Lecture 1

ECON 410: Macroeconomic Theory

Yoon J. Jo

Texas A&M University

Fall 2021

0 / 34
Today

• Syllabus

• Introduction

• Basic Concepts of Macroeconomics

• Questions in Macroeconomics

• Reading: Mankiw Chapter 1 and 2

• HW 1 is posted. Due on September 9th.

1 / 34
Syllabus

1 / 34
Logistics

• Lecture: TR 09:55 – 11:10 AM. HECC Room 200

• Course website: https://canvas.tamu.edu/

• Instructor: Yoon J. Jo
I Office: Liberal Arts and Social Sciences Building 270

I Office hour: Tuesday 12:00 – 1:00 PM (or by appointment)

https://tamu.zoom.us/j/98310058560
Meeting ID: 983 1005 8560 Passcode: econ410
I Email: yoonjo@tamu.edu

2 / 34
Logistics

• TA: Jik Lee

I Email: yeonjik@tamu.edu

I Office hour: Wednesday 10:00 AM – 12:00 PM.

Link:https://tamu.zoom.us/j/5482857899

3 / 34
Textbook

• The main references are the slides posted at the course

website(https://canvas.tamu.edu).

• A required textbook is N. Gregory Mankiw, Macroeconomics, 10th

Edition, Worth Publishers. (A prior edition of this book would also
be fine.)

• Additional readings will be posted at the course website.

4 / 34
Grading

• The final grade will be based on written homework assignments

(10%) and three exams (30% each).
• Homework assignments. There will be 6 homework assignments.
For each student, the top 5 homework grades will count. The
lowest homework grade will be dropped. Homework assignments
will be posted on Canvas one week before their due dates.
Homework will be due at the beginning of class: Sep 9, Sep 23,
Oct 14, Oct 28, Nov 18, and Dec 2. No late problem sets will be
accepted.
• First Exam: Tuesday, September 28th in class.

• Second Exam: Thursday, November 4th in class.

• Third Exam: Friday, December 10th, 12:30-1:45 pm.

5 / 34
Grading

• The final grade will be based on written homework assignments

(10%) and three exams (30% each).
• Homework assignments. There will be 6 homework assignments.
For each student, the top 5 homework grades will count. The
lowest homework grade will be dropped. Homework assignments
will be posted on Canvas one week before their due dates.
Homework will be due at the beginning of class: Sep 9, Sep 23,
Oct 14, Oct 28, Nov 18, and Dec 2. No late problem sets will be
accepted.
• First Exam: Tuesday, September 28th in class.

• Second Exam: Thursday, November 4th in class.

• Third Exam: Friday, December 10th, 12:30-1:45 pm.

5 / 34
Grading

• The final grade will be based on written homework assignments

(10%) and three exams (30% each).
• Homework assignments. There will be 6 homework assignments.
For each student, the top 5 homework grades will count. The
lowest homework grade will be dropped. Homework assignments
will be posted on Canvas one week before their due dates.
Homework will be due at the beginning of class: Sep 9, Sep 23,
Oct 14, Oct 28, Nov 18, and Dec 2. No late problem sets will be
accepted.
• First Exam: Tuesday, September 28th in class.

• Second Exam: Thursday, November 4th in class.

• Third Exam: Friday, December 10th, 12:30-1:45 pm.

5 / 34
Policy

• Late work is not accepted, unless proof of a university-authorized

excuse is presented.

• Statement of Academic Integrity: The Aggie Honor Code states

An Aggie does not lie, cheat, or steal, or tolerate those who

do.

6 / 34
Introduction

6 / 34
What is Macroeconomics?

Source: Wikipedia: https://en.wikipedia.org/wiki/Macroeconomics

Macroeconomics (from the Greek prefix makro- meaning "large" + eco-

nomics) is a branch of economics dealing with the performance, struc-
ture, behavior, and decision-making of an economy as a whole. This
includes regional, national, and global economies.

Macroeconomists study topics such as GDP, unemployment rates, na-

tional income, price indices, output, consumption, unemployment, infla-
tion, saving, investment, energy, international trade, and international
finance.

7 / 34
What is Macroeconomics?

For example, macroeconomists attempts to answer these and many

related questions.

• Why do some countries have high rates of inflation while others

maintain stable prices?

• Why have some countries experienced rapid growth in incomes

over the past century while others have stayed mired in poverty?

