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LECTURE 1

- Course Road Map- Introduction To Macroeconomics

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y COURSE ROAD MAP

y COURSE OUTLINE

y LECTURE ROOMS AND TIMES

y TESTS (20 +10+ 10) AND EXAM (60)

y OFFICE and OFFICE HOURS

y TEXTBOOK: N. GREGORY MANKIW MACROECONOMICS (4TH OR HIGHER EDITION).

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INTRODUCTION TO MACROECONOMICS

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The issues macroeconomists study

Why macroeconomics is important to us

The tools macroeconomists use

Important concepts in macroeconomic analysis

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WHAT MACROECONOMICS IS ABOUT:

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y

The study of the economy as a whole; for example:y Growth in incomes

y Changes in prices

y Rate of unemployment

y Questions macroeconomists seek answers to

y The key role: explain economic events ; and devise policies

y Contrast to microeconomics

y

Needed to explain events:y Data on aggregate variables (eg. above of aggregate variables

collected (real GDP; inflation, unemployment rate)

y Models

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Performance of the Tanzanian Economy

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GDP per capita (US Dollars), 1989-2008

0

100

200

300

400

500

600

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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Performance of the Tanzanian Economy

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Inflation, GDP deflator (annual %), 1989-2008

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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Performance of the Tanzanian Economy

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y Unemployment

y 1990/91 = 3.6

y 2000/01 = 5.1

y More severe among persons aged 10-34 yrs than in other agegroups

y More severe among females than males

y 1990/91 2.9 vs. 4.2

y 2000/01 4.4 vs. 5.8

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WHY IS MACROECONOMICS IMPORTANT TO US?

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y

Key events/issues in our economy;y Jobs

y power rationing

y Value TZS

y High price of oil

y How do these events/issues touch our lives?

y

Minimum wages and real incomes;y Graduates - the economy and jobs;

y High rate of unemployment and social problems - crime, domestic

violence and homelessness

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THE APPROACH: ECONOMIC MODELS

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y The Approach

y Use of models

y simplify reality through symbols and equations

y Show relationship among variablesy Understand mechanism behind facts

y Devise policies

y Types of variables

y Endogenous - value is determined within the model

y Exogenous taken as given

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THE APPROACH: ECONOMIC MODELS

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y

Example: Demand and Supply ModelDemand function: QD = f(P, Y)

Supply function: QS = f(P)

Equilibrium condition: QD = QS

y Example: The market for cars

Qd = quantity of cars that buyers demand

Qs = quantity that producers supply

P = price of new cars

Y= aggregate income

Ps = price of steel (an input)

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THE APPROACH: ECONOMIC MODELS

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y

The Demand equation: Qd = D(P,Y)y The Supply equation: Qs = S(P, Ps)

y The equilibrium: Qd = Qs

y TYPES OF FUNCTIONS

y General functional notation: Qd = D(P,Y)

y Specific functional notation : D(P,Y) = 60 10P + 2Y

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THE APPROACH: ECONOMIC MODELS

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THE MARKET FOR CARS: EQUILIBRIUM

Q

Quantityof cars

P

Priceof cars S

D

equilibrium

price

equilibriumquantity

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THE APPROACH: ECONOMIC MODELS

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THE EFFECTS OF AN INCREASE IN INCOME

Q

Quantity

of cars

P

Priceof cars S

D1

Q1

P1

P2

Q2

D2

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THE APPROACH: ECONOMIC MODELS

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THE EFFECTS OF A STEEL PRICE INCREASE

QQuantityof cars

PPrice

of cars S1

D

Q1

P1

P2

Q2

S2

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MICROECONOMIC THINKING AND MACROECONOMIC

MODELS

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y The link between micro and macro;

y Economy-wide events arise from interaction of many consumers and many

firms

y

Macroeconomic models: built from microeconomic principles (fromdescription of consumers and firms, their objectives and constraints

and how they interact)

y Main idea: deriving explicitly macroeconomic predictions from a

model that starts from the optimizing behaviour of individual agentsy the microfoundations of macroeconomics this not attempted in this

course!

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PRICES: FLEXIBLE VS. STICKY

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y

Market clearing: assumption relates to speed at which wagesand prices adjust

y Normally assumed: prices are flexible; adjust to; supply =demand

y Markets equilibrium

y price: at point of intersection of supply and demand curves

y Is assumption of continuous market clearing is not totally realistic?

y Instantaneous adjustment of prices?

y

Short-run sticky prices (eg. Labour contracts)y Long-run flexible prices