Chapter 4 – Overview of Macroeconomics
2 major themes of Economics: the business cycle and economic growth
Business cycles – patterns of expansion and contraction in the economy
Macroeconomics studies the sources of unemployment and high inflation. The goal is low, stable inflation
Main goal: increase the rate of economic growth (growth of GDP). This may require greater investment in
education and capital. Other goals include low unemployment and stable prices.
1. High unemployment and underused capital can persist in market economies
2. Fiscal and monetary policies can affect output
Output – providing the goods and services that the public desires
GDP – Gross Domestic Product, the measure of the market value of all final goods and services produced
in a country in a year.
- Nominal GDP: measured in actual market prices
- Real GDP: calculated at constant prices
% growth rate of real GDP in the year t = 100 x GDP t−1
Economic growth – when advanced economies exhibit steady long-term growth in real GDP and an
improvement in living standards
Potential GDP – maximum sustainable level of output that the economy can produce
- When output rises above potential output, price inflation rises. When output is below potential, it
leads to high unemployment.
- Determined by the economy’s productive capacity, which depends upon inputs available and
Recession – a period of significant decline in total output, income, and employment usually lasting a few
Depression – a severe recession when output is strained that usually requires assistance from monetary or
The unemployment rate usually reflects the movement of the business cycle. When output falls, the
demand for labor falls, and the unemployment