Introduction to Macroeconomics
Lecture Notes
Robert M. Kunst
March 2006
,1 Macroeconomics
Macroeconomics (Greek makro = ‘big’) describes and explains economic
processes that concern aggregates. An aggregate is a multitude of economic
subjects that share some common features. By contrast, microeconomics
treats economic processes that concern individuals.
Example: The decision of a firm to purchase a new office chair from com-
pany X is not a macroeconomic problem. The reaction of Austrian house-
holds to an increased rate of capital taxation is a macroeconomic problem.
Why macroeconomics and not only microeconomics? The whole
is more complex than the sum of independent parts. It is not possible to de-
scribe an economy by forming models for all firms and persons and all their
cross-effects. Macroeconomics investigates aggregate behavior by imposing
simplifying assumptions (“assume there are many identical firms that pro-
duce the same good”) but without abstracting from the essential features.
These assumptions are used in order to build macroeconomic models. Typi-
cally, such models have three aspects: the ‘story’, the mathematical model,
and a graphical representation.
Macroeconomics is ‘non-experimental’: like, e.g., history, macro-
economics cannot conduct controlled scientific experiments (people would
complain about such experiments, and with a good reason) and focuses on
pure observation. Because historical episodes allow diverse interpretations,
many conclusions of macroeconomics are not coercive.
Classical motivation of macroeconomics: politicians should be ad-
vised how to control the economy, such that specified targets can be met
optimally.
policy targets: traditionally, the ‘magical pentagon’ of good economic
growth, stable prices, full employment, external equilibrium, just distribution
1
,of income; according to the EMU criteria, focus on inflation (around 2%),
public debt, and a balanced budget; according to Blanchard, focus on low
unemployment (around 5%), good economic growth, and inflation (0—3%).
In all specifications, aim is meeting several conflicting targets simultaneously.
Examples for further typical questions to macroeconomics: what
causes business cycles (episodes of stronger and weaker economic growth)?
can an increase in the monetary supply by the central bank cause real effects?
what is responsible for long-run economic growth? should the exchange rate
of a currency be kept at a fixed level? can one decrease unemployment, if
one accepts an increase in inflation?
A survey of world economics: three large economic blocks (Eu-
rope, USA+Canada, Japan+Far East) with different problems, the remain-
der mostly developing countries.
1. USA: good growth, low inflation, tolerable unemployment rate, per-
sistent external deficit, increasing income inequality.
2. EU: moderate growth, low inflation, in some countries high unem-
ployment, inconspicuous external balance (total EU active, in Austria
recently turned active), for some countries large public debt, currently
important unification process, convergence and heterogeneity of indi-
vidual countries. ‘Richest’ EU countries Luxembourg, Denmark, then
‘mid-field’ with Austria, IRL, B, NL, UK, D, F, FIN, I, S; slightly be-
low E, GR, SLO, P. Last come most ‘new’ (2004 accession) countries
(from Malta down to Latvia). Very ‘rich’ non-EU countries Norway,
Iceland, and Switzerland.
3. Japan: recently weak growth, large external surplus, deflationary ten-
dencies.
2
, 2 System of National Accounts
Basic idea (not the definition): Summary of all economic activities within
a country’s territory and within a given time range (e.g., a year or quarter)
yields the gross domestic product (GDP). The value of all goods and ser-
vices is determined at market prices (final prices, purchasers’ prices). System
for compilation of data and bookkeeping of all positions is called the System
of National Accounts (SNA). In Europe, compilation of the SNA conforms
to the ESA (European System of Accounts) standard.
Economic activity is mainly measured by transactions. Phrases from
text books: diversification of labor (not complete self-subsistence) causes
transactions, exchange of money for goods or services, exchange of an asset
or liability for a different asset or liability, etc. The transactions take place on
markets. Money makes transactions easier than direct exchange of goods for
goods, which may require ‘double coincidence’ (hungry tailor meets freezing
baker).
Purpose of money: apart from payment and storage of value primarily
unit of measurement (numeraire). In economic text books, usually dollar
($), monetary unit (MU), or euro.
gross: many activities serve to repair or replace worn or damaged ma-
chines and objects (‘depreciation’), therefore it is not the total GDP that
contributes to the accumulation of aggregate wealth. In the SNA, ‘gross’
usually means ‘inclusive of depreciation’, ‘net’ often contains taxes, though
no depreciation.
Consumption of fixed capital (in economics, depreciation) of SNA is the
estimated wear and tear of produced means of production (this ‘depreciation’
should not be confused with positions in tax declarations or with changes in
the currency exchange rate).
