Macroeconomics by G.

Mankiw

PART 1, CHAPTER 1 : The Science of Macroeconomics Lecture 1

Source : Slide Database by Ron Cronovich + Slides by Nathalie Bolh

CHAPTER 1

The Science of Macroeconomics

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Learning objectives
This chapter introduces you to

 some important concepts in

macroeconomic analysis

 the issues macroeconomists study  the tools macroeconomists use

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The Science of Macroeconomics

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What is Macroeconomics?
 A global definition  Explanations and Policy prescriptions  Macroeconomics+ Microeconomics =
Economics

 The study of macroeconomic variables

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The Science of Macroeconomics

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Important issues in macroeconomics

 3 major indicators of economic
performance : - GDP and Growth - Unemployment rate - Inflation rate

 3 major economic areas under review :

the USA, the EU and Japan

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The Science of Macroeconomics

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Recent data in the USA

Source: OECD (Y/Y)

19602000 3.5

19922000 3.7

2000/ 2001 4.1/ 1.1

Output growth rate

Unemplo 6.1 yment rate Inflation Rate

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5.4

4.0/ 4.8

5.1

1.7

2.3/ 2.1

The Science of Macroeconomics

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Recent Data in the EU

Source: OECD

19602000 3.1

19922000 2.1

2000/ 2001 3.3/ 1.7

Output growth rate

Unemploy 6.5 ment rate Inflation Rate

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9.9

8.1/ 7.8

5.6

1.7

1.5/ 2.5

The Science of Macroeconomics

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Recent Data in Japan

19602000 Output growth rate 5.5 19922000 1.2 2000/ 2001 1.5/ -0.7 3.0 4.7/ 5.0 -0.1 -1.6/ -1.6
The Science of Macroeconomics
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Unemplo 2.0 yment rate Inflation 4.5 Rate

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Economic models

Mathematics Observation of data => simplified reality

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The Science of Macroeconomics

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The example of a model of supply and demand for rice

 explains the factors that determine the price of
Manggo and the quantity sold.

 assumes the market is competitive  Variables:

Q d = quantity of rice that buyers demand Q s = quantity that producers supply P = price of rice Y = aggregate income Pg = price of grapes (an input)
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The Science of Macroeconomics

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The rice market

 The supply for rice :
Q s = S(P+, Pf-)

 The demand for rice :

Q d =D(P-, Y+)

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The Science of Macroeconomics

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The market for rice: equilibrium

P
Price of rice S

equilibrium price
D

Q
equilibrium quantity
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Quantity of rice

The Science of Macroeconomics

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The effects of an increase in income:

demand equation: Q d ! D (P ,Y )

P
Price of rice P2 P1 D1 Q1 Q2 D2 S

Q
Quantity of rice

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The Science of Macroeconomics

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Endogenous vs. exogenous variables:

 The values of endogenous variables
are determined in the model.

 The values of exogenous variables

are determined outside the model: the model takes their values & behavior as given.

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The Science of Macroeconomics

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Prices: Flexible Versus Sticky

 Market clearing: an assumption that prices
are flexible and adjust to equate supply and demand.

 In the short run, many prices are sticky.

 In models : Prices are supposed to be

sticky in the short run and flexible in the long run.

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Question
1) Macroeconomic issues in the news over the last month? 2) What would be the effect of an increase in the price of Fertilizers on the rice market equilibrium 3) Give the 2 definitions of a recession (the NBER definition and the popular definition) 4) Identify the main recession episodes in the Indonesia economy since 1900

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The Science of Macroeconomics

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