Lecture 1 Introduction Copyright 2011 Pearson Addison-Wesley. All rights reserved.
Course Overview Welcome to Advanced Macroeconomics What you will NOT learn in this class How to make money by predicting stock prices
What you will learn in this class Models built to explain macroeconomic phenomena. The important pheonomena are long-run growth and business cycles. Approach in this book is to build up macroeconomic analysis from microeconomic principles. Use models and tools to analyze real world data
What you will need Working knowledge of Calculus Constrained optimization, Lagrangians Taking derivatives Solving systems of linear equations For example max log( c) log( ) c, s.t. pc w( h )
What you will need Working knowledge of Calculus Constrained optimization, Lagrangians Taking derivatives Solving systems of linear equations Working with data Excel or other spreadsheet program Detrending data (HP filter) Growth accounting
How to get the most out of this class It s a small class Ask questions! Engage in discussions! The course outline is not set in stone Make suggestions! What do you want learn/study/research?
Chapter 1 Topics Today, we ll cover some basic facts GDP, economic growth, business cycles. Macroeconomic models. Understanding recent and current macroeconomic events.
Per Capita Real GDP (in 2000 dollars) for the United States, 1900 2011 What is GDP?
Per Capita Real GDP (in 2000 dollars) for the United States, 1900 2011 What is GDP? Why real GDP per capita?
Natural Logarithm of Per Capita Real GDP Why natural log?
Natural Logarithm of Per Capita Real GDP and Trend The time series of GDP can be separated into trend and business cycle components.
Percentage Deviations from Trend in Per Capita Real GDP
Macroeconomic Models A macroeconomic model captures the essential features of the world needed to analyze a particular macroeconomic problem. Macroeconomic models should be simple, but they need not be realistic.
Basic Structure of a Macroeconomic Model Consumers and firms The set of goods that consumers consume Consumers preferences The production technology Resources available
What do we learn from macroeconomic analysis? What is produced and consumed in the economy is determined jointly by the economy s productive capacity and the preferences of consumers. In free market economies, there are strong forces that tend to produce socially efficient economic outcomes. Unemployment is painful for individuals, but it is a necessary evil in modern economies. Improvements in a country s standard of living are brought about in the long run by technological progress.
What do we learn from macroeconomic analysis? Part II A tax cut is not a free lunch a tax cut today implies a tax hike in the future Credit markets and banks play key roles in the macroeconomy. What consumers and firms anticipate for the future has an important bearing on current macro events. Money takes many forms, and society is much better off with it than without it. Once we have it, however, changing its quantity ultimately does not matter. Business cycles are similar, but they can have many causes.
What do we learn from macroeconomic analysis? Part III Countries gain from trading goods and assets with each other, but trade is also a source of shocks to the domestic economy. In the long run, inflation is caused by growth in the money supply. There may be a significant short run tradeoff between aggregate output and inflation, but aside from inefficiencies caused by long run inflation, there is no long run tradeoff.
Understanding Recent Macroeconomic Events Aggregate productivity Unemployment and vacancies Taxes, Government Spending and the Government Deficit Inflation Interest Rates Business Cycles in the United States Credit Markets and the Financial Crisis The Current Account Surplus
Natural Logarithm of Average Productivity Average labor productivity: aggregate output produced per worker (Y/N)
The Unemployment Rate for the United States
Total Taxes and Total Government Spending
Total Government Surplus in the United States as a Percentage of GDP
The Inflation Rate and the Money Growth Rate What is inflation?
The Inflation Rate and the Money Growth Rate What is inflation? The rate of change in the average level of prices Positive comovement in the long run, less so in the short run
The Nominal Interest Rate and the Inflation Rate Positive correlation between nominal interest rate and inflation
Real Interest Rate Note: Real interest rate = nominal expected inflation rate
Percentage Deviation from Trend in Real GDP
Interest Rate Spread Interest rate spread: gap between interest rates on AAA(safe) and BAA(somewhat risky) rated corporate debt
Relative Price of Housing Average price of houses/cpi
Exports and Imports of Goods and Services as Percentages of GDP
The Current Account Surplus Note: CA Surplus = NX + Net Factor Payments