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CHAPTER 20 Introduction to Macroeconomics

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ECONOMICS IN PRACTICE

The Economy and the Election in 2008

On November 4, 2008, Democrat Barak Obama
was victorous over Republican John McCain in the
U.S. presidential election, winning over 53 percent
of the popular vote.
At the time of the 2008 election, the economy
was not doing well. Output was falling and unemployment was rising. Indeed, in the fall of 2008, the
United States was in the midst of a worldwide
financial crisis in which large financial institutions
around the globe were faltering. In the United
States, fiscal policy and monetary policy were
expansive in 2008 as policy makers tried to help the economy. These policies are discussed in future
Economics in Practice boxes. The policies were not enough, however, to prevent a contraction.
The economy and election outcomes are closely linked. The state of the economy is almost
always an important issue in U.S. presidential elections. Voters appear to hold the party that is
in power in the White House accountable for the economy. Voters tend to favor the incumbentparty candidate if the economy is good (high output and low inflation) and vote against the
incumbent-party candidate if the economy is bad (low output and high inflation). In fact, it is
possible to quantify the relationship between the economy and election outcomes using the
tools of econometrics, one of the fields listed in Table 1.2 on p. 9. One of the authors of this text
(Fair, Predicting Presidential Elections and Other Things, Stanford University Press, 2002) has an
equation that explains the incumbent-party vote share for president based on output and inflation (and some non-economic incumbency information). Economic performances and election outcomes back to the 1916 election are used for the analysis. Given predictions of output
and inflation before an election, this equation can be used to predict each partys vote share.
Two years ahead of the 2008 election, on November 1, 2006, the equation was predicting, given
economic forecasts that were available at the time, that the Democratic challenger, whoever he or
she might be, would get 53.5 percent of the vote. During the next two years the economic forecasts changed as new economic information became available, which allowed a new vote prediction to be made. The final vote prediction before the election, on October 30, 2008, was
51.9 percent for the Democratic challenger (Obama). In fact, Obama got 53.3 percent of the vote,
so the predictions from the vote equation were quite close to what actually occurred. Two years
ahead the equation was predicting that the Democrats would win and by roughly the amount by
which they did! Not all economic and political predictions are this accurate, but it is important to
realize that the economy is generally very important in influencing elections. The economy was
struggling at the time of the 2008 election, and the incumbent-party candidate lost.

S U M M A R Y
1. Microeconomics examines the functioning of individual
industries and the behavior of individual decision-making
units. Macroeconomics is concerned with the sum, or aggregate, of these individual decisionsthe consumption of all
households in the economy, the amount of labor supplied
and demanded by all individuals and firms, and the total
amount of all goods and services produced.

MACROECONOMIC CONCERNS p. 402

2. The three topics of primary concern to macroeconomists are

the growth rate of aggregate output; the level of unemployment; and increases in the overall price level, or inflation.

THE COMPONENTS OF THE MACROECONOMY p. 404

3. The circular flow diagram shows the flow of income received

and payments made by the four groups in the economy
households, firms, the government, and the rest of the
world. Everybodys expenditure is someone elses receipt
every transaction must have two sides.
4. Another way of looking at how households, firms, the government, and the rest of the world relate is to consider the
markets in which they interact: the goods-and-services market, labor market, and money (financial) market.
5. Among the tools that the government has available for influencing the macroeconomy are fiscal policy (decisions on