Introduction To Topics In Macroeconomics 2 - Chapter 1
Introduction toTopics in Macroeconomics 2Chapter 1Topics in Macroeconomics 2Economics DivisionUniversity of SouthamptonFebruary 1 & 5, 2010Chapter 11/34Topics in Macroeconomics
Course OutlineTopics in Macroeconomics 2Alice Schoonbroodt E-mail:alicesch@soton.ac.uk Web ch/Teaching.htm Office Hours:Wednesdays from 14:00 to 16:00 or by appointmentChapter 12/34Topics in Macroeconomics
Course OutlineTopics in Macroeconomics 2Textbook Williamson, Stephen D., “Macroeconomics” Pearson /Addison Wesley.Meetings (see Timetable.pdf) 20 Lectures: Weeks 18 to 23; Weeks 29 to 32Note 1: Independent study week: Week 24 but.Note 2: February 26: cancelled, recup March 15 (Week 24)Note 3: May 3: Bank Holiday, recup May 17 (Week 33) 8 Master Classes: Weeks 20 to 23; Weeks 29 to 32Chapter 13/34Topics in Macroeconomics
Course OutlineTopics in Macroeconomics 2AssessmentWeightDateQuiz I5%March 8, 2010during LectureQuiz II5%May 14, 2010during LectureExam90%During the final exam periodChapter 14/34Topics in Macroeconomics
Course OutlineMacroeconomicsWhat Do We Study in Macroeconomics? The behaviour of large collections of economic agents The behaviour of governments The overall level of economic activity The economic interaction among nations The effects of fiscal and monetary policyMain Issues in Macroeconomics Long-run growth Business CyclesChapter 15/34Topics in Macroeconomics
Course OutlineCourse OutlinePart I: Intro and Measurement Issues1. Introduction2. Measurement3. Business Cycles MeasurementPart II: A One-period Model of the Macroeconomy4. Consumer and Firm behaviour5. A Closed-Economy One-Period Macroeconomic ModelPart III: Economic Growth (independent study week)Chapter 16/34Topics in Macroeconomics
Course OutlineCourse Outline (cont.)Part IV: Savings, Government Deficits and Investment8. A Two-Period Model: The Consumption-Savings Decision9. A Real Intertemporal Model with InvestmentPart V: Money and Business Cycles10. A Monetary Intertemporal Model: The Neutrality of Money11. Market-Clearing Models of the Business Cycle12. Keynesian Business Cycle Theory: The Sticky WageModel (if time allows)Chapter 17/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesMacroeconomicsWhat Do We Study in Macroeconomics? The behaviour of large collections of economic agents The behaviour of governments The overall level of economic activity The economic interaction among nations The effects of fiscal and monetary policyMain Issues in Macroeconomics Long-run growth Business CyclesChapter 19/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesAggregate ProductionGross Domestic Product (GDP)Monetary value of final output produced during a given periodof time within the borders of a countryReal GDP per capita(adjusts for inflation and population growth)One measure of a country’s standard of livingChapter 111/34Topics in Macroeconomics
IntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesChapter 1: IntroductionMacroeconomic EventsFigure 1: Real GDP per capita since 1900(year 2003 pounds) 20,000 18,000RGDP per capita 16,000 14,000 12,000 10,000 8,000 6,000 4,000 930192419181919061219191900 0YearSource: Lawrence H. Officer, "What Was the U.K. GDP Then?", MeasuringWorth.Com, 2007.Chapter 112/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesSome Observations There has been sustained economic growth in per capitaGDP during the 20th century In 1900 the average income for a Brit was approx. 4,000(2003 pounds) In 2006 it was almost 20,000 Average Brit became almost 5 times richer in real terms in100 years Although growth was sustained it was not constant These fluctuations are called business cyclesChapter 113/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesUnusual Business Cycle Events The Inter War and Great depression (1919–1937) The Second World War In 1918, Real GDP was 20% higher than in 1921 and 10%higher than in 1932!From 1932 to 1943, real GDP per capita increased by 52%!Current events?Chapter 114/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesQuestions raised by Figure 1Motivation for this Course What causes sustained economic growth? Could economic growth continue indefinitely, or is theresome limit to growth? Is there anything that governments can or should do toalter the rate of economic growth? What causes business cycles? Could the dramatic decreases and increases in economicgrowth that occurred during the Great Depression andWWII be repeated? Should governments act to smooth business cycles?Chapter 115/34Topics in Macroeconomics
IntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesChapter 1: IntroductionMacroeconomic EventsA Useful Transformation for Growing Time SeriesThe Natural Logarithm and the Rate of GrowthFactIf x is small, log(1 x) xConsider a time series yt , t 1928, 1929, . . .Let gt denote the growth rate from period t 1 to period t:gt ytyt 1 1If gt is small, log(yt /yt 1 ) log(1 gt ) gtIf we plot the natural log of GDP, the slope is the growth rate:log(yt ) log(yt 1 ) log(yt /yt 1 ) gtChapter 116/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesFigure 2: Natural Logarithm of Per Capita Real 02Log RGDP per capita4.3YearChapter 117/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesSome Observations Growth was very low (negative) during the GreatDepression Growth was very high during WWII Other than these “unusual” events, log GDP is almost astraight line That means growth is fairly constant, around 2% per yearChapter 118/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesOther Useful TransformationsTime series can be decomposed into two components: A growth or trend componentFor the most part, close to 2% per year for GDP A cyclical or business cycle componentThese are fluctuations around trend GDPChapter 119/34Topics in Macroeconomics
IntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesChapter 1: IntroductionMacroeconomic EventsFigure 3: Natural Logarithm of RGDP pc and Trend4.4Log RGDP per capita4.2Trend4.14.03.93.83.73.620/34Topics in Macroeconomics029620901984YearChapter 9061919003.519Log RGDP per capita4.3
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesFigure 4: Percent Deviations from Trend in RGDP pc15%DeviationsOn 05-15%19Deviations from Trend10%YearChapter 121/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesMacroeconomic Models Simplification of reality We want to keep models as simple as possible Capture the relevant features of the actual economy for thequestion one is trying to address Models are specific to the economic problem we want tostudy Abstracts from other features, even realistic onesChapter 123/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesBasic Structure of Macroeconomic Models I The consumers and firms that interact in the economy The set of goods that consumers wish to consume Consumers’ preferences over goods The technology available to firms for producing goods The resources availableNote: Models usually have a mathematical representation,which we will try to analyze in graphical termsChapter 124/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesBasic Structure of Macroeconomic Models II The behaviour of economic agents How is consistency achieved between consumers andfirms? We will assume that consumers and firms optimizeThe economy must be in equilibriumWe will use the competitive equilibrium concept Goods are bought and sold on markets where consumersand firms are price takers Equilibrium is achieved when prices are such that supplyequals demand for all marketsChapter 125/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesWhat Are Macroeconomic Models Used for? Before using the model for any purpose We want to make sure that the model makes sense for theparticular problem we want to study For example: if you study growth, there better be growth inthe model to start with This can be done analytically, graphically, or numericallyChapter 126/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesWhat Are Macroeconomic Models Used for? Use the model to answer questions of interest Unlike the test above, we now want to answer questions forwhich we don’t know the answer! Example 1: how fast would the UK have grown in the lastcentury if capital income taxes had remained zerothroughout the century? Example 2: how should government expenditures befinanced in order to maximize growth (or welfare)?Chapter 127/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesMicroeconomic Principles The macroeconomy ultimately consists of manyconsumers and firms Macroeconomic behaviour results from manymicroeconomic decisions Government policies may affect behaviour in ways that arevirtually impossible to model at the aggregate level This is generally known as the Lucas Critique We now deal with rational expectations models, whichemphasize microeconomic foundationsChapter 129/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsIntroductionGDPMacroeconomic ModelsMicroeconomic PrinciplesWhat Are we Going to Learn? What is produced and consumed in the economy isdetermined jointly by the economy’s productive capacityand the preferences of consumersIn free market economies, there are strong forces that tendto produce socially efficient economic outcomes (AdamSmith’s invisible hand)There is no such thing as a free lunch — In particular, taxcuts are not free, nor are taxes in generalWhat consumers and firms anticipate for the future willhave an important bearing on current macroeconomiceventsImprovements in a country’s standard of living are broughtabout in the long run by technological progressChapter 130/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsFigure 5: Interest Rates and Inflation Rate25%Nominal Interest Rate20%Inflation Rate15%Real Interest 91199519992003-25%YearChapter 131/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsFigure 6: Unemployment RateFigure 1: UK Unemployment Rate, hapter 132/34Topics in Unemployment Rate12.00
Chapter 1: IntroductionMacroeconomic EventsFigure 7: Deviations from Trend for Unemploymentand GDP (U.S.)Chapter 133/34Topics in Macroeconomics
Chapter 1: IntroductionMacroeconomic EventsTo do: Read Chapter 1 in Williamson’s book Make sure you know the definitions and understand the“KEY TERMS” from this chapter (p. 32–34) Practice your knowledge by attempting to answer thequestions for review and solving (at least some of) theproblems (p.34–35) Let me know if you have any problems understanding earlyon!!!Chapter 134/34Topics in Macroeconomics
Topics in Macroeconomics 2 Chapter 1 Topics in Macroeconomics 2 Economics Division University of Southampton February 1 & 5, 2010 . Chapter 1 25/34 Topics in Macroeconomics. Chapter 1: Introduction Macroeconomic Events Intro
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