Macroeconomic Analysis I
Topic 1
Introduction
(Abel, Bernanke & Croushore: Chapter 1)
1
Learning Objectives
• Summarize the main issues addressed in macroeconomics
• Describe the activities and objectives of macroeconomists
• Differentiate between the classical and Keynesian
approaches to macroeconomics
2
What Macroeconomics Is About
Macroeconomics: the study of structure and performance of
1national economies and@government policies that affect
economic performance
Issues addressed by macroeconomists:
– Long-run economic growth
– Business cycles
– Unemployment
– Inflation
– The international economy
– Macroeconomic policy
Aggregation: from microeconomics to macroeconomics
3
What Macroeconomics Is About
Long-run economic growth
– Figure 1.1: Output of United States since 1869
– Note decline in output in recessions; increase in output
in some wars
– Two main sources of growth workers
# available
in
• Population growth steady
increase
• Increases in average labor productivity
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)
funny
more significant / labor input
unit of
amount Of output produced per
rely
don't
On
much
.
limit
4
Figure 1.1 Output of the U.S. economy, 1869-2014
Sources: Federal spending
and receipts for 1869–1929
from Historical Statistics of the
United States, Colonial Times
to 1970, p. 1104; GNP 1869–
1928 from Christina D. Romer,
“The Prewar Business Cycle
Reconsidered: New Estimates
of Gross National Product,
1869–1908,” Journal of
Political Economy, 97, 1
(February 1989), pp. 22–23;
GNP for 1929 from FRED
database, Federal Reserve
Bank of St. Louis,
Research.stlouisfed.org/fred2/
series/GDPA; Federal
spending and receipts as
percentage of output, 1930–
2011 from Historical Tables,
Budget of the U.S.
Government, Table 1.2
5
What Macroeconomics Is About
Average labor productivity
– Output produced per unit of labor input
– Figure 1.2 shows average labor productivity for United
States since 1900
6
Figure 1.2 Average labor productivity in the
United States, 1900-2014
Sources: Employment in
thousands of workers 14 and
older for 1900–1947 from
Historical Statistics of the
United States, Colonial Times
to 1970, pp. 126–127;
workers 16 and older for
1948 onward from FRED
database, Federal Reserve
Bank of St. Louis,
research.stlouisfed.org/fred2
/series/ CE16OV. Average
labor productivity is output
divided by employment,
where output is from Fig.
1.1.
7
What Macroeconomics Is About
Average labor productivity growth:
About 2.5% per year from 1949 to 1973
1.1% per year from 1973 to 1995
1.7% per year from 1995 to 2011
* 1.9% per year from 1995 to 2007
2014
year•>hl%
from
per 2007 to
8
What Macroeconomics Is About
Business cycles 1
– Business cycle: Short-run contractions and -
expansions in economic activity
@
– Downward phase is called a recession
concern :
are also a major political
Recessions reelected & the
almost every politician
wants
to be
's POP
.
snwth
nation
if the economy
( productivity
are
better
reelection
w⇒
Chances of
at
declining
Tread
than .
is expanding rather
g-
.
GDP
-
:
.
time
9
What Macroeconomics Is About
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
– Recessions cause unemployment rate to rise
£ in
output
fall
10
Figure 1.3 The U.S. unemployment rate, 1890-2014
Sources: Civilian
unemployment rate (people
aged 14 and older until 1947,
aged 16 and older after 1947)
for 1890–1947 from Historical
Statistics of the United States,
Colonial Times to 1970,
p.135; for 1948 onward from
FRED database Federal
Reserve Bank of St. Louis,
research.stlouisfed.org/fred2/
series/UNRATE.
11
What Macroeconomics Is About
when the of most
gas
are
rising
prices
the is experiencing inflation
time
economy
.
over ,
Inflation
– U.S. experience shown in Fig. 1.4
Inflation vs Deflation
– Inflation rate: the percentage increase in the level of
prices
– Deflation: when prices of most goods and services
decline
– Hyperinflation: an extremely high rate of inflation
(
50% month
Inflation
> per
Disinflation
\
inflation rate slows down
period when .
inflation rates
High
:
tends
to function poorly
The
.
economy
12
1
→
situation forces ppl to
spend their
money
erodes
@ of money quickly
purchasing power
.
almost as soon as receive it
they .
Figure 1.4 Consumer prices in the United States,
1800-2014
Sources: Consumer price index, 1800–1946 (1967 = 100) from Historical Statistics of
the United States, Colonial Times to 1970, pp. 210–211; 1947 onward (1982–1984 =
100) from FRED database, Federal Reserve Bank of St. Louis,
research.stlouisfed.org/fred2/series/CPIAUCSL.
13
Data prior to 1971 were rescaled to a base with 1982–1984 = 100.
What Macroeconomics Is About
The international economy
– Open vs. closed economies
• Open economy: an economy that has extensive
trading and financial relationships with other
national economies
• Closed economy: an economy that does not
interact economically with the rest of the world
– Trade imbalances
• U.S. experience shown in Fig. 1.5
• Trade surplus: exports exceed imports
• Trade deficit: imports exceed exports
14
Figure 1.5 U.S. exports and imports, 1869-2014
×<
M )
(
Sources: Imports and exports of
goods and services: 1869–1959
from Historical Statistics of the
United States, Colonial Times to
1970, pp. 864–865; 1960 >
:
onward from FRED database, (X
Federal Reserve Bank of St.
