topic 1 - intro to macroeconomics
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TOPIC 1
ABC: Ch. 1
Introduction to
Macroeconomics
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OUTLINE
What Macroeconomics Is About
Leading Macroeconomists
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WHAT MACROECONOMICS IS ABOUT
Macroeconomics:
The study of structure and performance of nationaleconomies and government policies that affect economicperformance
Issues addressed by macroeconomists: Long-run economic growth
Business cycles
Unemployment
Inflation
The international economy
Macroeconomic policy
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WHAT MACROECONOMICS IS ABOUT
Long-run economic growth
The extremes of rich and poor
World Bank:DR of Congo has the second-lowest GDP per head of $163
in the world, and a quarter of the population live on less
than $1.25 a dayMonaco has the highest GDP per head in the world -
$211,501, according to 2008 figures
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WHAT MACROECONOMICS IS ABOUT
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Long-run economic growth
Long-run growth makes a huge difference
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WHAT MACROECONOMICS IS ABOUT
Long-run economic growth
Growth of output over time
Figure 1.1: Output of United States since 1869
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Figure 1.1 Output of the U.S. economy, 1869-2008
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WHAT MACROECONOMICS IS ABOUT
Long-run economic growth Main source of growth
Increases in average labor productivity
Average labor productivity
Output produced per unit of labor input
Figure 1.2
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Figure 1.2 Average labor productivity in the UnitedStates, 1900-2008
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WHAT MACROECONOMICS IS ABOUT
Business cycles Business cycle: short-run contractions and
expansions in economic activity
Downward phase is called a recession
Unemployment
Unemployment: the number of people who are
available for work and actively seeking work but
cannot find jobs
U.S. experience shown in Fig. 1.3
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Figure 1.3 The U.S. unemployment rate, 1890-2008
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WHAT MACROECONOMICS IS ABOUT
Percentage change in the level of prices
Inflation rate: the percentage increase in the average
level of prices over a year
Hyperinflation: an extremely high rate of inflation
Deflation: when prices of most goods and services
decline
U.S. experience shown in Fig. 1.4
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Figure 1.4 Consumer prices in the UnitedStates, 1800-2008
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WHAT MACROECONOMICS IS ABOUT
Example: hyperinflation in Zimbabwe
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AUSTRALIAVS. US
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WHAT MACROECONOMICS IS ABOUT
Macroeconomic Policy
Fiscal policy: government spending and taxation
U.S. experience in Fig. 1.6
Monetary policy: growth of money supply;determined by central bank; the Fed in U.S.
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Figure 1.6 U.S. Federal government spendingand tax collections, 1869-2008
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WHAT MACROECONOMICS IS ABOUT
Big questions Thinking about the economy as a whole. General
Equilibrium
What determine output and long-run economic growth?
What are the causes of business cycles? Can governmenthelp to stabilize the macroeconomy?
Why causes unemployment, and why does theunemployment rate fluctuate so much?
What causes inflation? Can central banks controlinflation?
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WHAT MACROECONOMICS IS ABOUT
A Model of Macroeconomy:
Three markets: labor, goods, and assets (money and bonds)
Three prices: the wage, the price level, and the interestrate
Three equations: The aggregate supply curve (equilibrium in the labor market)
The IS curve (equilibrium in the goods market)
The LM curve (equilibrium in the asset market)
Keynesian vs. Classical How quickly does the economy adjust to shocks?
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LEADING KEYNESIAN
MACROECONOMISTS
John Maynard Keynes (18831946)
Created the field of macroeconomics
Sir John Hicks (19041989)
Nobel Prize winner in 1972. Developed the IS-LM
model as a way of explaining Keynes ideas
James Tobin (19182002)
Nobel Prize winner in 1981. Tried to reconcile
Keynesian macroeconomics with modern
microeconomic theory
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LEADING NEW CLASSICAL
MACROECONOMISTS
Robert E. Lucas, Jr., Thomas J. Sargent
Leaders of the new classical revolution in the
1970s. Lucas won the Nobel Prize in 1995.
Finn E. Kydland, Edward C. Prescott
Nobel Prize winners in 2004. Pioneers of real
business cycle theory
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NEXTTOPIC:
The Labor Market and the FE line
Chapter 3, Section 9.1, Appendix 9.B.
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