Some Notable

Macroeconomics
John M. Keynes
(1883 –1946)
Keynesian economics
 Foundation of Macroeconomics
• He was one of the most influential economists of the Twentieth
Century
• His ground breaking work in the 1930s led to the development of a
whole new economic discipline dedicated to macroeconomics
• His economic theories termed ‘Keynesianism’ advocated
government intervention to end the Great Depression
• After the war, to varying degrees, governments in the West, pursued
Keynesian demand management in an attempt to achieve full
employment
• The basic principle of Keynes’ work was that in a recession, there
were wasted resources due to falling private sector investment and
spending
Simon Kuznets
(1901-1985)
National Income Accounting
Known for “Kuznets Curve”
• Empirically founded interpretation of economic growth which has led
to new and deepened insight into the economic and social structure
and process
• Contribution to the transformation of economics into empirical
science, and to the formation of quantitative economic history of
development
• Kuznets’s development of measures of SAVINGs, consumption,
and INVESTMENT came along just as Keynes’s ideas about how national
income is determined created a demand for such measures
• Kuznets helped advance the Keynesian revolution
• Kuznets’ measures also helped advance the study of econometrics
established by RAGNAR FRISCH and JAN TINBERGEN
Milton Friedman
(1912-2006)
Believing in the market
Corporate Social Responsibility
Lawrence Klein
(1920-2013)
Macro-econometric modelling
• Developed economic models and their application to the
analysis of economic fluctuations and economic policies
• Built a model of the U.S. economy, using Jan Tinbergen’s earlier
model as a starting point, to forecast economic conditions and
to estimate the impact of changes in government spending,
taxes, and other policies
• Made important contributions in developing forecasting
techniques
James Tobin
(1918-2002)
Monetary Economics and Finance
• Analysed financial markets and their relations to expenditure
decisions, employment, production, and prices
• America’s most distinguished Keynesian economist
• Developed theories to explain how financial markets affect
people’s consumption and investment decisions
• Tobin’s portfolio-selection theory
• Argued that investors balance high-risk, high-return
investments with safer ones so as to achieve a balance in their
portfolios
Richard Stone
(1913-1992)
Social Accounting Matrix
• Made fundamental contributions to the development of
systems of national accounts and hence greatly improved the
basis for empirical economic analysis
• Integrate national income into a double-entry bookkeeping
format. Every income item on one side of the balance sheet
had to be matched by an expenditure item on the other side,
thus ensuring consistency
• Double-entry method has become the universally accepted
way to measure national income
Robert M. Solow
(1924-)
Theory of Economic Growth
• One of the world’s leading economic theorists
• Contributions to the theory of capital and economic growth
Robert E. Lucas, Jr.
(1937-)
Theory of Rational Expectations
• Developed and applied the hypothesis of rational
expectations, and thereby having transformed
macroeconomic analysis and deepened our understanding of
economic policy
• From 1970 to 2000 he revolutionized macroeconomic theory
• No long-run trade-off between unemployment and INFLATION;
or, in economists’ jargon, that the long-run PHILLIPS
CURVE should be vertical
Robert Mundell
(1932-)
Mundell-Fleming model
Fiscal-monetary interaction
• Analysis of monetary and FISCAL POLICY under different
exchange rate regimes and his analysis of optimum
currency areas
• Addressed was how governments should stabilize
economies—keeping them growing while avoiding
high INFLATION—in a world of trade and capital flows
Edmund S. Phelps
(1933-)
Fiscal Neutrality
Golden rule of accumulation
Introduction to
Macroeconomics
Major terms
• GDP, GNP, GNI
• Consumption, savings, investment, interest
• Wage, inflation, unemployment
• Factor returns
• Goods, money and labor market
• Aggregate demand and supply
• National income accounting
• Fiscal and monetary policy
• Economic fluctuations, growth
• International transmission
• Convergence
Endogenous and Exogenous Variables
• Endogenous variables are the variables that a model tries to explain
• Exogenous variables are those variables that a model takes as given
Multiple Models, Prices
• Macroeconomists study many facets of the economy
• Prices: Flexible Versus Sticky
• Economists normally presume that the price of a good or a service moves
quickly to bring quantity supplied and quantity demanded into
equilibrium
• Market clearing price
• continuous market clearing is not entirely realistic
• prices must adjust instantly to changes in supply
• Many wages and prices adjust slowly (stickiness)
• Labor contracts often set wages for up to three years
• Many firms leave their product prices the same for long periods
(magazine)
National Income
• Gross domestic product (GDP) is often considered the best measure
of how well the economy is performing
• GDP is as the total income of everyone in the economy; another way
is as the total expenditure on the economy’s output of goods and
services
• GDP is the market value of all final goods and services produced
within an economy in a given period of time
GDP = (Price of Apples × Quantity of Apples)
+ (Price of Oranges × Quantity of Oranges)
= ($0.50× 4) + ($1.00 × 3)
= $5.00.
 Stock and Flow
• A stock is a quantity measured at a
given point in time
Example
• A person’s wealth is a stock
• The number of unemployed people
is a stock
• The amount of capital in the
economy is a stock
• The government debt is a stock
• A flow is a quantity measured per
unit of time
Example
• His income and expenditure are flows
• The number of people losing their
jobs is a flow
• The amount of investment is a flow
• The government budget deficit is a
flow
Nominal and Real GDP
• Value of goods and services measured at current prices nominal GDP
• Real GDP is the value of goods and services measured using a
constant set of prices
• GDP deflator, also called the implicit price deflator for GDP, is the
ratio of nominal GDP to real GDP
 Components of Expenditure
National income accounts identity
(an equation that must hold because of the way the variables are
defined)
National income accounts divide GDP into four broad categories of
spending:
• Consumption (C )
• Investment (I )
• Government purchases (G)
• Net exports (NX).
Thus, letting Y stand for GDP,
• Y = C + I + G + NX
• Consumption consists of the goods and services bought by
households.
• nondurable goods
• durable goods
• services
• Investment consists of goods bought for future use
• business fixed investment
• residential fixed investment
• inventory investment
• Government purchases are the goods and services bought
by federal, state, and local governments
What is Investment?
US GDP and the
Components of
Expenditure:
2010
 Other Measures of Income
• Gross national product (GNP)
• GNP = GDP + Factor Payments from Abroad – Factor Payments to
Abroad