Macroeconomics Instructor ： Dr. Jack Zhang Date: 2007.9.5 Lecture 1 ： Introduction to Macroeconomics Issues covered Objective Contents Issues covered What is the subject matter of macroeconomics?
Instructor： Dr. Jack Zhang
Explain the philosophy underlying macroeconomics, especially why we have divided the main body of macroeconomics into two parts: one concerned with the long run, and the other dealing with the short run.
Gary Becker:Economics is the study of the allocation of scarce resources to satisfy competing ends.
This definition generally applies to microeconomics, but not macroeconomics, because some parts of macroeconomics are concerned with situations where resources are not scarce, e.g., the available supplies of labor and capital are not fully utilized.
Generally accepted definition: Macroeconomics is that part of economics focuses which is concerned with the economics as a whole.
This definition is inaccurate, since important parts of macroeconomics are not (directly) concerned with the whole economy, but rather with understanding particular markets such as the labor market or the credit market
The basic questions in macroeconomics:
Definition by subject: Macroeconomics is the study of economic growth and business cycles.
To explain the movements in total output, we must also understand the movements in：
Another definition, known as the empiricist view, reflects the view that a scientific discipline should be in terms of data macroeconomics seeks to explain: Macroeconomics is concerned with explaining observed time series for economic variables like GDP, consumption, investment, prices and wages, the rate of unemployment, etc.
Basic belief: theories should be evaluated by holding them up against the facts, and new theory should ideally be justified and accompanied by illustrative empirical material.
To sum up, in macroeconomics we follow in three steps:
Macroeconomic theory for the short run intends to
explain the economic fluctuations from year to year or from
Quarter to quarter, which typically includes the following
Three modeling features:
i.e., sudden abrupt influences on the economy coming from changes in preferences, technology, or economic policies.
Supply shock: Examples like
- a sudden increase in the productivity of resources
- a sudden increase in oil prices
Demand shock: Examples like
- a sudden rise in domestic consumption or investment rooted in more optimistic expectations concerning the future, or in a more expansionary fiscal or monetary policy, or in a sudden increase in the demand for exports.
i.e., some period after the occurrence of a shock during which some prices and/or wages are sticky.
Short-run nominal wage rigidity:
Nominal wage rates are fixed for a certain period of time.
Short-run nominal price rigidity:
The nominal prices of most goods and services are only adjusted with certain time intervals.
i.e., a period after the occurrence of a shock during which some prices are different from what was expected before the shock.
Misperceptions by workers: since (most) wages had to be set before the shock, and since the shock was not perfectly foreseen, the negotiated wage had to be based on the expected price level which did not include the full inflationary effect of the shock.
Misperceptions by firms: when firms pre-set their prices for a certain period, they will base their pricing decisions on their expected costs which will be influenced by the expected general price level.
Macroeconomic theory for the long runintends to
explain the trend-wise movements of main economic
variables around which the year-to-year fluctuations occur,
which portrays the economy as if：
static: a macroeconomic model for the long run can be a single-period static model: models of long-run structural unemployment
dynamic: dynamic models for the long run describe the process of capital accumulation and technological improvement: growth models
A main motivation for studying economic phenomena is the need to improve the basis for economic policy advice.
Long-run policies:aimed at promoting growth and long-run prosperity and at reducing long-run unemployment.
Structural: long-run policies must affect one or several structural characteristics of the economics such as the long-run prosperities to save and invest, to engage in education and R&D, etc.
Short-run policies: aimed at mitigating economic fluctuations and their harmful consequences coming, say, from sudden increases in unemployment.
Demand management:short-run policies can affect the rate of unemployment even if they do not influence the basic structures and incentives in the economy.