Lecture 1: Introduction to Macroeconomics
What is macroeconomics? What do we study? How do we study it? Macroeconomics: studies the whole economy main variables: real, inflation, unemployment usually dynamic setting Topics: Long term: Why some countries grow more quickly? Short term: Why do we have recessions and depressions? What can we do about it? Is it working?
source: Macroeconomics US BEA II What do we study? How do we study it? Figure : US real per capita 4000 (2005 USD) 12000 20000 28000 44000 36000 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year
Inflation What do we study? How do we study it? Figure : US Inflation inflation (%) 0 5 10 15 1960 1970 1980 1990 2000 2010 year
What do we study? How do we study it? Figure : US unemployment (%) 4 6 8 10 1960 1970 1980 1990 2000 2010 year
Models What do we study? How do we study it? Example: Supply and demand exogenous vs. endogenous variables model assumptions and realism
Microeconomic foundations What do we study? How do we study it? Microeconomics: study of decisions of firms and consumers Macroeconomics: implicit vs. explicit modeling: Trade-off between tractability and realism based on the question studied
Why Do We Need? One cannot make conclusions based on casual observations The plural of anecdote is NOT data! The criterion of a model s worth is how it fits the data - The great tragedy of Science - the slaying of a beautiful hypothesis by an ugly fact. (Thomas Huxley)
Stock and Flow Two types of variables: 1 Stock - Quantity measured at a given instance: number of unemployed, amount of capital etc. 2 Flow - Quantity measured per a unit of time - (annual, quarterly...), number of jobs created per year etc., investment, depreciation etc.
Measures the performance of economy - primary sources of data: government - tax collection agencies, regulation etc. survey of businesses 2 ways of looking at it: 1 sum of income of every person in the economy 2 sum of all expenditures in the economy
Income, Expedinture and Circular Flow Flow of goods, factors and money - the market value of all final goods and services produced within economy in a given period of time Rules: used goods inventories intermediate goods and value added imputed values
Nominal vs. Real deflator = Nominal Real Chain-weighted measures of real - use average prices between two years to compute growth Lesson is the same: we have to take into account price changes when evaluating performance of an economy across years!
Components of Expedinture National income accounts identity: Y = C + I + G + NX C: nondurables, durables, services I : business fixed investment, residential fixed investment, inventory investment; what is investment? G: government purchases NX : net exports
Other Measures of Income GNP = + Factor Payments from Abroad Factor Payments to Abroad NNP = GNP Depreciation NI = NNP + statistical discrepancy Compensation of employees, proprietor s income, rental income, corporate profits, net interest, indirect business taxes
Personal Income Personal Income = NI Indirect Business Taxes +Dividends Corporate Profits +Government Transfers to Individuals Social Security Contributions +Personal Interest Income Net interest Disposable Personal Income = Personal Income Personal Tax Nontax Payments
CPI Inflation - increase in the overall level of prices Basket of goods consumed by a typical household Another indexes: PPI, specific types of goods (food, housing, and energy; core inflation)
CPI vs. Deflator Types of goods measured Origin of goods measured Aggregation of prices: Paasche index = Σ(pc,tn qc,tn ) Σ(p c,t0 q c,t0 ) Laspeyres index = Σ(pc,tn qc,t 0) Σ(p c,t0 q c,t0 )
CPI vs Deflator Figure : CPI vs Deflator - Czech Republic % 5 0 5 10 01 Jan 07 01 Jan 08 01 Jan 09 01 Jan 10 01 Jan 11 Period CPI change Deflator change
Workers - chief resource of an economy Total Adult Population = Labor Force + Out of Labor Force Labor Force = Number of Employed + Number of Unemployed UR = # of unemployed Labor Force Labor Force Participation = Labor Force Total Adult Population
Labor Force Participation Figure : Labor Force Participation in the US % 20 40 60 80 100 1940 1960 1980 2000 2020 Year Male Female