ECON 2102 I: Intermediate

Macroeconomics

Lecture 1: Introduction (Ch. 1)

Mariko J. Klasing slide 0

 Announcements

Xiaonan’s office hours: Th., 9:30-10:30am, Loeb-A-800

Ian’s office hours: T., 11:30am-12:30pm, Loeb-D881
Mariko’s office hours: Wed.,10:00am-noon, Loeb A-808
The first assignment will be posted this weekend and is
due on Oct. 4 at the beginning of the TA section or at
11:30am in the Economics Department (drop box)
First TA section: W., 10/04 (discussion of homework
#1), 11:35am-12:25 pm, Mackenzie Building 3275

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 Learning Objectives

This lecture introduces you to

 the issues macroeconomists study
 the tools macroeconomists use
 some important concepts in macroeconomic
analysis
Remark: You should be familiar with this material
from ECON 1000.

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 What causes recessions?
Can the government do anything to combat recessions?
Should it?

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 What is the difference between economic growth and
business cycles?
40,000

30,000

Growth=long-run
20,000 upward trend

10,000 Business Cycles =

short-run
fluctuations
0
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000
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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 Why does the cost of living keep rising?

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 Why are millions of people unemployed?
 What is the government budget deficit? How does it affect
the economy?

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 Why are so many countries poor?
What policies might help them grow out of poverty?

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
 Why does the U.S. have such a huge trade deficit?
 What is the trade deficit? How does it affect the country’s
well-being?

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 Why learn macroeconomics?
The macroeconomy affects well-being.
5
In most years, wage growth falls 5

percent change from 12 mos earlier

4 when unemployment is rising.
change from 12 mos earlier

3
3
1
2

1 -1

0
-3
-1
-5
-2

-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
Marikounemployment
J. Klasing rate inflation-adjusted mean wage (right scale) slide 9
 Why learn macroeconomics?
The power of economic growth
 In just one century, the U.S. economy has been completely
transformed
 Life expectancy: 1900 = 50 years, today = 78 years
 Education: in 1900 fewer than 10% of adults had completed
high school; today the overwhelming majority of people has at
least a high school degree
 Child mortality: in 1900 one out of every 10 children born died
before the age of one; today more than 90% of children born
survive
 Enormous increase in living standards: electricity, refrigerators,
cell phones, airplanes, dishwashers, …

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 Economic models

 Unlike physicists, macroeconomists cannot conduct

controlled experiments in a lab.
 Using data that history provides we have observed that
economies differ from one another and that they change
over time.
 This observation has provided the motivation for
developing macroeconomic models (theories).

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 Economic models

…are simplified versions of a more complex reality

 irrelevant details are stripped away
…are used to
 show relationships between variables (often in
mathematical terms)
 explain the economy’s behavior
 derive policies to improve economic performance

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 Example of a model:
Supply & demand for new laptops
 shows how various events affect price and
quantity of laptops
 assumes the market is competitive: each buyer
and seller is too small to affect the market price
 Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new laptops
Y = aggregate income
P C = price of chips (an input)
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 The demand for laptops

demand equation: Q d = D (P ,Y )
 shows that the quantity of laptops consumers
demand is related to the price of laptops (P) and
aggregate income (Y)

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 Economic Models: Notation
 General functional notation
shows only that the variables are related.
Q d = D (P,Y )

A list of the
variables
that affect Q d
 A specific functional form shows
the precise quantitative relationship.
 Example:
D (P,Y ) = 60 – 10P + 2Y

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 The market for laptops: Demand

demand equation: P
Price
Q d
= D (P ,Y ) of laptops

The demand curve

shows the relationship
between quantity D
demanded and price, Q
holding other things Quantity
equal. of laptops

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 The market for laptops: Supply

supply equation: P
Price
Q s = S (P ,P C) of laptops S

Q
The supply curve
shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of laptops

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 The market for laptops: Equilibrium

P
Price
of laptops S

equilibrium
price
D
Q
Quantity
of laptops
equilibrium
quantity
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 The effects of an increase in income
demand equation: P
Q d = D (P ,Y ) Price
of laptops S

An increase in income
increases the quantity P2
of laptops consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price of laptops
and quantity.

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 The effects of a chip price increase

supply equation: P S2
Q s = S ( P , P C) Price
of laptops S1

An increase in P C
reduces the quantity of P2
laptops producers P1
supply at each price…
D
Q
…which increases the Q2 Q1
market price and Quantity
of laptops
reduces the quantity.

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 Endogenous vs. exogenous
variables
 The values of endogenous variables
are determined in the model.
 The values of exogenous variables
are determined outside the model:
the model takes their values & behavior
as given.

Exogenous: Y, PC Endogenous: P, Qd, Qs

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 A multitude of models

 No one model can address all the issues we

care about.
 e.g., our supply-demand model of the laptop
market…
 can tell us how a fall in aggregate income
affects price & quantity of laptops
 cannot tell us why aggregate income falls.

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 A multitude of models

 So we will learn different models for studying

different issues (e.g., unemployment, inflation,
long-run growth).
 For each new model, you should keep track of
 its assumptions
 which variables are endogenous,
which are exogenous
 the questions it can help us understand,
and those it cannot

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 Prices: flexible vs. sticky
 Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
 In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example,
 many labor contracts fix the nominal wage
for a year or longer
 many magazine publishers change prices
only once every 3-4 years

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 Prices: flexible vs. sticky

 The economy’s behavior depends partly on

whether prices are sticky or flexible:
 If prices are sticky, then demand won’t always
equal supply. This helps explain
 unemployment (excess supply of labor)
 why firms cannot always sell all the goods
they produce
 Long run: prices flexible, markets clear,
economy behaves very differently
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 Summary

 Macroeconomics is the study of the economy as

a whole, including
 growth in incomes,
 changes in the overall level of prices,
 the unemployment rate.
 Macroeconomists attempt to explain the
economy and to devise policies to improve its
performance.

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 Summary

 Economists use different models to examine

different issues.
 Models with flexible prices describe the economy
in the long run; models with sticky prices
describe the economy in the short run.
 Macroeconomic events and performance arise
from many microeconomic transactions, so
macroeconomics uses many of the tools of
microeconomics.
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