1. The Macro Lens

Micro asked how a single market clears; macro asks how big the whole economy is and why it shakes. This chapter measures GDP through the circular flow, then shows why three schools answer the same shock differently — in the end, because of one assumption: how fast prices move.

• The Circle Money Travels: GDP — In micro, the story was one cafe's sales. In macro, all spending in a country forms one big circle. Households spend, firms invest, and the government spends. Add what foreigners buy from us, minus what we buy from them. The total is GDP — the sum in the formula below. The circle keeps turning when 💰 money flowing in matches money leaking out. For example, imagine 30 🧑 classmates each spend a 10,000-won allowance at the corner 🏪 snack bar every month. The owner buys ingredients with that money and drops the rest in a 🐷 piggy bank. Adding up everything the class spent gives the class its own tiny GDP.
• One Shock, Three Schools — In micro, prices moved the moment they were out of line. In macro, how fast prices move is exactly what splits the schools. A sudden drop in demand leaves output below where it should be. That shortfall is called a gap. Classical economists say prices fall at once and close it. Keynes said prices freeze, so the gap just stays. New Keynesians say prices crawl, so the gap shrinks little by little. The only difference is the speed in the formula below. For example, say a 🏪 snack bar raises its prices and 🧑 customers vanish overnight. One owner cuts prices again the very next day. Another cannot be bothered reprinting the menu and leaves them for months. A third lowers them a little each week. Customers come back at a different speed for each owner.