INTRODUCTION ECON204 (A01) Intermediate Macroeconomics September 05, 2012 1
Text N.G. Mankiw and W.M. Scarth, Macroeconomics, Fourth Canadian Edition, Worth Publishers Inc., 2011 Organization of the Book Part I: Introduction (Ch 1-2) Part II: Economy in the Long run (Ch 3-6) Part III: Economy in the very long run (Ch 7-8) Part IV: Economy in SR/ Business Cycle (Ch 9-13) Part V: Govt & Economy (Ch 14-15) Part VI: Microfoundation (Ch 16-19) 2
Our Course Outline Introduction Ch 1: The Sciences of Macroeconomics Ch 2: The Data of Macroeconomics The Economy in the Long-run Ch 3: National Income Ch 4: Money and Inflation Ch 5: The Open Economy Ch 6: Unemployment The Economy in the Short- run Ch 9: Introduction to Economic Fluctuation Ch 10: AD I: Building the IS-LM Model Ch 11: AD II: Applying the IS-LM Model Ch 12: Open Economy Revisited: The Mundell-Fleming Model and the ER regime 3
The Economy in the Very Longrun Ch 7: Economic Growth I: Capital Accumulation and Population Growth Ch 8: Economic Growth II: Technology, Empirics, and Policy 4
Chapter One THE SCIENCE OF MACROECONOMICS 5
Issues... What is Macroeconomics? Why do we study Macroeconomics? What and how Macroeconomists Study? Macroeconomic modeling 6
What is Economics? Economics is the study of the use of scarce resources to satisfy unlimited human wants. Macroeconomics? The study of the economy as a whole; or Macroeconomics is the study of the determination of economic aggregates, such as total output, total employment, the price level, and the economic growth. Issues in Macroeconomics Determinants of economic aggregates: output, unemployment, price level 7
Behaviour of an economy over time: short-run fluctuations and long-run economic trend (i.e., growth rate) Drivers of Macroeconomics Economic policies Fiscal policy: Government Monetary Policy: Monetary Authority Examples: Aggregate production - Growth Aggregate price level - Inflation Unemployment rate Exchange rate 8
How do economists think? Macroeconomic Modeling: Short run vs Long run Cycle (about short run) and Trend (about long run) o Business cycle: fluctuation of macroeconomic variables around their long run trends 9
Real GDP A Typical Business Cycle Recessionary Gap Peak Actual GDP Peak Trough Potential GDP Inflationary Gap Time 11 10
Trend Growth long run growth path Determined by longer term issues such as savings and investment (capital accumulation) Population and education (labour force and human capital accumulation) Resources; and Economic and political environment 11
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Figure: Real GDP per Person in the Canadian Economy 13
Figure: Inflation/Deflation in Canadian economy 14
Figure: Unemployment rate in Canada 15
2. Economic Variables Endogenous Variables explained by the model Exogenous Variables taken as given by the model Let s construct a model of the market for pizza What determines the demand for pizza? Q D = f (P, Y) What determines the supply of pizza? Q S = f (P, P m ) Condition for market equilibrium Q D =Q S 16
Figure: Model of Supply and Demand 17
Which variables are exogenous? - Income (Y) and the price of materials (Pm) Which variables are endogenous? - The price of pizza (P) and the quantity exchanged (Q) What is the impact of a change in exogenous variables? What happens if Y changes or Pm changes? Is this model realistic? 18
Macroeconomics Models Why are there many models in macroeconomics? No single model answers all questions Which models will we develop and use? The assumption about Flexible vs. Sticky prices Microeconomic thinking behind the macroeconomic model Micro foundation of Macroeconomic 19
Now you try... Consider the macroeconomic data shown below for a hypothetical country s economy: Year Real GDP Output Gap Unemployment Actual Potential (Billions of $) (% of Potential) Rate (% of labor force) 2003 1168 1180 11.1 2004 1184 1196 10.2 2005 1197 1205 9.1 2006 1211 1215 8.3 2007 1225 1225 7.6 2008 1240 1236 7.3 2009 1253 1247 7.1 2010 1262 1258 7.3 2011 1270 1270 7.6 a) Compute the output gap for each year b) Explain how GDP can exceed potential GDP c) Does real GDP ever fall in the time period shown? What do economists call such periods? d) What is the natural rate of unemployment? What kind of unemployment exists at this time? 20