1.3 How This Book Proceeds


This book has six parts. This chapter and the next make up Part One, the Introduction. Chapter 2 discusses how economists measure economic variables, such as aggregate income, the inflation rate, and the unemployment rate.

Part Two, Classical Theory: The Economy in the Long Run, presents the classical model of how the economy works. The key assumption of the classical model is that prices are flexible. That is, with rare exceptions, the classical model assumes that markets clear. Because the assumption of price flexibility describes the economy only in the long run, classical theory is best suited for analyzing a time horizon of at least several years.

Part Three, Growth Theory: The Economy in the Very Long Run, builds on the classical model. It maintains the assumptions of price flexibility and market clearing but adds a new emphasis on growth in the capital stock, the labour force, and technological knowledge. Growth theory is designed to explain how the economy evolves over a period of several decades.

Part Four, Business Cycles Theory: The Economy in the Short Run, examines the behaviour of the economy when prices are sticky. The non-market-clearing model developed here is often referred to as the Keynesian model since this approach was pioneered by British economist John Maynard Keynes in the 1930’s. It is designed to analyze short-run issues, such as the reasons for economic fluctuations and the influence of government policy on those fluctuations. It is best suited for analyzing the changes in the economy we observe from month to month or from year to year.

Part Five, Macroeconomic Policy Debates, builds on the previous analysis to consider what role the government should have in the economy. It considers how, if at all, the government should respond to short-run fluctuations in real GDP and unemployment. It also examines the various views of how government debt affects the economy.

Part Six, More on the Microeconomics Behind Macroeconomics, presents some of the microeconomic models that are useful for analyzing macroeconomic issues. For example, it examines the household’s decisions regarding how much to consume and how much money to hold and the firm’s decision regarding how much to invest. These individual decisions together form the larger macroeconomic picture. The goal of studying these microeconomic decisions in detail is to refine our understanding of the aggregate economy.