Goethe University Frankfurt

Macroeconomics 1 (BMAK)
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

Macroeconomics 1 (BMAK)

I. Introduction

Readings:
- Burda and Wyplosz (2022), Chapter 1
- Jones (2020), Chapter 1
- International Monetary Fund (2022), World Economic Outlook

1
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

I. Introduction

1. Scope of Macroeconomics

‐ Modelling the decisions taken by households, firms and public institutions

(as microeconomics does), and analyzing how the interactions of these
decisions determine economy-wide activity (that is, determine
macroeconomic outcomes). Macroeconomics thus involves microeconomic
foundations, but takes the additional step of aggregating microeconomic
outcomes to the level of the macroeconomy as a whole.

‐ Designing macroeconomic policies, with the aim of improving on

macroeconomic outcomes.

A good approach to obtain a concrete sense of the scope of

macroeconomics: Considering some of the questions it deals with ...

2
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

Levels of Real Income per Capita

(2011 U.S. Dollars, Holding Purchasing Power Fixed Across Countries and Time)

1870 1950 2018

(i) What has been driving
the large long-run increases Western Europe 3,301 7,263 39,790
of average income that we Middle East 1,165 2,393 18,430
have observed during the East Asia 989 1,122 16,327
last approximately hundred Latin America 1,319 3,713 14,076
and fifty years?
Sub-Sahara Africa 800 1,323 3,532
(ii) What is the source of the Brazil 1,084 2,236 14,034
large variation in average China 945 799 13,102
income across countries that
Germany 2,931 6,186 46,178
we observe today?
South Africa 1,286 4,041 12,166
USA 4,803 15,240 55,335
Source of Data: Bolt and van Zanden (2022), The Maddison Project

3
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

(iii) What explains the losses of output following the global financial crisis, the
COVID-19 pandemic and the current energy crisis?

Growth Rates of Real Output Around the Global Financial Crisis,

the COVID-19 Pandemic and the Current Energy Crisis
(Percent)

Source of Data: IMF (2022; Values for 2022 to 2024: IMF Projections)

4
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

(iv) What explains inflation dynamics during the global financial crisis, the
COVID-19 pandemic and the current energy crisis?

Inflation Around the Global Financial Crisis,

the COVID-19 Pandemic and the Current Energy Crisis
(Percent)

Source of Data: IMF (2022; Values for 2022 to 2024: IMF Projections)

5
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

(v) To what extent do shocks in their macroeconomic impact propagate

and persist?
Output Growth Following the Shocks of 2022
(Percent, Deviation from Pre-Shock Growth Forecast)

Source of Data: IMF (2022)

6
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

(vi) To what extent can the decisions of the monetary and fiscal authorities
stabilize the macroeconomy in crisis times?

Monetary Policy Rates in Selected Advanced Economies

(Percent)

U.S. Federal Reserve European Central Bank

Sources of Data: Federal Reserve Bank of St. Louis (2022); Deutsche Bundesbank (2022)

7
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

Fiscal Policy: Government Net Lending/Borrowing

(Percent of GDP)

5
0
-5
-10
-15

2000 2005 2010 2015 2020 2025

Advanced Emerging Markets and Developing

United States Germany

Source of Data: IMF (2022; Values for 2022 to 2024: IMF Projections)

8
Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
1. Scope of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

Fiscal Policy: Government Expenditure

(Percent of GDP)

Source of Data: IMF (2022; Values for 2022 to 2024: IMF Projections)

9
 Goethe University Frankfurt
I. Introduction
Macroeconomics 1 (BMAK)
2. Methodology of Macroeconomics
Wintersemester 2022/23
Prof. Michael Binder, Ph.D.

2. Methodology of Macroeconomics
• Document the facts.
• Develop a model. [“Everything should be made as simple as possible;
but not simpler. " (Einstein) ]
• Compare the key predictions of the model with the data, and possibly
revise the model until arriving at a model specification that is supported
by the data.
• Use the model to gain insights into questions for which the data
available do not give direct insight. For example: How would specific
changes in external conditions and/or in domestic economic policy affect
the performance of the domestic economy?
• Using such modelling strategy, in this course we will develop models of
business cycles and long-run economic growth that embed various of
the mechanisms present in frontier models used by macroeconomists in
academia, as well as the public and private sectors.
10