ECON 1220A:

Introductory Macroeconomics –
L1. Introduction

1
What is Economics?

Limited Unlimited
vs.
Resources Wants

• How to make choices in a world of scarcity

• i.e. when we have unlimited wants but limited resources
• Quote some daily examples…
• Economics is the study of the choices people make to attain their
goals given their scarce resources
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Micro vs. Macro economics
Microeconomics Macroeconomics

Analysis Individual components of the economy The economy as a whole

Unit Economic behavior of individual units or Aggregate economic behavior or all players
markets for particular goods in the economy

Type of decision A certain firm or certain The entire economy

making household/consumer

Variables under e.g. Quantities demanded and supplied of Aggregate Variables

interest particular goods and their prices e.g. Gross Domestic Products, Inflation,
Unemployment etc…

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• Trade-offs force the society to make choices to answer the following 3
fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?

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How are decisions made in the economy?
Planned Economy Market Economy

Decision made by The Government Market demand and supply forces

Right to produce Only the central authority decides the full Producers are free to produce the goods
variety of goods and services that people demanded in the economy to maximize
can consume their profit
Aim Social welfare is the prime consideration Self-interest is the prime consideration

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Most of the countries lie somewhere in
between…

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What macroeconomics is about?
Macroeconomics: The branch of economics that deals with the
structure, performance, behavior, and decision-making of the whole, or
aggregate economy.

Issues addressed by Macroeconomists:

• Long-run economic growth
• Business cycle/short-run fluctuations
• Unemployment
• Inflation
• Macroeconomic policy

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 Billions of US$

10000
15000
20000
25000

5000

0
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
Historic Nominal GDP of US (1929-2020)
Historical data of GDP in the US

1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
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 Billions US$

10,000
15,000
20,000
25,000

5,000

0
2001

2002

2003

2004

2005

2006

2007

2008

2009
China
2010
US

2011

2012

2013

2014

2015

2016
Nominal GDP - China vs. US (2001 to 2020)

2017

2018

2019

2020
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 Billions US$

100
150
200
250
300
350
400

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Nominal GDP - Hong Kong (2001 to 2020)

2017

2018

2019

2020
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 Real GDP per capita in the US (1971 – 2020)
Sub-prime
1973 oil crisis 1990s oil price mortgage crisis
shock
60,000

55,000

50,000
Constant 2010 US$

45,000
40,000

35,000

30,000

25,000
20,000
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
1979 energy crisis Dot-com bubble Covid-19
and 9-11 11
The US real GDP per capita with a linear trend
(1971-2020)
Real GDP per capita of US with a linear trend (1971-2020)
60000

55000

50000
Constant 2010 US$

45000

40000

35000

30000

25000

20000
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
Real GDP per capita Linear trend
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Percentage Deviation from the Linear trend
Percentage Deviation from the Linear Trend (US 1971 - 2020)
8.00%

6.00%

4.00%

2.00%

0.00%
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
-2.00%
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
-4.00%

-6.00%

-8.00%

-10.00%
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The use of Economic Models
• Economists use economic theories or models to analyze real-world
issues
• Economic models are simplified versions of the reality
• Steps in developing the model:
• Derived stylized facts from economic data
• Make appropriate assumptions when developing a model
• Formulate a testable hypothesis and test it against the data
• Retain and revise model to help answer similar economic questions in the
future

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The use of economic models in
Macroeconomics
• Key questions to be answered:
- How do we account for the behavior of the aggregate variables (e.g. GDP,
inflation, and unemployment) of a country overtime or amongst other
countries?
- E.g. What are the factors contributing to the long-run growth of an economy?
- What are the sources of short-run fluctuations in the economy?
- How does the use of Macroeconomic policies help to stabilize the economy?

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Micro-foundation of Macroeconomics…
The economy is composed of household/consumers and firms
• Although Macroeconomics is the study of the economy as a whole, it
does not abstract from the individual unit.
• In modern macroeconomics, emphasis is put on the micro-foundation
of macroeconomics.
• i.e. behavior of aggregate economic variables is determined by the
collective decision making/economic behavior of individual firms
(maximizing profit) and households (maximizing utility)

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Some Assumptions on Behavior…
• In particular, we assume people in the economy are:
1. Rational
- Use all available information to achieve your goals
- Rational consumers and firms weigh the benefits and costs of each action and
try to make the best decision possible.
2. Respond to economic incentives
- People’s decisions are driven by economic incentives
- Example: lotteries for Covid-19 vaccination…
3. Optimal decisions are made at the margin
- Optimum is achieved at the point where the marginal cost (MC) equals to the
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marginal benefit (MB)
信7reui-ee.MG
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The use of economic models in
Macroeconomics
• What are the key players or building blocks in the model?
• Household/consumers
• Firms
• Markets
• Government
• In this course, the model we use to explain real world phenomena is
the AD-AS model

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What do Macroeconomists do?
1. Macroeconomic forecasting:
• Forecasting is difficult, because
i. Our understanding of how the economy works is imperfect; and
ii. It is impossible to take into account all the uncertain factors

2. Macroeconomic analysis:
• Private sector economists: determine how general economic trends will affect
the company’s financial investments, opportunities of expansions, the
demand for their products etc…
• Public sector (national and regional governments, and international agencies)
economists: Assist in policymaking, e.g. writing reports to assess various
macro problems and by identifying and evaluating possible policy options
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Summary:
• We have introduced in this lecture…
üWhat is Economics?
üDifferences between Micro- and Macro- economics
üHow decision are made in an economy – planned vs. market economy
üThe use of Economic models
üA quick look at the Nominal GDPs over time and across countries

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