Chapter 19 - Introduction to Macroeconomics

Macroeconomics is concerned with the economy's overall performance. The phrase economy refers to the organization of the economic life or activity of a community, region, country, set of countries, or the entire planet. We might discuss the Chicago economy, the Illinois economy, the Midwest economy, the United States economy, the North American economy, or the global economy.

The size of an economy is measured in a variety of ways, including the amount produced, the number of people employed, and total income. The most commonly used yardstick is the gross product, which measures the market value of final goods and services produced in a specific geographical region over a given time period, typically one year.

• The term GDP refers to the gross domestic product or the market value of all final goods and services produced in the nation during a particular period, usually a year.

• The term Gross World Product refers to the market value of all final goods and services produced in the world during a given period, usually a year

The national economy is deserving of particular consideration. This is why. Driving west on Interstate 10 in Texas, you'd scarcely notice the border crossing into New Mexico. If, on the other hand, you take the Juarez exit south into Mexico, you will be checked at the border, asked for identification, and may be searched. You would become acutely aware that you were crossing an international boundary. The United States and Mexico, like other governments, allow people and products to move more freely inside their borders than across them.

The distinctions between the United States and Mexico are considerably bigger than those between Texas and New Mexico. Each country, for example, has its level of living.

Consider the parallels and distinctions between the human body and the economy. The body is made up of millions of cells, each of which performs a specific job yet is related to the entire body. Similarly, the US economy is made up of millions of decision-makers, each operating independently yet all related to the economy as a whole. Like the body, the economy is constantly renewing itself, with new households, new enterprises, a shifting cast of public officials, and new foreign rivals and customers. Blood flows throughout the body, allowing cells to exchange oxygen and essential nutrients. Similarly, money flows throughout the economy, making it easier to do business.

Despite these ups and downs, the US economy has risen significantly in the long run. Although economic activity may be assessed in a variety of ways, if we had to choose just one, output best reflects what's going on.

The economy today generates more than 13 times as much as it did in 1929. Real GDP is the worth of final products and services after deducting changes due to inflation, which is a rise in the economy's average price level. Production grew due to a rise in the quantity and quality of resources, particularly labor and capital, improved technology, and changes in the laws of the game that promote production and trade.

Exhibit 1 shows the long-term growth trend in economic activity as an upward-sloping straight line. Economic fluctuations reflect movements around this growth trend.

A contraction occurs when the preceding expansion hits a trough, or low point, and lasts until the economy reaches a peak or high point. The time between a peak and a trough is referred to as a contraction, whereas the time between a dip and the next high is referred to as an expansion. It is worth noting that expansions last longer than contractions, but the total length of the cycle varies.

The National Bureau of Economic Research (NBER) has been studying the US economy since 1854. Since then, the country has gone through 33 peak-to-trough-to-peak cycles. There have been no two that have been exactly alike. Before 1945, expansions lasted an average of 29 months and contractions lasted an average of 21 months. Expansions have been twice as long in the 11 cycles since 1945.

The U.S. economy was on such a roll that toward the end of the 1960s some economists believed the business cycle was history. As a sign of the times, the name of a federal publication, Business Cycle Developments, was changed to Business Conditions Digest.