• Why do all countries experience recessions and depressions -

recurrent periods of falling income and rising unemployment - and
how can government policy reduce the frequency and severity of
these episodes?

8 / 34
Basic Concepts in Macroeconomics

8 / 34
Basic variables in Macroeconomics

• Three macroeconomic variables are especially important to

measure the performance of an economy:
I real gross domestic product (GDP): total income of everyone in the
economy adjusted for the level of prices
I inflation rate: how fast prices are rising
I unemployment rate: the fraction of the labor force that is out of work

• Macroeconomists study how these variables are determined, why

they change over time, and how they interact with on another.

9 / 34
Real GDP per person in the US Economy

Real GDP measures the total income of everyone in the economy, and real GDP per person mea-
sures the income of the average person in the economy. This figure shows that real GDP per
person tends to growth over time and that this normal growth is sometimes interrupted by period of
declining income, called recessions or depressions.

10 / 34
Real GDP per person
Related questions to answer:
• Why is the typical American today more than 8 times richer than
the typical American a century ago?
• Why is the American of today 50 times richer than the typical
Ethiopian?
• What factors cause some countries to sustain fast growth over long
periods of time?
• What can policymakers do to foster growth?
• Why is China growing faster than the U.S. today?
• What causes boom and recessions?
• Why do all countries experience recessions and depressions -
recurrent periods of falling incomes and rising unemployment - and
how can government policy reduce the frequency and severity of
these episodes?

11 / 34
Real GDP per person
Related questions to answer:
• Why is the typical American today more than 8 times richer than
the typical American a century ago?
• Why is the American of today 50 times richer than the typical
Ethiopian?
• What factors cause some countries to sustain fast growth over long
periods of time?
• What can policymakers do to foster growth?
• Why is China growing faster than the U.S. today?
• What causes boom and recessions?
• Why do all countries experience recessions and depressions -
recurrent periods of falling incomes and rising unemployment - and
how can government policy reduce the frequency and severity of
these episodes?

11 / 34
The Inflation Rate in the US Economy

The inflation rate measure the percentage change in the average level of prices from the year
before. When the inflation rate is above zero, prices are rising. When it is below zero, prices are
falling. If the inflation rate declines but remains positive, prices are rising but at a lower rate.

12 / 34
U.S. Annual Inflation

• Pre-WWII, the inflation rate averaged only slightly above zero,

deflation were common

• Great Inflation(mid1960s – early 1980s): the inflation rate soared

from a 1.6 percent in 1965 to 13.5 percent in 1980

• Great Moderation(mid 1980s – 2009): In 1993, core inflation first

fell below 2.5 percent, and has since remained in the narrow range
of 0.9 percent to 2.5 percent.

13 / 34
Venezuela Annual Inflation
• Hyperinflation in Venezuela. In 2017, the annual inflation rate
reached over 4,000%.
• In 2017, 10 Venezuelan Bolivares = 1 US dollar
• In 2018, 241,713 Venezuelan Bolivares = 1 US dollar

Source:Bloomberg
14 / 34
Zimbabwe
• Zimbabwe banknotes ranging from 10 dollars to 100 billion dollars
printed within a one-year period.
• The largest denomination of a Zimbabwean banknote
(Z$100,000,000,000,000)

15 / 34
What can you do with Z$100 Trillion Dollars?

16 / 34
Japan Annual Inflation

• Deflation in Japan
• What is cost of deflation?

17 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Inflation Rate

Related questions to answer:

• What determines the rate of inflation?

• Why did inflation in the U.S. rise to double digit levels in the
1970’s?

• Why do some countries experience hyperinflations?

• How should a country deal with deflation?

• How costly in inflation (deflation)?

• What monetary policy will result in low and stable inflation?

18 / 34
The Unemployment Rate in the US Economy

The unemployment rate measures the percentage of people in the labor force who do not have
jobs. This figure shows that the economy always has some unemployment and that the among
fluctuates from year to year.

19 / 34
The Unemployment Rate in the US Economy

• There is always some unemployment in the economy.

• Recession and depressions are associated with high

unemployment.

• The highest rates of unemployment were reached during the Great

Depression of the 1930s.

• The worst economic downturn since the Great Depression

occurred ...

