Macroeconomics is the study of the total economy — the national, regional or even the world economy. It is a fascinating subject that touches our daily lives. We are invariably interested in news about what is happening in the macroeconomy because changes in economic variables impinge upon our wellbeing. We follow news about unemployment and growth because our standard of living and ability to find jobs depends on these indicators. We also follow developments pertaining to interest rates and inflation because these variables determine our mortgage payments and the purchasing power (how much we can buy) of our incomes and savings, as well as the profitability of our investments. And we are interested in what happens in the foreign exchange market because the exchange rate determines the purchasing power of our spending money overseas, as well as the cost of imported items.

Macroeconomics explores the complex relationships among these variables — which include cause, effect and feedback interactions, and may also involve leads and lags — whose validity ranges between the short run and the long run. Relating theory to empirical observations and then trying to derive some policy conclusions in the presence of such intricate relationships is not an easy endeavour. This makes writing an introductory book on macroeconomics a challenging task, for a book like this has to be both motivating and accessible. It is with these considerations in mind that we have decided to write an Australian version of the a book that has proved to be successful in the United States market.

In writing the Australian version of the book, we followed the same path, starting with empirical observations on the Australian economy, then considering the bits and pieces from which a macroeconomic model is constructed and finally using the analysis to derive some policy implications. The book also considers other countries and external relations in chapters on economic development and international trade.

The most distinguishing feature of this book is the macroeconomic model that is used to explain economic fluctuations. We depart from the conventional aggregate demand and aggregate supply model by using a model that is, despite its simplicity and intuitive appeal, effective in explaining empirical observations. The model is theoretically more appealing than the conventional model in that it relates the level of output (or, rather, the deviation of output from its trend) to the inflation rate, not to the general price level, a concept that is difficult to deal with.

Macroeconomics 2e is designed for a one-semester course. It falls into four parts. The first part deals with basic concepts of macroeconomics and how consumers, firms and the government behave. Part 2 contains an introduction to the main concepts used in macroeconomics and presents a description of the methods used to measure the macroeconomy. The same parts deals with the long-run determinants of output, including labour, capital and technology. It also deals with the role of the monetary sector and the effect of changes in monetary variables, particularly the generation of inflation. Part 3 explains economic fluctuations in the short run and how a recession starts and ends. It also examines macroeconomic policy, including fiscal policy, monetary policy and exchange rate policy. Students are introduced to the various schools of thought in macroeconomics and the debates on macroeconomic theory and policy. Part 4 deals with economic development and international trade, two topics that are highly related. Students will find out why there are rich countries and poor countries, why is it that some poor countries have become rich while others remain poor, and how international trade contributes to growth and welfare.