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- 1. Intermediate Macroeconomics Chapter 1 An Overview of Macroeconomics
- 2. Intermediate Macroeconomics An Overview of Macroeconomics 1. What is Macroeconomics 2. Macroeconomic Goals 3. Economic Theory in Practice
- 3. Intermediate Macroeconomics 1. What Is Macroeconomics? • Microeconomics - study of behavior of individual economic agents. • Macroeconomics - study of aggregate measures of the economy
- 4. Intermediate Macroeconomics 2. Macroeconomic Goals • Low Unemployment • Price Stability • Economic Growth • Complementary and Conflicting Goals
- 5. Intermediate Macroeconomics 2. Macroeconomic Goals Low Unemployment 0% 5% 10% 15% 20% 25% 1930 1940 1950 1960 1970 1980 1990 2000 Averageannualunemploymentrate,% U.S. Fairfax Co., VA. 1973 - 1975 recession 1981 - 1982 recession 1990 - 1991 recession Great Depression (1929 - 1933) World War II (1941 - 1945) Source: Bureau of Labor Statistics (www.bls.gov)
- 6. Intermediate Macroeconomics 2. Macroeconomic Goals Price Stability Average Annual U.S.Inflation Rate Consumer Price Index -15% -10% -5% 0% 5% 10% 15% 20% 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 AnnualChange,percent Great Depression 1929 - 1933 World War 1 1917 - 1918 World War 2 1941 - 1945 Arab oil Embargo 1973 - 1974 Iranian Revolution and Oil Price Increase Source: Bureau of Labor Statistics (www.bls.gov)
- 7. Intermediate Macroeconomics 2. Macroeconomic Goals Economic Growth -0.3 -0.2 -0.1 0 0.1 0.2 0.3 1930 1940 1950 1960 1970 1980 1990 2000 Percentannualchange Source: Bureau of Economic Analysis (www.bea.gov) Nominal GDP Real GDP (chained 1996 dollars) Annual change in U.S. GDP per capita
- 8. Intermediate Macroeconomics 2. Macroeconomic Goals Economic Growth $0 $10,000 $20,000 $30,000 $40,000 1930 1940 1950 1960 1970 1980 1990 2000 RealGDPpercapita chained(1996)dollars Long term trend 2.4% per year
- 9. Intermediate Macroeconomics 2. Macroeconomic Goals Complementary and Conflicting Goals • Complementary Goals – Low unemployment and high economic growth • Conflicting Goals – Low unemployment and low inflation
- 10. Intermediate Macroeconomics 3. Economic Theory in Practice • Economic Theory and Models • Empirical Applications
- 11. Intermediate Macroeconomics 3. Economic Theory in Practice Economic theory and models What makes a good model? • Accurately explains history • Makes reasonable predictions about the future
- 12. Intermediate Macroeconomics 3. Economic Theory in Practice Economic theory and models Keep models simple • Occam’s Razor - eliminate complicating details that don’t significantly contribute to the model • Ceteris Paribus - other things being equal
- 13. Intermediate Macroeconomics 3. Economic Theory in Practice Empirical time series applications • Use Real rather than Nominal values • Compare Per Capita rather than Totals • Compare Growth Rates rather than Levels
- 14. Intermediate Macroeconomics 3. Economic Theory in Practice Compare real rather than nominal $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 1929 1939 1949 1959 1969 1979 1989 1999 Chained2000dollars Real GDP Nominal GDP Source: Bureau of Economic Analysis, www.bea.gov Percent increase 1929 – 2003 Nominal GDP: 10,522 % Real GDP: 1,100 %
- 15. Intermediate Macroeconomics 3. Economic Theory in Practice Compare per capita rather than aggregates $0 $10,000 $20,000 $30,000 $40,000 1929 1939 1949 1959 1969 1979 1989 1999 Percapitachained2000dollars $0 $10,000 $20,000 $30,000 $40,000 billionsofchained2000dollars Total Real GDP Real GDP per capita Source: Bureau of Economic Analysis, www.bea.gov Percent increase 1929 – 2003 Total Real GDP: 1,100 % Real GDP per capita: 402%
- 16. Intermediate Macroeconomics 3. Economic Theory in Practice Compare growth rates rather than levels 2.0% 4.1% 1.7% 2.9% 2.1% 2.3% 2.0% 0% 1% 2% 3% 4% 5% AnnualgrowthrealGDP percapita 1930- 1940 1940- 1950 1950- 1960 1960- 1970 1970- 1980 1980- 1990 1990- 2000 Source: Bureau of Economic Analysis, www.bea.gov
Editor's Notes
- Forest vs. trees. Macroeconomics is study of the forest. Microeconomics is study of individual trees. Aggregate - (n) a total, a mass or amount, brought together. (v) to collect or form into an aggregate. Aggregate demand represents the total spending on all final goods and services in an economy by all consumers. Problem with aggregation of preferences. Could add pro-con votes as in an election. But, how do you account for differences in intensity of preferences?
- Unemployment Rates: U.S. Virginia Fairfax Co. Jun 2005 5.2% 3.8% 2.9% Jun 2004 5.8% 4.0% 3.0% Jun 2003 6.5% 4.5% 3.6% Jun 2002 6.0% 4.4% 3.7% Jun 2001 4.7% 3.2% 2.6% Lowest rates last 10 years: U.S. 3.6% Oct 2000 Virginia1.9% Apr 2000 Fairfax Co1.2% Apr 1998
- Economic Growth Distinction between short run and long run Short run – described by business cycle models. Fluctuations in economic activity around a long-run trend. Long-run – described by growth models. Long0run trend determined by factors such as savings, productivity, changes in technology.
- Are high economic growth and low inflation conflicting goals? Not necessarily if your policy action is to increase worker productivity then you could increase economic growth while maintaining low inflation. Because of conflicting goals economics has been described as the “Dismal Science”
- A theory is like a map to a friends house. The map is necessarily incomplete and in many ways inaccurate. The map probably only shows the roads that will take you directly where you want to go. It may show a few landmarks like the gas station where you turn right. The map is useful precisely because it is a simplification. Showing every building and intersecting street won’t get you where you want to go any faster or with significantly greater confidence. Similarly, an economic theory tries to take you directly where you want to go without burdening you with the details. But when the details of the map or a theory are left out it becomes less useful for other purposes. If we use one economic model to study economic growth it is likely unsuitable for studying short-term economic fluctuations.
- John Maynard Keynes, General Theory of Employment Interest and Money, 1936 (p. 297): “The object of our analysis is not to provide a machine or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking.”
- Empirical (Webster’s dictionary): relying or based solely on experiment or observation rather than theory. Two types of empirical studies: Longitudinal - time trends Examining single sector at different points in time - use Real or Real per capita to eliminate effects of both inflation and population differences Comparing sectors over a period of time use Real growth rates or Real per capita growth rates Cross-sectional Comparing different sectors at same point in time - either nominal or real OK Comparing different geographic areas (e.g., countries) - use per Capita rather than aggregates Purchasing power parity corrects for differences in average price levels Indexes - not mentioned in text. Consumption as a share of total GDP. Eliminates problem of differences in population.
- The greatest problem with looking at a graph of levels is that a straight line does not imply constant growth and the slope does not indicate the growth rate. The trick is that an increase from $10,000 to $15,000 is much greater (50 percent) than growth from $30,000 to $35,000 (17 percent). Similarly, a 100 point increase in the stock market's Dow Jones Industrial Average today is not nearly as dramatic as it was twenty years ago.