eco 121 macroeconomics lecture one aisha khan section f & g spring 2009
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ECO 121 MACROECONOMICS
Lecture One
Aisha KhanSection F & G
Spring 2009
Aisha Khan Office: Centre for Research in Economics and Business (CREB) Email: aisha@lahoreschool.edu.pk Office hours:
Mondays 9:00- 10:30 am Tuesdays 11:00-12:30 pm
Teaching Assistants: Section F: Taha Ahmed
V4ever85@hotmail.com Section G: Nida Zahid
nida_zahid1@hotmail.com
Classroom Etiquette
Cell phones must be turned off during class hours.
Quizzes and Assignments will not be retaken.
Cheating in exams/quizzes and any form of plagiarism will be penalized.
Five absences are allowed for the term after which attendance marks will be affected.
Attendance will be taken in the first half and after the break. If you miss either half of the session, you will be marked absent for the entire session.
If you would like to meet at a time other than the office hours, email in advance to setup up an appointment.
Assessment
(tentative)
Final Examination 35%
Mid Term Examination 25% Quizzes (best 3 out of 4)
15% Assignments (2)
10% Review Paper/ Presentation 10% Class Attendance 5%
Syllabus
I. Introduction: Macroeconomic IssuesII. National Income and OutputIII. Money, Banking and Monetary Policy
Core Reading List: I. McConnell and Brue, Economic Principles, Problems
and Policies
II. Lipsey, An Introduction to Positive Economics
Course Pack: Available at the Photocopier
What is Economics?
What is the economy? Economics?
Scarcity Resources of individuals Resources of countries
Opportunity Costs
Positive economics Focuses on facts, description, theory
development
Normative economics Incorporates value judgments- what the
economy should be like (policy economics)
Macro vs. Micro
Allocation decisions take place at various levels
Two different points of observation
Macroeconomics total output of a nation, allocation of land, labor, capital
Microeconomics similar issues but at the level of individuals and firms
Macroeconomics
Economic measures of the macro economy Monitor the production of the nation Help determine inputs to the production
process Examples
Total output/income of a nation (GDP) Population
Workforce (labor) Unemployment
Prices CPI, WPI Inflation
Savings Investment new capital
Production Process
Production function Inputs: Land/Capital, Labor Other factors are assumed to be fixed
(technology etc)
Y = f ( K , L )
Y = f ( K , L )
Shape?
Y
K, L
Diminishing marginal productivity As inputs increase initially, output increases
by a large factor As inputs increase in the latter half, output
increases but at a decreasing rate
Population
All ages make up the entire population Ages 15-65 constitute the working force
can be employed as labor
Unemployment? Large numbers unemployed as is taking
place in the US today what significance does it hold?
Prices
Measuring prices Consumer Price index (basket of
consuemr goods) Wholesale Price Index
Inflation Percentage change in prices
Savings
Portion of income saved(not consumed) Investment Leads to greater capital accumulation
Helps increase production Helps the economy grow
State Bank of Pakistan (SBP) report – First Quarterly Report 2008-09
Global Inflationary Trends
Economic Growth and Instability M&B- Chapter 8
What is Economic growth? (define)
Why is it important for economic growth to take place?
Economic Growth
An increase in real GDP occurring over some time
An increase in real GDP per capita occurring over some time period
“Growth lessons the burden of scarcity”
A goal for countries?
“Growth lessons the burden of scarcity”
A goal for countries?
Rule of 70
Mathematical approximation of the effect of growth
Approximate number of years required to double GDP = 70/ (annual percentage rate of growth)
Sources of Growth
1. Increasing its inputs of resources2. Increasing productivity of inputs
Productivity (real output per unit of input) rises by increasing health, sanitation, training, education, motivation
The Business Cycle
Does growth take place persistently?
Case of Pakistan: episodic growth between 2000-2005
Now?
Phases of economic growth/ activity are characterized as business cycles
Peak: temporary maximum in activity
Recession: a period of decline in employment, trade, income
Trough: bottom lowest in the temporary cycle
Recovery: rise in output and employment towards full employment
Causes of business cycles Changes in productivity changes in spending levels
Growth trend is the overall trend of the business cycles Expansionary Contractionary
Who is affected the most through a cycle? Capital goods/ consumer durables can be
put off to a later date e.g. car industry in the US
Whereas, Non-durable consumer goods (services)
harder to remove oneself from e.g. medical, legal services
Unemployment
Those part of the labor force which are not employed must be actively seeking work to be
considered unemployed
Calculate
Types of unemployment
1. Frictional In search of employment In between jobs, fresh graduates
2. Structural Changes in consumer preferences,
demand and in technology e.g sewing3. Cyclical
Caused by changes in spending , less demand and less income causes higher unemployment e.g. Credit Crunch 2008
Full Employment
The maximum population that can be employed at a time (considering only structural and frictional unemployment)
Natural Rate of Unemployment (NRU) unemployment rate at full employment
level
Economic cost of unemployment Large unemployment has costs
Causes a GDP gap The amount by which actual GDP falls short of
potential GDP (at full employment levels) Okun’s law: for every 1percentage point
unemployment rises above NRU a GDP gap of 2 percent occurs
Cost of unemployment is unequally distributed Different groups experience different
unemployment rates
Unemployment varies by Occupation Age Race and ethnicity Gender Education Duration
Non-economic costs: depression, socio-political unrest, lowering
morale, poverty, ethnic and racial tension
Inflation
Rise in the general level of prices
Measuring inflation Price indices Calculate
Types of inflation Demand-pull inflation Cost-push inflation
Types of Inflation
Demand-pull Excess demand for goods, can push up prices “too much spending chasing too few goods”
Cost-push Rising per-unit production costs Reduces profits and thus reduces output Prices rise Also known as supply shocks
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