A brief presentation on the history of Macroeconomics and Overview.

2. Macroeconomics
Evolution and Overview

3. Presented By:
 Md. Atiqul Basher ID – 31
 Rakesh Ranjan Nag ID - 13

4. 1929-32 :The great
depression
Among many factors, to most economists
belief, it started with stock market crash at
the US in October 29, 1929.
Uncertainty prevailed over economy, so
people focused on saving more money,
and so, demand for product declined.
Decline of demand, led to decrease in
production and bankruptcies in industry
based nations.
Countries like UK saw unemployment rate
increase as high as 129% and US saw
607% rise in unemployment

5. 1936: Introduction
of General Economic theory
 John Maynard Keynes wrote
General economic theory to
identify reasons behind mass
unemployment, Since Business
cycle theory failed.
 He believed, Unemployment
resulted from decrease in
aggregate demand and lack
of investment.

6. 1936: Introduction of General
Economic theory
 His solution:
Government circulate more
money In the economy, reduce
taxes and interest rates
Industries borrow more money
for increasing production
Unemployment gets reduced
as more production needs
more people
Employed workers will
circulate money by spending
more

7. • In the 1950s, Keynesian macroeconomics
established itself as the dominant form of
macroeconomics – known as Neoclassical
Synthesis
• Alvin Hansen’s IS/LM curve was a key tool in
this era.
• Some notable work included:
- 1944, Franco Modgliani added a labor
market model.
- Lawrence Klein’s U.S. macroeconomic
model The model was an extended IS
relation, with 16 equations.
1950s: the Neoclassical
Synthesis

8. 1950s: the Neoclassical
Synthesis
 Even though IS-LM
curve dominated the
field of
macroeconomics, it
worked, based on
fixed price
assumption.
 However, Philips
curve, showed a
relation between
inflation and
employment, solved
this problem of the
era.

9. 1950s: the Neoclassical
Synthesis
 Milton Friedman and
Edmund Phelps argued
that the apparent trade-
off between
unemployment and
inflation would quickly
vanish if policy makers
actually tried to exploit
it.
 By the mid 1970s, the
consensus was that
there was no long-run
trade off between
inflation and
unemployment.

10. The Rational
Expectations Critique
 After being scrutinized by
Friedman, In the early 1970s,
Robert Lucas, Thomas
Sargent, and Robert Barro
led a strong attack against
Keynesian macroeconomics.
 Under Lucas Critique, Robert
Lucas argued that the models
captured relations as they had
held in the past, under past
policies. Hence, conventional
macroeconomics was a poor
tool to predict future!
 The findings dethroned
Keynesian macroeconomics

11. Current Developments:
New Classicals
 Edward Prescott is the intellectual leader of
the new classicals—a group of economists
interested in explaining fluctuations as the
effects of shocks in competitive markets with
fully flexible prices and wages.
 Their real business cycle (RBC) models
assume that output is always at its natural
level, and fluctuations are movements of the
natural level of output. These movements
are fundamentally caused by technological
progress.

12. Current Developments:
New Keynesians
 The new Keynesians are a loosely
connected group of researchers
working on the implications of several
imperfections in different markets.
 New Keynesianism is a response to
Robert Lucas and the new classical
school.

13. Current Developments:
New Keynesians (Cont.)
 Significant early
contributions to New
Keynesian theory were
compiled in 1991 by editors
N. Gregory Mankiw and
David Romer in New
Keynesian Economics,
volumes 1 and 2.
 Multiple line of researchers
are making contributions in
studies like:
- Wage determination in
Labor market
- Imperfections in credit
markets.

14. Dynamic Stochastic General
Equilibrium (DSGE) model
RBC
theory
New
Keynesian
DSGE

15. DSGE Modelling
 Like other general equilibrium models in
economics, DSGE models aim to
describe the behavior of the economy as
a whole by analyzing the interaction of
many microeconomic decisions.
 The decisions considered in most DSGE
models correspond to some of the main
quantities studied in macroeconomics,
such as consumption, saving,
investment, and labor supply and
labor demand.

