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gets bigger almost every year. Nominal gross domestic product in 2007 was around
$13.8 trillion, more than 27 times as much as in 1959. The black curve in Figure 4 shows



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Part 2
92 The Macroeconomy: Aggregate Supply and Demand



F I GU R E 4
Nominal GDP, Real GDP, and Real GDP per Capita Since 1959


$14,000
$45,000
$13,000




SOURCE: Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, various years).
$40,000 $12,000

$11,000
35,000
$10,000




Billions of Dollars per Year
$9,000
30,000
Real GDP per capita (left scale)
Dollars per Year




8,000
25,000
7,000

6,000
20,000

5,000
15,000
4,000
Real GDP
(right scale) 3,000
10,000
Nominal GDP (right scale) 2,000
5,000
1,000

0
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year

NOTE: Real GDP figures are in 2000 dollars.



that extraordinary upward march. But, as the discussion of nominal versus real GDP
suggests, a large part of this apparent growth was simply inflation. Because of higher
prices, the purchasing power of each 2007 dollar was less than one-fifth of each 1959 dollar.
Corrected for inflation, we see that real GDP (the blue curve in the figure) was only about
4 3„4 times greater in 2007 than in 1959.
Another reason for the growth of GDP is population growth. A nation becomes richer
only if its GDP grows faster than its population. To see how much richer the United States
has actually become since 1959, we must divide real GDP by the size of the population to
obtain real GDP per capita”which is the brick-colored line in Figure 4. It turns out that
Real GDP per capita is
the ratio of real GDP di- real output per person in 2007 was roughly 2.8 times as much as in 1959. That is still not a
vided by population. bad performance.
If aggregate supply and demand grew smoothly from one year to the next, as was de-
picted in Figure 3, the economy would expand at some steady rate. But U.S. economic his-
tory displays a far less regular pattern”one of alternating periods of rapid and slow
growth that are called macroeconomic fluctuations, or sometimes just business cycles. In some
years”five since 1959, to be exact”real GDP actually declined.6 Such recessions, and their
attendant problem of rising unemployment, have been a persistent feature of American
economic performance”one to which we will pay much attention in the coming chapters.
The bumps encountered along the American economy™s historic growth path stand out
more clearly in Figure 5, which displays the same data in a different way and extends the
time period back to 1870. Here we plot not the level of real GDP each year, but, rather, its
growth rate”the percentage change from one year to the next. Now the booms and busts
that delight and distress people”and swing elections”stand out clearly. For example, the


The 2001 recession was so mild that real GDP for the full year 2001 was actually higher than in 2000.
6




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Chapter 5 93
An Introduction to Macroeconomics



F I GU R E 5
The Growth Rate of U.S. Real Gross Domestic Product since 1870
SOURCE: Constructed by the authors from Commerce Department data since 1929.



Rapid
World
industrialization
Percentage Growth Rate of Real GDP
War II
20
Data for 1869“1928 are based on research by Professor Christina Romer.




Roaring Korean
Pre“1940 Twenties War
15 Railroad World Expansion Expansion Boom
prosperity War I of of of
1960s 1980s 1990s
10

5

0
1974“75 1990“91
“5 Recession Recession
Depression Postwar 1982“83
of 1890s depression Recession
“10
Panic Postwar
of 1907 Post“1950
recession
“15 Great
2007
Depression
“20
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year




fact that real GDP grew by over 7 percent from 1983 to 1984 helped ensure Ronald
Reagan™s landslide reelection. Then, from 1990 to 1991, real GDP actually fell by 1 percent,
which helped Bill Clinton defeat George H. W. Bush. On the other hand, weak economic
growth from 2000 to 2004 did not prevent George W. Bush™s reelection.


Inflation and Deflation
The history of the inflation rate depicted in Figure 6 also shows more positive numbers
than negative ones”more inflation than deflation. Although the price level has risen Deflation refers to a
sustained decrease in the
roughly 16-fold since 1869, the upward trend is of rather recent vintage. Prior to World
general price level.


F I GU R E 6
The Inflation Rate in the United States since 1870
SOURCE: Constructed by the authors from Commerce Department data since 1929.




World
World War II
25
Data for 1869“1928 are based on research by Professor Christina Romer.




War I
Postwar
Percentage Inflation Rate




20 adjustment
Pre“1940
Inflation
15
of the 1970s
Disinflation
10
of the 1980s
5

0
Vietnam War
inflation
“5
Post“1950
Post-Civil War
“10 Postwar Great
deflation 2007
deflation Depression
“15
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year




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Licensed to:
Part 2
94 The Macroeconomy: Aggregate Supply and Demand



War II, Figure 6 shows periods of inflation and deflation, with little or no tendency for one
to be more common than the other. Indeed, prices in 1940 were barely higher than those at
the close of the Civil War. However, the figure does show some large gyrations in the in-
flation rate, including sharp bursts of inflation during and immediately after the two
world wars and dramatic deflations in the 1870s, the 1880s, 1921“1922, and 1929“1933.
Recently, as you can see, inflation has been both low and stable.
In sum, although both real GDP, which measures the economy™s output, and the price
level have grown a great deal over the past 138 years, neither has grown smoothly. The
ups and downs of both real growth and inflation are important economic events that need
to be explained. The remainder of Part 2, which develops a model of aggregate supply
and demand, and Part 3, which explains the tools the government uses to try to manage
aggregate demand, will build a macroeconomic theory designed to do precisely that.



The Great Depression
As you look at these graphs, the Great Depression of the 1930s is bound to catch your eye.
The decline in economic activity from 1929 to 1933 indicated in Figure 5 was the most se-
vere in our nation™s history, and the rapid deflation in Figure 6 was extremely unusual.
The Depression is but a dim memory now, but those who lived through it”including
some of your grandparents”will never forget it.

Human Consequences Statistics often conceal the human consequences and drama
of economic events. But in the case of the Great Depression, they stand as bitter testimony
to its severity. The production of goods and services dropped an astonishing 30 percent,
business investment almost dried up entirely, and the unemployment rate rose ominously
from about 3 percent in 1929 to 25 percent in 1933”one person in four was jobless! From
the data alone, you can conjure up pictures of soup lines, beggars on street corners, closed
factories, and homeless families. (See “Life in ˜Hooverville.™”)




Life in “Hooverville”
During the worst years of the Great Depression, unemployed work-
ers congregated in shantytowns on the outskirts of many major
cities. With a heavy dose of irony, these communities were known
as “Hoovervilles,” in honor of the then-president of the United
SOURCE: © American Stock/Hulton Archive/Getty Images




States, Herbert Hoover. A contemporary observer described a
Hooverville in New York City as follows:
It was a fairly popular “development” made up of a hundred or

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