Macroeconomics?

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Topics to study:

• How an economy works?

• Micro vs. Macro

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Why study Economics?
• Intellectual Curiosity?
• To get rich?
• To better understand the world in which we live.
• To better understand how an economy works
“ Economic literacy
… crucial part of common sense”

• To make our life better off.

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Economics

• Study of an economy.
- study of mankind in the ordinary biz of life.
• Economy?
- a group of people who produce, distribute and consume G/S
- using limited resource (scarcity)
- to maximize happiness (economic wellbeing)

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Economics?

• Social science, study of human behavior.

• Study of production, distribution, and consumption of G/S.
• Study of decision makings.

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Economics?

• How people make decisions?

• How people interact in the markets?
Constrained optimization, Equilibrium

• How an economy as a whole works?

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Micro: Constrained Optimization

Max Our happiness (Economic Wellbeing)

….
subject to Limited Resources.

“Decision making is at the heart of Economics.”

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Individuals make choices

• People face tradeoffs.  have to make choices

• The cost of any action is measured in terms of
foregone opportunities.
• Rational(self interested) people make decisions
by comparing marginal costs and marginal
benefits.
• People respond to incentives.

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Interaction : Equilibrium

Not Robinson Crusoe.

Living Together.
Participate and interact in MKTs.

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Interaction : Equilibrium

• Trade can be mutually beneficial.

• Markets are usually a good way of coordinating
trade.
• Govt. can potentially improve market outcomes
if there is a market failure or if the market
outcome is inequitable.

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Micro vs. Macroeconomics
• Micro : Individual level (household, firm)
- How people make choices?
- How people interact?
Allocation of resources: “ constrained optimization”

• Macro : aggregate level (national level)

- How an economy works as a whole?
- The whole is greater than the sum of its parts.
* Paradox of Thrift…
- “ Economic Fluctuations and Growth”
Macroeconomics
• Look at the Big Picture
- what is happening in the economy as a whole
- economy wide movements at the national level
- the state of the whole economy, how good or bad?
- economic performance as a whole

• Don’t get lost in details!

Macroeconomics?

• Key macro variables.

• How are these variables determined?
• How do they behave over time?
• How do they interact with one another?
Key Macro Variables

• Gross Domestic Output(GDP, Y), The Growth Rate

• Overall price level(P) – the Price index, The Inflation Rate
• The Unemployment Rate(u)

These are big factors in people’s lives.

Macroeconomists study

• How these variables(Y, 𝑔𝑦 , P, π, u) are determined?

• Why these variables change over time?
• How they interact with one another?

Measure these variables, and build theories to explain the

determination/movements of these variables.
Economic Models
• Economics : a model oriented subject
• Model : simplified version of a complex reality
• Endogenous variables : solution variables, determined in the
model.
• Exogenous variables : determined outside the model. Shocks..
• Changes in exo. Variables  changes in endo. Variables.
• Different models for different issues.
- depending on time span.
Time Horizons
• How an economy works as a whole?
• It depends on the time horizon : SR–LR–VLR (or SR-MR-LR)

• Short Run : prices are fixed/sticky

• Long Run : prices are flexible
• Very Long Run : prices are flexible, technological progress
and changes in labor and capital considered.
HOW THE ECONOMY WORKS A WHOLE

• Macro : “big picture” at the national level

• Major variables : GDP, Inflation, Unemployment

• Potential GDP – production capacity.

• In the SR, GDP fluctuates around potential GDP
depending aggregate demand.
• In the LR, GDP returns to its potential(natural) level
• In the VLR, GDP grows over time.

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Policy Goals and Tools
• An economy returns to its potential(natural) level in the LR.
• Y fluctuates around its potential(natural) level in the SR
- Economic Stability (Biz Cycle)
- Fiscal and Monetary Polices
• Potential(natural) level of output grows over time in the VLR
- Economic Growth
- Tech Progress, Capital accumulation, R&D, Education