16. In conclusion:
 DSGE models are dynamic
and consistently changing,
based on the changes in
economy.
 The end result of all these
developments is that we
now find economists
holding opposite policy
views agreeing about the
conceptual apparatus upon
which to base their
theoretical conversation.
This state of affairs seems
to be agreeable to both
camps.

17. Measuring Macroeconomics

18.  Aggregate Output
 Environmental Dimensions
 Social Dimensions

19. Aggregate Output
 National income accounts An accounting system used to
measure aggregate economic activity.
 The typical measure of aggregate output in the national
income accounts is gross domestic product, or GDP.

20. GDP: Production and Income
There are three ways of defining GDP:
1. The value of the final goods and services produced in
the economy.
2. The sum of value added in the economy.
3. The sum of the incomes in the economy.

21. Environmental and Social
Dimensions

22. New Understandings for the 21st Century
 The traditional macroeconomic model portrays a hypothetical
economy in which only businesses engage in production, and
in which the natural environment plays no role.
 But now-a-days , people have come to realize that economic
activity actually takes place within the context of human social
institutions which in turn are inextricably embedded in the
natural environment.

23. Accounting for the Environment
 resource functions: the provision by the natural environment of
inputs
into human production processes
 environmental service functions: the provision by the natural
environment of the ecosystem services that support and
enhance life
 sink functions: the provision by the natural environment of
places to
put waste materials

24. Macroeconomics in Context

25. Accounting for the Environment
 Physical Accounts
 Natural Assets and the National Accounts
 National Accounts and What Nature Produces
 The Problem of Valuation
 Making Changes

26. Physical Accounts
 To quantify some of the major
environmental effects of economic
activity in physical terms

27. Natural Assets and the National Accounts
 The value of a nation’s natural resources should be added to
the value of its manufactured capital stock in accounting for
national assets.
 the 2003 version of the United Nations System of Integrated
Environmental and Economic Accounts discusses a measure
called environmentally adjusted net domestic
product (eaNDP), or GDP less both these kinds of
depreciation.
eaNDP = GDP
−Depreciation of manufactured capital
−Depreciation of natural capital

28. National Accounts and What Nature
Produces
 Defensive expenditures: Expenditures necessary
just to maintain a status quo situation (that is,
necessary to keep well-being from going down in
the face of negative developments)

29. The Problem of Valuation
 Even if we were able to compile very good
information on environmental assets and
production in physical terms, there is a very
big problem of monetary valuation.

30. Making Changes: Satellite Accounts
 As an alternative to defining a “greened”
GDP, many nations have chosen to
create supplementary or satellite
accounts
Satellite accounts: Additional or parallel
accounting systems that provide
measures of social and environmental
factors in physical terms, without
necessarily including monetary valuation.

31. The History of Exclusion of Household
activities
1. Households are nonproductive
2. It’s too hard to distinguish household
production from consumption
3. GDP measures market production
4. Including household production would
make too big of a change in the
accounts

32. Measuring Household Production
 Time Use Surveys
Methods of Valuing Household Production
1. replacement cost method (for estimating the value of household
production): valuing hours at the amount it would be necessary to pay
someone to do the work
2. opportunity cost method (for estimating the value of household
production): valuing hours at the amount the unpaid worker could have
earned at a paid job

33. Measuring Economic Well-Being
 Does Output Measure Well-Being?
1. Well-being-reducing products
2. Defensive expenditures
3. Loss of leisure
4. Loss of human and social capital formation
5. Well-being reducing production method
6. Unequal distribution

34. The Genuine Progress Indicator
 A measure of economic wellbeing that adds
many benefits, and subtracts many costs,
that are not included in GDP. This measure
is calculated by the nonprofit group
Redefining Progress.

35. The Human Development Index
 An index of well-being made by combining
measures of health, education, and income.
Calculated by the United Nations Development
Program (UNDP).
The HDI aggregates three indicators of human well-
being:
• Life expectancy at birth
• An index reflecting a combination of the adult literacy
rate and statistics on enrollments in education
• GDP per capita

36. The Future of Macroeconomic
Indicators