CHAPTER 1: INTRODUCTION TO MACROECONOMICS
LEARNING OBJECTIVES
Goals of Part I: Introduction
Introduce students to the main concepts in macroeconomics (Ch. 1)
Introduce national income accounting and major economic magnitudes (Ch. 2)
Goals of Chapter 1
Major economic issues—growth, business cycles, unemployment, inflation, the international economy, macroeconomic policy, aggregation (Sec. 1.1)
What macroeconomists do—forecasting, analysis, research, data development (Sec. 1.2)
Why macroeconomists disagree—Classicals vs. Keynesians, the text’s approach (Sec. 1.3)
Notes to Eighth Edition Users
Sections on economic theory and data development are combined into the section titled macroeconomic research.
Answer for numerical question #2 was updated.
TEACHING NOTES
What Macroeconomics Is About (Sec. 1.1)
Long-run economic growth
Growth of real output in Canada over time
Sources of growth—rising population, increase in the average labour productivity
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 growth over the past year, or the inflation rate. We also recommend explaining how the growth rate of a ratio is approximately the growth rate of the numerator minus that of the denominator. Throughout the text, students may come across mathematical calculations that are unfamiliar to them. The Appendix at the end of the textbook contains some helpful basic guidance to mathematical topics, including discussions of functions and graphs, slopes of functions, elasticities, functions of several variables, shifts of a curve, exponents, and growth rate formulas.
Business cycles
Unemployment and Price Instability
Analytical Problem 1 asks students to think about average labour productivity and unemployment and their relationship to output.
Analytical Problem 2 asks students to think about the welfare consequences of having a higher price level.
You may wish to note here that the inflation rate is just the growth rate of the price level, so that π = [(Pt + 1/Pt) - 1 × 100%. Numerical Problem 1 gives students practice calculating growth rates, including the growth rate of average labour productivity, unemployment rate, and the inflation rate.
The international economy
Open vs. closed economies
Trade imbalances; the trade deficit and the trade surplus
The exchange rate
Macroeconomic policy
Fiscal policy
Effects of large federal deficits
Canadian experience
Relation to decline in productivity growth
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.
Monetary policy; the Bank of Canada
Aggregation; from microeconomics to macroeconomics
What Macroeconomists Do (Sec. 1.2)
Macroeconomic forecasting
Relatively few economists make forecasts
Data Application
There are many firms that provide forecasts for macroeconomic variables in Canada, such as the Conference Board of Canada, DRI Canada, and most private banks. In addition, the Federal Department of Finance and the Bank of Canada make projections for the economy based on large scale macroeconometric models. Finally, international agencies such as the Organization for Economic Cooperation and Development (OECD) provide annual surveys of the Canadian economy which make forecasts for the economy.
Forecasting is very difficult
Data Application
Francis X. Diebold presents a comprehensive survey of the development of structural and non-structural forecasting in his article, “The Past, Present, and Future of Macroeconomic Forecasting,” Journal of Economic Perspectives, Spring 1998, vol. 12, pp. 175-92. Despite the difficulties in macroeconomic forecasting, he is optimistic about its future with the rapid advances in numerical and simulation techniques.
Macroeconomic analysis
Private and public sector economists—analyze current conditions
Data Application
The Canadian financial sector hires a large number of economists, most of whom are engaged in data analysis on a daily basis. Their job is to tell traders what the current data means in terms of their effect on the financial markets in general, as well as on the prices of individual assets. Many of them also make their own detailed forecasts of the economy.