Louis,
research.stlouisfed.org/fred2/se
ries/BOPX and BOPM;
nominal output: 1869–1928
from Christina D. Romer, “The
Prewar Business Cycle
Reconsidered: New Estimates of
Gross National Product, 1869–
1908,” Journal of Political
Economy, 97, 1 (February
1989), pp. 22–23; 1929 onward
from FRED database, series
GDPA.
15
What Macroeconomics Is About
as a whole
affects the economy
-
Macroeconomic Policy
– Fiscal policy: government spending and taxation
• Effects of changes in federal budget
• U.S. experience in Fig. 1.6
– Monetary policy: growth of money supply;
determined by central bank; the Fed in U.S.
16
Figure 1.6 U.S. Federal government spending and tax collections,
The
& the
possible
trade
1869-2014
link blw
imbalance
the
government
illustrates an
's
budget
important
deficit
aspect
Macroeconomic issues & Problems 4 spending
on various
programs
of macroeconomics :
government
the economy
interconnected designed to help
.
are frequently
.
@ financed Jobs programs
9
.
government
-
y
Sources: Federal spending and
receipts for 1869–1929 from
Historical Statistics of the
United States, Colonial Times to
1970, p. 1104; GNP 1869–1928
from Christina D. Romer, “The
Prewar Business Cycle
Reconsidered: New Estimates of
Gross National Product, 1869–
1908,” Journal of Political
Economy, 97, 1 (February
1989), pp. 22–23; GNP for
1929 from FRED database,
Federal Reserve Bank of St.
Louis,
Research.stlouisfed.org/fred2/s
eries/GDPA; Federal spending
and receipts as percentage of
output, 1930–2011 from
Historical Tables, Budget of the
U.S. Government, Table 1.2.
17
What Macroeconomics Is About
Aggregation
– Aggregation: summing individual economic variables
to obtain economy-wide
. totals
– Distinguishes microeconomics (disaggregated) from
macroeconomics (aggregated)
18
What Macroeconomists Do
Macroeconomic forecasting
goody
– Relatively few economists make forecasts
– Forecasting is very difficult
of how the Works is imperfect
understanding
1 Our economy
that
factors of them not
Strictly economic
-
take into account all the many
-
2 to
it is impossible
future economic trends
might affect .
Macroeconomic analysis
– Private and public sector economists—analyze
current conditions
– Does having many economists ensure good
macroeconomic policies?
Answer: No, since politicians, not economists, make
major decisions only recommend
policy .
19
What Macroeconomists Do
Macroeconomic research
– Goal: to make general statements about how the
economy works
– Theoretical and empirical research are necessary for
forecasting and economic analysis
– Economic theory: a set of ideas about the economy,
organized in a logical framework
– Economic model: a simplified description of some
aspect of the economy
– Usefulness of economic theory or models depends on
reasonableness of assumptions, possibility of being
applied to real problems, empirically testable
implications, theoretical results consistent with real-
world data
20
What Macroeconomists Do
In Touch with Data and Research: Developing and Testing
an Economic Theory what determines traffic
flaws in
city
– Step 1: State the research question during
rush hours
?
Assume ppl choose
– Step 2: Make provisional assumptions routes that minimize
driving time
.
Use to
map plot
– Step 3: Work out the implications of the theory route that
minimizes
driving time
from home
to
workplace
– Step 4: Conduct an empirical analysis to compare
.
the implications of the theory with the data
Conduct
survey of
Commuters
– Step 5: Evaluate the results of your comparisons
Does f- + data well ?
theory
21
Why Macroeconomists Disagree
Positive vs. normative analysis
– Positive analysis: examines the economic
-
may
agree consequences of a policy
normally – Normative analysis: determines whether a policy
aisagr - should be used
values
due to different .
22
Why Macroeconomists Disagree
Classicals vs. Keynesians
– The classical approach ( Adam Smith )
• The economy works well on its own
• The “invisible hand”: the idea that if there are free
markets and individuals conduct their economic
affairs in their own best interests, the overall
economy will work well
• Wages and prices adjust rapidly to get to
equilibrium
– Equilibrium: a situation in which the quantities
demanded and supplied are equal
– Changes in wages and prices are signals that
coordinate people’s actions
Conculsion: Government should have only a limited
role in the economy
23
Why Macroeconomists Disagree
Classicals vs. Keynesians
– The Keynesian approach
• The Great Depression: Classical theory failed
because high unemployment was persistent
• Keynes: Persistent unemployment occurs
because wages and prices adjust slowly, so
markets remain out of equilibrium for long periods
Conclusion: Government should intervene to
restore full employment
24
Why Macroeconomists Disagree
Classicals vs. Keynesians
– The evolution of the classical-Keynesian debate
• Keynesians dominated from WWII to 1970
high inflation & high unemployment
an
• Stagflation led to a classical comeback in the
1970s
• Last 30 years: excellent research with both
approaches
25
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