Chapter 1 measurement issues
What is macroeconomics ?
macroeconomics
the study of the behaviour of the behaviour of a large collection of economic
agents
focus on aggregate behaviour of consumers , firms and governments , the
overall level of economic activity in an individual country , economic interactions
among nations , fiscal and monetary policy
Economic models
models built and used to explain macroeconomic phenomena
long run growth vs business cycles
Long run growth - the increase in a nations productive capacity and average
standard of living that occurs over a long period of time
Business cycles - The short run ups and downs , booms or recessions in
aggregate economic activity
build up macroeconomic analysis from macroeconomic principles
GDP economic growth and business cycles
Gross domestic product (GDP) - The quantity of goods and services
produced within the borders of a country during a specified time period
(real) GDP is the measure of aggregate output adjusted for inflation and
population growth
Two key business cycle events in us
Chapter 1 measurement issues 1
, 1. Great depression
2. WW II
GDP time series split into trend & business cycle components
GDP
GDP per capita = POP ULAT ION
Natural log transformation can be used to show trends
growth rate from period t - 1 to period t is denoted by gt
yt
gt = yt−1 −1
The slope of the graph of a natural log of a time series yt is goof approximation of
the growth rate of yt when the growth rate is small
Graphs shows difference between trend and actual
Macroeconomic models
macroeconomic models - organised structure to explain LR economic growth ,
why there are business cycles and what role economic policy should play
purpose is to capture the essential features needed for analysing a particular
problem
Models need to be simple , need not be realistic
Experimentation is impossible
Features of a macroeconomic model
1. Consumers and firms that interact in the economy
2. The set of goods that consumers wish to consume
3. Consumer preferences
4. Technology available to firms for production
5. Resources available
-want to use models for predictions
Two additional features of models
Chapter 1 measurement issues 2
, 1. Assume the consumers and firms optimise
2. How is consistency achieved
Competitive equilibrium - Consumers and firms are price-takers in the market ,
behave as if their actions have no effect on the market price . Q supplied is Q
demanded
Macroeconomic principles
changes in government policy generally alter the behaviour of firms and
consumers , affects the behaviour of the economy as a whole
Analyse how the policy change affect individual consumers and firms , then
aggregate these decisions to arrive at a conclusion
Disagreement in macroeconomics
Keynesian vs non-Keynesian
Traditional old Keynesian model
Wages and prices are sticky in the SR (doesn’t change sufficiently /
quickly enough to yield efficient outcomes)
Government interventions through monetary and fiscal policy can correct
the market inefficiency
non-Keynesian models
Real business cycle theory
Government policy is inefficient and could be detrimental to economy
What do we learn from macroeconomics analysis
1. What is produced and consumed by the economy is determined jointly by the
economy's productive capacity and the preferences of consumers
Chapter 1 measurement issues 3
, 2. In free market economies , there are strong forces that tend to produce
socially efficient economic outcomes
3. Unemployment is painful for individuals , but necessary in modern
economies
4. improvements in a country’s standard of living are brought about in the LR by
technological process
5. A tax cut is not a free lunch
6. Credit markets and banks play a key role in the macroeconomy
7. consumer’s and firm’s anticipations about the future , affects current events
8. Money takes many forms , once we have it - changing its quantity doesn’t
matter
9. Business cycles are similar , but can have many causes
10. Countries gain form trading goods and assets with each other , trade is
source of shocks to domestic economy
11. in the LR , inflation is caused by growth in money supply
12. If there is a SR trade-off between output and inflation , that has very different
implications relative to the relationship between nominal interest rate and
inflation
Understanding recent and current macroeconomic
events
Aggregate productivity
Average labour productivity - Total quantity of output per labourer
Y
= N
Growth in aggregate productivity is what determines LR growth in living
standards
Unemployment and vacancies
unemployment is socially useful search activity that is necessary
Chapter 1 measurement issues 4
What is macroeconomics ?
macroeconomics
the study of the behaviour of the behaviour of a large collection of economic
agents
focus on aggregate behaviour of consumers , firms and governments , the
overall level of economic activity in an individual country , economic interactions
among nations , fiscal and monetary policy
Economic models
models built and used to explain macroeconomic phenomena
long run growth vs business cycles
Long run growth - the increase in a nations productive capacity and average
standard of living that occurs over a long period of time
Business cycles - The short run ups and downs , booms or recessions in
aggregate economic activity
build up macroeconomic analysis from macroeconomic principles
GDP economic growth and business cycles
Gross domestic product (GDP) - The quantity of goods and services
produced within the borders of a country during a specified time period
(real) GDP is the measure of aggregate output adjusted for inflation and
population growth
Two key business cycle events in us
Chapter 1 measurement issues 1
, 1. Great depression
2. WW II
GDP time series split into trend & business cycle components
GDP
GDP per capita = POP ULAT ION
Natural log transformation can be used to show trends
growth rate from period t - 1 to period t is denoted by gt
yt
gt = yt−1 −1
The slope of the graph of a natural log of a time series yt is goof approximation of
the growth rate of yt when the growth rate is small
Graphs shows difference between trend and actual
Macroeconomic models
macroeconomic models - organised structure to explain LR economic growth ,
why there are business cycles and what role economic policy should play
purpose is to capture the essential features needed for analysing a particular
problem
Models need to be simple , need not be realistic
Experimentation is impossible
Features of a macroeconomic model
1. Consumers and firms that interact in the economy
2. The set of goods that consumers wish to consume
3. Consumer preferences
4. Technology available to firms for production
5. Resources available
-want to use models for predictions
Two additional features of models
Chapter 1 measurement issues 2
, 1. Assume the consumers and firms optimise
2. How is consistency achieved
Competitive equilibrium - Consumers and firms are price-takers in the market ,
behave as if their actions have no effect on the market price . Q supplied is Q
demanded
Macroeconomic principles
changes in government policy generally alter the behaviour of firms and
consumers , affects the behaviour of the economy as a whole
Analyse how the policy change affect individual consumers and firms , then
aggregate these decisions to arrive at a conclusion
Disagreement in macroeconomics
Keynesian vs non-Keynesian
Traditional old Keynesian model
Wages and prices are sticky in the SR (doesn’t change sufficiently /
quickly enough to yield efficient outcomes)
Government interventions through monetary and fiscal policy can correct
the market inefficiency
non-Keynesian models
Real business cycle theory
Government policy is inefficient and could be detrimental to economy
What do we learn from macroeconomics analysis
1. What is produced and consumed by the economy is determined jointly by the
economy's productive capacity and the preferences of consumers
Chapter 1 measurement issues 3
, 2. In free market economies , there are strong forces that tend to produce
socially efficient economic outcomes
3. Unemployment is painful for individuals , but necessary in modern
economies
4. improvements in a country’s standard of living are brought about in the LR by
technological process
5. A tax cut is not a free lunch
6. Credit markets and banks play a key role in the macroeconomy
7. consumer’s and firm’s anticipations about the future , affects current events
8. Money takes many forms , once we have it - changing its quantity doesn’t
matter
9. Business cycles are similar , but can have many causes
10. Countries gain form trading goods and assets with each other , trade is
source of shocks to domestic economy
11. in the LR , inflation is caused by growth in money supply
12. If there is a SR trade-off between output and inflation , that has very different
implications relative to the relationship between nominal interest rate and
inflation
Understanding recent and current macroeconomic
events
Aggregate productivity
Average labour productivity - Total quantity of output per labourer
Y
= N
Growth in aggregate productivity is what determines LR growth in living
standards
Unemployment and vacancies
unemployment is socially useful search activity that is necessary
Chapter 1 measurement issues 4