20 / 34
The COVID 19 Pandemic Recession

20 / 34
2019 Q4

• Longest economic expansion in US history: from 2009/6-2020/2,

128 months
• In 2019 Q4, unemployment rate drops to 3.5%. The lowest
unemployment since 1969 Q1 (3.4%)
• Record high stock market performance

21 / 34
Longest US economic expansion in history

Source: CNBC on 2019/07/02 Link)

22 / 34
The Covid-19 Recession of 2020
• A novel virus, Covid-19, was sweeping the world. The first U.S.
case was reported on January 21, 2020 in the state of Washington.
• By 08/30/2021, the virus killed more than 630,000 people in the
United States and more than 4.5M worldwide.
• To slow the spread of the virus, health experts advised people to
avoid close interactions with others.
• Lockdown orders - closing down non-essential business.
I Movie theater, sporting events, concerts, restaurants (dine-in), and
non-essential retail stores
• Reopening at a limited capacity
• Not about the instability of the financial system or fundamental
economic problems
• Intentional recession. To curb the Covid-19 pandemic,
policymakers compelled changes in behavior that reduced
production and employment.
23 / 34
Real GDP per capita in the US Economy

The quarterly real GDP per capita growth rate in the first quarter in 2020 was -1.37 percent and
that in the second quarter in 2020 was -9.6%. Data source: FRED (Link)

24 / 34
Real GDP per capita growth rates in the US Economy

The quarterly real GDP per capita growth rate in the 2020Q1 was -1.4 percent and the growth rate
in the 2020Q2 was -9.0%, and the growth rate in the 2020Q3 was 7.4%. Data source: FRED (Link)

25 / 34
The Inflation Rate in the US Economy

Data source: FRED (Link)

26 / 34
The Unemployment Rate in the US Economy
The unemployment rate in April 2020 was 14.7 percent, the highest
level since the Great Depression, when the unemployment rate reached
25 percent in 1933.

The unemployment rate had reached 13% in 2020 Q2. Data source: FRED (Link)

27 / 34
Policy Responses

• Stabilization policy: policy actions aimed at reducing the severity of

short-run economic fluctuations.

• Monetary response
I On March 15th, 2020: Federal reserve cuts rates to zero and
launches massive $700 billion quantitative easing program in
attempting to push down long run rates (Link)

• Fiscal response
I Stimulus check
I Extend unemployment insurance

28 / 34
Policy Responses: Now

(Link) (Monetary Policy in the Time of COVID)

(Link)

29 / 34
What Macroeconomists Study

From Chapter 1 of the textbook:

These macroeconomic events touch all of our lives.
Macroeconomic issues are also central to world politics, and the inter-
national news is filled with macroeconomic questions. Should the Fed
start tapering its bond purchases? Can emerging economies afford ’ta-
per tantrum’?
Although the job of making economic policy belongs to world leaders,
the job of explaining the workings of the economy as a hole falls to
macroeconomists. To this end, macroeconomists collect data on in-
comes, prices, unemployment, and many other variables from different
time periods and different countries. They then attempt to formulate
general theories to explain these data.

30 / 34
GDP

30 / 34
Gross Domestic Product

• Gross Domestic Product, or GDP, is often considered the best

measure of how well an economy is performing.
• History of GDP (Landefeld, Seskin, and Fraumeni (2008))

The first official measure of the overall U.S. economy was created
by Simon Kuznets and his colleagues in the 1930s. The nation was
in the midst of the Great Depression, but policymakers had no
comprehensive picture of what was happening to the economy. · · ·

The first set of such accounts was delivered to the Congress in a

1934 report by the Bureau of Domestic and Foreign Commerce’s
Statistics Division under the direction of Kuznets.

31 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
Gross domestic product
• GDP measures the market value of all final goods and services
produced within an economy in a given period of time
• Three methods of measuring GDP
I “Final Expenditures Approach,” measures the total expenditure on
the economy’s output of goods and services
I “Income Approach” measures the total income of everyone in the
economy
I “Production Approach” computes the value added at each stage of
production

• These three measures of the size of an economy are conceptually

identical
I Expenditure equals income because every dollar a buyer spends
becomes income to the seller.
I GDP = value of final goods produced = sum of value added at all
stages of production

32 / 34
GDP - the circular flow
Imagine an economy that produces a single good, bread, from a single
input, labor. This illustrates all the economic transactions that occur
between households and firms in the economy.

This figure illustrates the flows between firms and households in an economy that produces one
good, bread, from one input, labor. In this economy, GDP is both the total expenditure on bread
and the total income from the production of bread.
33 / 34
Three ways to measure GDP

Source:BEA link
34 / 34