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Macroeconomics by G.MankiwMacroeconomics by G.Mankiw

PART 1, CHAPTER 1 :

The Science of Macroeconomics

Lecture 1

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

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Learning objectivesLearning objectives

This chapter introduces you to

some important concepts in macroeconomic analysis

the issues macroeconomists study

the tools macroeconomists use

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What is Macroeconomics?What is Macroeconomics?

A global definition

Explanations and Policy prescriptions

Macroeconomics+ Microeconomics = Economics

The study of macroeconomic variables

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Important issues in macroeconomicsImportant 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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Recent data in the USA Recent data in the USA

Source:

OECD (Y/Y)

1960-2000

1992-2000

2000/

2001

Output growth rate

3.5 3.7 4.1/

1.1

Unemployment rate

6.1 5.4 4.0/

4.8

Inflation

Rate

5.1 1.7 2.3/

2.1

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Recent Data in the EURecent Data in the EU

Source:

OECD1960-2000

1992-2000

2000/

2001

Output growth rate

3.1 2.1 3.3/

1.7

Unemployment rate

6.5 9.9 8.1/

7.8

Inflation

Rate

5.6 1.7 1.5/

2.5

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Recent Data in JapanRecent Data in Japan

1960-2000

1992-2000

2000/

2001

Output growth rate

5.5 1.2 1.5/

-0.7

Unemployment rate

2.0 3.0 4.7/

5.0

Inflation

Rate

4.5 -0.1 -1.6/

-1.6

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Economic modelsEconomic models

Mathematics

Observation of data => simplified reality

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The example of a model of supply The example of a model of supply and demand for riceand 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 demandQ

s = quantity that producers supplyP = price of riceY = aggregate incomePg = price of grapes (an input)

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The rice marketThe 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 market for rice: The market for rice: equilibriumequilibrium

Q Quantit

y of rice

P Price

of rice S

D

equilibrium price

equilibriumquantity

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The effects of an increase in income:The effects of an increase in income:

D2

Q Quantit

y of rice

P Price

of rice S

D1

Q1

P1

P2

Q2

demand equation:

( , )dQ D P Y

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Endogenous vs. exogenous variables: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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Prices: Flexible Versus StickyPrices: 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 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