Week 1 Macro-economics
Economics: domain concerned with the production, use and management of
resources
Macroeconomics key elements:
• Macroeconomics lags behind as a science
- Less data compared to other fields
- Opinions matters
Societal relevance might be larger
- Macroeconomic choices shape society as a whole
Differences micro and macro:
Macroeconomics has:
● Emergent properties =
- Property that is present when you have something in large
quantities, but not in small quantities
- Require interaction
Example: inflation and consumer confidence require many transactions.
● General equilibrium effects
- Individual behaviour affects the price level
- The price level is an input for individual behaviour
● Economy wide actors
- Economic sectors
- Government
- Central bank
Short run Macro
- Involves the business cycle (4-7 years)
, - Dominates economic news and short-term policy making
- Key elements:
- Shocks and policy (monetary,fiscal) affect the economy the
economy returns towards well-defined equilibrium
Long run Macro
- Important for understanding the structure of the economy
- Key elements:
- Changes in institutions, technology and incentives affect the
structure of the economy
- No well-defined equilibrium
Macro policy = about smoothing
● Like economy wide shocks
● Affect everyone
Example:
- Inflation
- Fall / increase in house prices
- Stock market crash / boom
- Etc
Model: a simplified description of reality that allows for analysis of a usually
complicated issue
- Modelling the economy: dishpan analogy (Krugman, 1995)
What is the point of a model?
● Model is not a correct representation of reality.
● Yet, model provides insights nevertheless.
● However it cannot predict the ‘weather’.
,Goals
Positive goals:
● Understanding
● Validation
● Forecasting
Normative goals:
● Policy options (counterfactual analysis)
Traditions in Macroeconomics models:
- Large-scale macroeconomic models
- Small theoretical model
- Empirical work
- Agent based models
Small theoretical model
● Goes back to the 19th century
● Models specific economic proces
● Only necessary equations
● Many examples in this course
● Used to explain characteristics of the economy, facilitate empirical
papers
, Empirical work
● Used more and more since the 1970s
● Tests relations between economic variables
● Main tool in academia now
● Many references in this course
● Macro-economic interpretation cumbersome
● Used in forecasting
GNP = produced by country’s citizens, both domestic and abroad (also in other
countries)
GDP= Gross Domestic Product
● Product = everything that is produced
● Domestic = in the country
● Gross = no discount for depreciation
Not included in GDP
- Intermediate goods → complements
- Non-production transactions
Economics: domain concerned with the production, use and management of
resources
Macroeconomics key elements:
• Macroeconomics lags behind as a science
- Less data compared to other fields
- Opinions matters
Societal relevance might be larger
- Macroeconomic choices shape society as a whole
Differences micro and macro:
Macroeconomics has:
● Emergent properties =
- Property that is present when you have something in large
quantities, but not in small quantities
- Require interaction
Example: inflation and consumer confidence require many transactions.
● General equilibrium effects
- Individual behaviour affects the price level
- The price level is an input for individual behaviour
● Economy wide actors
- Economic sectors
- Government
- Central bank
Short run Macro
- Involves the business cycle (4-7 years)
, - Dominates economic news and short-term policy making
- Key elements:
- Shocks and policy (monetary,fiscal) affect the economy the
economy returns towards well-defined equilibrium
Long run Macro
- Important for understanding the structure of the economy
- Key elements:
- Changes in institutions, technology and incentives affect the
structure of the economy
- No well-defined equilibrium
Macro policy = about smoothing
● Like economy wide shocks
● Affect everyone
Example:
- Inflation
- Fall / increase in house prices
- Stock market crash / boom
- Etc
Model: a simplified description of reality that allows for analysis of a usually
complicated issue
- Modelling the economy: dishpan analogy (Krugman, 1995)
What is the point of a model?
● Model is not a correct representation of reality.
● Yet, model provides insights nevertheless.
● However it cannot predict the ‘weather’.
,Goals
Positive goals:
● Understanding
● Validation
● Forecasting
Normative goals:
● Policy options (counterfactual analysis)
Traditions in Macroeconomics models:
- Large-scale macroeconomic models
- Small theoretical model
- Empirical work
- Agent based models
Small theoretical model
● Goes back to the 19th century
● Models specific economic proces
● Only necessary equations
● Many examples in this course
● Used to explain characteristics of the economy, facilitate empirical
papers
, Empirical work
● Used more and more since the 1970s
● Tests relations between economic variables
● Main tool in academia now
● Many references in this course
● Macro-economic interpretation cumbersome
● Used in forecasting
GNP = produced by country’s citizens, both domestic and abroad (also in other
countries)
GDP= Gross Domestic Product
● Product = everything that is produced
● Domestic = in the country
● Gross = no discount for depreciation
Not included in GDP
- Intermediate goods → complements
- Non-production transactions
