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Lecture 1

This document provides an introduction and overview of macroeconomics. It discusses that macroeconomics explains how and why the overall economy grows and fluctuates based on aggregate decisions of consumers, businesses, and governments. It also outlines how macroeconomics is studied through developing simple models of key macroeconomic variables and their relationships, and applying these models to analyze historical and current economic conditions. The course will cover topics like economic growth, business fluctuations, and international trade and finance.

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Ronald Diaz
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50 views

Lecture 1

This document provides an introduction and overview of macroeconomics. It discusses that macroeconomics explains how and why the overall economy grows and fluctuates based on aggregate decisions of consumers, businesses, and governments. It also outlines how macroeconomics is studied through developing simple models of key macroeconomic variables and their relationships, and applying these models to analyze historical and current economic conditions. The course will cover topics like economic growth, business fluctuations, and international trade and finance.

Uploaded by

Ronald Diaz
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to Economics Agenda

What is Macroeconomics? Why Do We Study Macroeconomics? How Do We Study Macroeconomics?

Economics
Economics is the study of how people, both individually and collectively, choose to allocate, over time and space, scarce resources to the production and distribution of various goods and services.

Microeconomics
Micro is Greek for small. Explains how markets work and the economic decisions made by individuals, households, business firms, industries, and units of government. Is partial equilibrium analysis. Provides a foundation for macroeconomics.
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Macroeconomics
Macro is Greek for large. Explains how and why the economy grows and fluctuates over time based on the decisions made, in the aggregate, by consumers, businesses, and governments. Is general equilibrium analysis. Explains variables taken as given in microeconomics.
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Macroeconomics
Macroeconomics is a model-based discipline. Plan of Action
Develop simple models that can generate useful and realistic explanations about the behavior of important macroeconomic variables. Apply these models to analyze historical and current macroeconomic developments and to make predictions about future events.
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Overview of the Course


Definitions, Concepts, Key Relationships Long-run Economic Growth
EXAM #1

Short-run Business Fluctuations


EXAM #2

International Trade and Finance Medium-term Growth and Inflation


EXAM #3
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Overview of the Course


The 3 major topics are related by the assumptions we make about how quickly wages and prices adjust in non-equilibrium situations.
In the short-run, no adjustment. In the medium term, partial adjustment. In the long-run, full adjustment.
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Why Study Macroeconomics?


Macroeconomics is all around us. Provides the environment in which business firms operate. Provides the environment in which the political system operates. Is essential for the formulation and evaluation of good economic policy. Is endlessly fascinating because it provides a description of how the world operates.
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How To Study Macroeconomics


Macroeconomics is a model-based discipline. Therefore, we need to:
Develop simple models that can generate useful and realistic explanations about the behavior of important macroeconomic variables. Apply these models to analyze historical and current macroeconomic developments and to make predictions about future events.

How To Study Macroeconomics


Building Economic Models
Identify key economic variables. Posit a relationship between these variables.
Focus on a few key relationships.
Provides a simplified way to think about the economy.

Collect data and test the model relationships.

Although this process abstracts from the complexity of the real world it still provides valuable insights and conclusions about how the economy operates.
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How To Study Macroeconomics


Types of Economic Variables
Exogenous: explained outside of the model. Endogenous: explained inside of the model. Constants and parameters: measures sensitivity of the relationship between variables.
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How To Study Macroeconomics

Exogenous Variables

Key Relationships: Constants and Parameters

Endogenous Variables

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How To Study Macroeconomics


Economic models helps us tell stories about:
How the key economic variables are related to one another. What happens to the endogenous variables if an exogenous variable(s) changes. What can be inferred about what happened to an exogenous variable(s) if an endogenous variable(s) changes.
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How To Study Macroeconomics


Types of descriptions:
Verbal Graphical Mathematical

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How To Study Macroeconomics


Drawbacks of Economic Models
Economics is not an exact science.
The macroeconomy is highly complex and continues to evolve over time.
General equilibrium analysis

How To Study Macroeconomics


Using Economic Models
Economic Theory
A description of what is. Uses models to understand how the economy works. Positive economics.

Economics is a behavioral science.


Behavior can change over time. Relationships between variables can change.
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Economic Policy
A description of what should be, a value judgment. Uses models to make policy recommendations. Normative economics.
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Why Macroeconomist Disagree


Theoretical Differences
About the structure of the economy. About the sensitivity of the economy.

Brief History of Macroeconomics


Classical Macroeconomics The Great Depression
John Maynard Keynes

Policy Differences
About the appropriate role for government spending/taxing and monetary policy.

Long-Term Economic Growth


Robert Solow

Inflation Different Time Horizons


Many disagreements revolve around different, but unspoken, time horizons.
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A.W. Phillips, Edmund Phelps and Milton Friedman

Unemployment
Arthur Okun
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