJaJperfectJmeasureJforJpeople'sJwelfareJsinceJitJdoesJnotJtakeJintoJconsid
erationJsuchJthingsJasJchangesJinJtheJdistributionJofJincome,JenvironmentalJquality,JorJleisureJactiv
ities.
TheJperformanceJofJanJeconomyJisJgenerallyJjudgedJbyJthreeJbroadJmeasures:JtheJgrowthJrat
eJofJoutput,JtheJunemploymentJrate,JandJtheJinflationJrate.JTheJtrendJpathJofJoutputJisJtheJpathJt
hatJrealJGDPJwouldJtakeJifJallJfactorsJofJproductionJwereJfullyJemployedJ(alsoJknownJasJpotentialJ
GDP).JActualJGDPJgenerallyJtendsJtoJbeJbelowJthisJtrendJpath,JsinceJinJmostJyearsJtheJfactorsJofJp
roductionJareJnotJfullyJemployed.JTheJoutputJgapJmeasuresJtheJsizeJofJtheseJcyclicalJdeviationsJa
ndJisJdefinedJasJtheJgapJbetweenJpotentialJGDPJandJactualJGDP.JThisJgapJgrowsJduringJrecessionsJw
henJunemploymentJincreases.JInJperiodsJofJexceptionalJgrowth,JlikeJinJtheJlateJ1990s,JactualJGDP
JcanJbecomeJlargerJthanJpotentialJGDP,JsoJtheJGDPJgapJcanJactuallyJbecomeJnegative.JSectionJ1-
2JdiscussesJhowJinflation,Jgrowth,JandJunemploymentJareJrelatedJthroughJeconomicJcycles,JthatJ
is,JpatternsJofJexpansionJandJcontractionJinJeconomicJactivityJaroundJtheJtrendJpathJofJGDP.JAJdi
stinctionJisJmadeJbetweenJaJrecessionJasJitJisJofficiallyJdefinedJandJanJeconomicJslump.
KnowingJtheJspeedJwithJwhichJpricesJadjustJisJcriticalJinJunderstandingJtheJworkingsJofJtheJec
onomy,JandJmuchJeconomicJresearchJisJdevotedJtoJthisJsubject.JTheJPhillipsJcurveJshowsJanJempi
ricalJrelationshipJbetweenJchangesJinJinflationJandJtheJunemploymentJrateJinJtheJmediumJrun.JT
heJquestionJofJwhetherJthereJisJaJusefulJtrade-
offJbetweenJunemploymentJandJinflationJisJofJconsiderableJimportanceJforJtheJimplementationJo
fJmacroeconomicJstabilizationJpolicies,JandJthereJisJmuchJcontroversyJamongJeconomistsJaboutJt
heJusefulnessJofJtheJPhillips-curve.
SuggestionsJforJLecturing
4
