1 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

INTRODUCTION

ECON204 (A01)

Intermediate Macroeconomics

September 05, 2012

2 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Text

N.G. Mankiw and W.M. Scarth, Macroeconomics, Fourth Canadian

Edition, Worth Publishers Inc., 2011

Organization of the Book

Part I: Introduction

(Ch 1-2)

Part II: Economy in the Long run

(Ch 3-6)

Part III:

Economy in the very long run

(Ch 7-8)

Part IV:

Economy in SR/ Business Cycle (Ch 9-13)

Part V:

Govt & Economy (Ch 14-15)

Part VI:

Microfoundation (Ch 16-19)

3 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Our Course Outline

Introduction

Ch 1: The Sciences of Macroeconomics Ch 2: The Data of Macroeconomics

The Economy in the

Long-run

Ch 3: National Income Ch 4: Money and Inflation Ch 5: The Open Economy Ch 6: Unemployment

The Economy in

the Short- run

Ch 9: Introduction to Economic Fluctuation Ch 10: AD I: Building the IS-LM Model Ch 11: AD II: Applying the IS-LM Model Ch 12: Open Economy Revisited: The Mundell-Fleming Model and the ER regime

4 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

The Economy in

the Very Long-

run

Ch 7: Economic Growth I: Capital Accumulation and Population Growth

Ch 8: Economic Growth II: Technology, Empirics, and Policy

5 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Chapter One

THE SCIENCE OF MACROECONOMICS

6 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Issues...

What is Macroeconomics?

Why do we study Macroeconomics?

What and how Macroeconomists Study?

Macroeconomic modeling

7 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

What is Economics? Economics is the study of the use of scarce resources to satisfy unlimited human wants.

Macroeconomics?

The study of the economy as a whole; or

“Macroeconomics is the study of the determination of economic aggregates, such as total output, total employment, the price level, and the economic growth”.

Issues in Macroeconomics Determinants of economic aggregates: output, unemployment, price level

8 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Behaviour of an economy over time: short-run fluctuations and long-run economic trend (i.e., growth rate) Drivers of Macroeconomics Economic policies Fiscal policy: Government Monetary Policy: Monetary Authority Examples:

Aggregate production - Growth

Aggregate price level - Inflation

Unemployment rate

Exchange rate

9 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

How do economists think? Macroeconomic Modeling: Short run vs Long run

Cycle (about short run) and Trend (about long run)

o Business cycle: fluctuation of macroeconomic variables around their long run trends

10 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Trough

Peak

Potential GDP

Time

Recessionary Gap

Inflationary Gap

Peak

Actual GDP

Real G

DP

A Typical Business Cycle

11

11 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Trend Growth — long run growth path

Determined by longer term issues such as savings

and investment (capital accumulation)

Population and education (labour force and human

capital accumulation)

Resources; and

Economic and political environment

12 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

13 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Figure: Real GDP per Person in the Canadian Economy

14 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Figure: Inflation/Deflation in Canadian economy

15 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Figure: Unemployment rate in Canada

16 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

2. Economic Variables

Endogenous Variables – explained by the model

Exogenous Variables – taken as given by the model

Let’s construct a model of the market for pizza

What determines the demand for pizza?

QD = f (P, Y)

What determines the supply of pizza?

QS = f (P, Pm)

Condition for market equilibrium

QD =QS

17 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Figure: Model of Supply and Demand

18 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Which variables are exogenous?

- Income (Y) and the price of materials (Pm)

Which variables are endogenous?

- The price of pizza (P) and the quantity exchanged (Q)

What is the impact of a change in exogenous variables?

What happens if

Y changes

or

Pm changes?

Is this model realistic?

19 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Macroeconomics Models

Why are there many models in macroeconomics?

No single model answers all questions

Which models will we develop and use?

The assumption about Flexible vs. Sticky prices

Microeconomic thinking behind the macroeconomic

model

Micro foundation of Macroeconomic

20 Lecture 1: Introduction. ECON204 (A01) Fall 2012. Ahmed A Hoque

Now you try...

Consider the macroeconomic data shown below for a hypothetical country’s economy:

Year Real GDP Output Gap (% of Potential)

Unemployment Rate (% of labor

force) Actual Potential

(Billions of $)

2003 1168 1180 11.1

2004 1184 1196 10.2

2005 1197 1205 9.1

2006 1211 1215 8.3

2007 1225 1225 7.6

2008 1240 1236 7.3

2009 1253 1247 7.1

2010 1262 1258 7.3

2011 1270 1270 7.6

a) Compute the output gap for each year

b) Explain how GDP can exceed potential GDP

c) Does real GDP ever fall in the time period shown? What do economists call such periods?

d) What is the natural rate of unemployment? What kind of unemployment exists at this time?