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1 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
INTRODUCTION
ECON204 (A01)
Intermediate Macroeconomics
September 05, 2012
2 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Text
N.G. Mankiw and W.M. Scarth, Macroeconomics, Fourth Canadian
Edition, Worth Publishers Inc., 2011
Organization of the Book
Part I: Introduction
(Ch 1-2)
Part II: Economy in the Long run
(Ch 3-6)
Part III:
Economy in the very long run
(Ch 7-8)
Part IV:
Economy in SR/ Business Cycle (Ch 9-13)
Part V:
Govt & Economy (Ch 14-15)
Part VI:
Microfoundation (Ch 16-19)
3 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Our Course Outline
Introduction
Ch 1: The Sciences of Macroeconomics Ch 2: The Data of Macroeconomics
The Economy in the
Long-run
Ch 3: National Income Ch 4: Money and Inflation Ch 5: The Open Economy Ch 6: Unemployment
The Economy in
the Short- run
Ch 9: Introduction to Economic Fluctuation Ch 10: AD I: Building the IS-LM Model Ch 11: AD II: Applying the IS-LM Model Ch 12: Open Economy Revisited: The Mundell-Fleming Model and the ER regime
4 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
The Economy in
the Very Long-
run
Ch 7: Economic Growth I: Capital Accumulation and Population Growth
Ch 8: Economic Growth II: Technology, Empirics, and Policy
5 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Chapter One
THE SCIENCE OF MACROECONOMICS
6 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Issues...
What is Macroeconomics?
Why do we study Macroeconomics?
What and how Macroeconomists Study?
Macroeconomic modeling
7 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
What is Economics? Economics is the study of the use of scarce resources to satisfy unlimited human wants.
Macroeconomics?
The study of the economy as a whole; or
“Macroeconomics is the study of the determination of economic aggregates, such as total output, total employment, the price level, and the economic growth”.
Issues in Macroeconomics Determinants of economic aggregates: output, unemployment, price level
8 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Behaviour of an economy over time: short-run fluctuations and long-run economic trend (i.e., growth rate) Drivers of Macroeconomics Economic policies Fiscal policy: Government Monetary Policy: Monetary Authority Examples:
Aggregate production - Growth
Aggregate price level - Inflation
Unemployment rate
Exchange rate
9 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
How do economists think? Macroeconomic Modeling: Short run vs Long run
Cycle (about short run) and Trend (about long run)
o Business cycle: fluctuation of macroeconomic variables around their long run trends
10 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Trough
Peak
Potential GDP
Time
Recessionary Gap
Inflationary Gap
Peak
Actual GDP
Real G
DP
A Typical Business Cycle
11
11 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Trend Growth — long run growth path
Determined by longer term issues such as savings
and investment (capital accumulation)
Population and education (labour force and human
capital accumulation)
Resources; and
Economic and political environment
12 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
13 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Figure: Real GDP per Person in the Canadian Economy
14 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Figure: Inflation/Deflation in Canadian economy
15 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Figure: Unemployment rate in Canada
16 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
2. Economic Variables
Endogenous Variables – explained by the model
Exogenous Variables – taken as given by the model
Let’s construct a model of the market for pizza
What determines the demand for pizza?
QD = f (P, Y)
What determines the supply of pizza?
QS = f (P, Pm)
Condition for market equilibrium
QD =QS
17 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Figure: Model of Supply and Demand
18 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Which variables are exogenous?
- Income (Y) and the price of materials (Pm)
Which variables are endogenous?
- The price of pizza (P) and the quantity exchanged (Q)
What is the impact of a change in exogenous variables?
What happens if
Y changes
or
Pm changes?
Is this model realistic?
19 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Macroeconomics Models
Why are there many models in macroeconomics?
No single model answers all questions
Which models will we develop and use?
The assumption about Flexible vs. Sticky prices
Microeconomic thinking behind the macroeconomic
model
Micro foundation of Macroeconomic
20 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque
Now you try...
Consider the macroeconomic data shown below for a hypothetical country’s economy:
Year Real GDP Output Gap (% of Potential)
Unemployment Rate (% of labor
force) Actual Potential
(Billions of $)
2003 1168 1180 11.1
2004 1184 1196 10.2
2005 1197 1205 9.1
2006 1211 1215 8.3
2007 1225 1225 7.6
2008 1240 1236 7.3
2009 1253 1247 7.1
2010 1262 1258 7.3
2011 1270 1270 7.6
a) Compute the output gap for each year
b) Explain how GDP can exceed potential GDP
c) Does real GDP ever fall in the time period shown? What do economists call such periods?
d) What is the natural rate of unemployment? What kind of unemployment exists at this time?