3
Lecture Notes
Robert M. Kunst
March 2006
,1 Macroeconomics
Macroeconomics (Greek makro = ‘big’) describes and explains economic
processes that concern aggregates. An aggregate is a multitude of economic
subjects that share some common features. By contrast, microeconomics
treats economic processes that concern individuals.
Example: The decision of a firm to purchase a new office chair from com-
pany X is not a macroeconomic problem. The reaction of Austrian house-
holds to an increased rate of capital taxation is a macroeconomic problem.
Why macroeconomics and not only microeconomics? The whole
is more complex than the sum of independent parts. It is not possible to de-
scribe an economy by forming models for all firms and persons and all their
cross-effects. Macroeconomics investigates aggregate behavior by imposing
simplifying assumptions (“assume there are many identical firms that pro-
duce the same good”) but without abstracting from the essential features.
These assumptions are used in order to build macroeconomic models. Typi-
cally, such models have three aspects: the ‘story’, the mathematical model,
and a graphical representation.
Macroeconomics is ‘non-experimental’: like, e.g., history, macro-
economics cannot conduct controlled scientific experiments (people would
complain about such experiments, and with a good reason) and focuses on
pure observation. Because historical episodes allow diverse interpretations,
many conclusions of macroeconomics are not coercive.
Classical motivation of macroeconomics: politicians should be ad-
vised how to control the economy, such that specified targets can be met
optimally.
policy targets: traditionally, the ‘magical pentagon’ of good economic
growth, stable prices, full employment, external equilibrium, just distribution
1
,of income; according to the EMU criteria, focus on inflation (around 2%),
public debt, and a balanced budget; according to Blanchard, focus on low
unemployment (around 5%), good economic growth, and inflation (0—3%).
In all specifications, aim is meeting several conflicting targets simultaneously.
Examples for further typical questions to macroeconomics: what
causes business cycles (episodes of stronger and weaker economic growth)?
can an increase in the monetary supply by the central bank cause real effects?
what is responsible for long-run economic growth? should the exchange rate
of a currency be kept at a fixed level? can one decrease unemployment, if
one accepts an increase in inflation?
A survey of world economics: three large economic blocks (Eu-
rope, USA+Canada, Japan+Far East) with different problems, the remain-
der mostly developing countries.
1. USA: good growth, low inflation, tolerable unemployment rate, per-
sistent external deficit, increasing income inequality.
2. EU: moderate growth, low inflation, in some countries high unem-
ployment, inconspicuous external balance (total EU active, in Austria
recently turned active), for some countries large public debt, currently
important unification process, convergence and heterogeneity of indi-
vidual countries. ‘Richest’ EU countries Luxembourg, Denmark, then
‘mid-field’ with Austria, IRL, B, NL, UK, D, F, FIN, I, S; slightly be-
low E, GR, SLO, P. Last come most ‘new’ (2004 accession) countries
(from Malta down to Latvia). Very ‘rich’ non-EU countries Norway,
Iceland, and Switzerland.
3. Japan: recently weak growth, large external surplus, deflationary ten-
dencies.
2
, 2 System of National Accounts
Basic idea (not the definition): Summary of all economic activities within
a country’s territory and within a given time range (e.g., a year or quarter)
yields the gross domestic product (GDP). The value of all goods and ser-
vices is determined at market prices (final prices, purchasers’ prices). System
for compilation of data and bookkeeping of all positions is called the System
of National Accounts (SNA). In Europe, compilation of the SNA conforms
to the ESA (European System of Accounts) standard.
Economic activity is mainly measured by transactions. Phrases from
text books: diversification of labor (not complete self-subsistence) causes
transactions, exchange of money for goods or services, exchange of an asset
or liability for a different asset or liability, etc. The transactions take place on
markets. Money makes transactions easier than direct exchange of goods for
goods, which may require ‘double coincidence’ (hungry tailor meets freezing
baker).
Purpose of money: apart from payment and storage of value primarily
unit of measurement (numeraire). In economic text books, usually dollar
($), monetary unit (MU), or euro.
gross: many activities serve to repair or replace worn or damaged ma-
chines and objects (‘depreciation’), therefore it is not the total GDP that
contributes to the accumulation of aggregate wealth. In the SNA, ‘gross’
usually means ‘inclusive of depreciation’, ‘net’ often contains taxes, though
no depreciation.
Consumption of fixed capital (in economics, depreciation) of SNA is the
estimated wear and tear of produced means of production (this ‘depreciation’
should not be confused with positions in tax declarations or with changes in
the currency exchange rate).
3
