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Unformatted text preview: Chapter6: An Introduction to Macroeconomics Chapter Opener p. 115 PART THREE GDP, GROWTH, AND INSTABILITY 6 AN INTRODUCTION TO MACROECONOMICS 7 MEASURING DOMESTIC OUTPUT AND NATIONAL INCOME 8 ECONOMIC GROWTH 9 BUSINESS CYCLES, UNEMPLOYMENT, AND INFLATION p. 116 AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO: 1 Interpret how macroeconomics studies both long-run economic growth and short-run fluctuations in output and unemployment. 2 Explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy. 3 Discuss why sustained increases in living standards are a historically recent phenomenon. 4 Identify why saving and investment are key factors in promoting rising living standards. 5 Describe why economists believe that shocks and sticky prices are responsible for short-run fluctuations in output and employment. As you know from Chapter 1 , macroeconomics studies the behavior of the economy as a whole. It is primarily concerned with two topics: long-run economic growth and the short-run fluctuations in output and employment that are often referred to as the business cycle Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases. . These phenomena are closely related because they happen simultaneously. Economies show a distinct growth trend that leads to higher output and higher standards of living in the long run, but in the short run there is considerable variability. Sometimes growth proceeds more rapidly and sometimes it proceeds more slowly. It may even turn negative for a while so that output and living standards actually decline, a situation referred to as a recession A period of declining real GDP, accompanied by lower real income and higher unemployment. . That is precisely what happened in late 2007 and continued through 2008 and into 2009. The economy experienced what has come to be called the Great Recession. p. 117 This chapter provides an overview of the data that macroeconomists use to measure the status and growth of an entire economy as well as a preview of the models that they use to help explain both long-run growth and short-run fluctuations. Because it is an overview chapter, it raises many unanswered questions. Subsequent chapters will explain these topics in much greater detail. Performance and Policy To understand how economies operate and how their performance might be improved, economists collect and analyze economic data. An almost infinite number of data items can be looked at, including the amount of new construction taking place each month, how many ships laden with cargo are arriving at our ports each year, and how many new inventions have been patented in the last few weeks. That being said, macroeconomists tend to focus on just a few statistics when trying to assess the health and development of an economy. Chief among these are real GDP, unemployment, and inflation....
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