Introduction: What is Macroeconomics?

EC4307, Sem.1 AY21/22

Department of Economics
National University of Singapore

10 Aug 2021

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 Introduction to Macroeconomics at 4000-level?

• First of all, you are in the right class meeting for EC4307
• Here, we briefly overview the scope of macroeconomic studies and the
requirements of an economic theory
• More broadly, one may ask why we should learn about macroeconomics

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 The Scope of Macroeconomics

• In macroeconomics, our interest is at the aggregate-level of an economy

• Long-run economic growth ⇒ Growth Theories
• Short-run economic fluctuations ⇒ Business Cycle Theories
• So, we ask questions like
• Why an economy does or does not keep growing over time?
• What are the determinants of economic growth?
• Why and how do we experience recurring booms and recessions?
• Are macroeconomic policies effective in dealing with such issues?

• In contrast, microeconomics usually focuses on decisions made by a single

individual, household, or firm
• Or, a limited set of individuals at most

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 Similarity between Macro and Micro

• Broadly, both macro and micro studies are applications of standard

neoclassical theories
• The distinctive nature is the equilibrium approach
• Economic agents optimize given preference and technology
• Decisions/actions are consistent with equilibrium allocations and prices

• This generally requires an economic theory to have scientific disciplines

• Explicit assumptions on individuals and economic environment
• Models as abstractions, but validated by economic principles and data

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 Modern Macroeconomic Studies

• Macro models require validations by using actual data

• Predictive/explanatory power for the observed time-series data
• More recently, further consistency with cross-sectional data

• Quantitative models as a laboratory for an aggregate economy

• Determinants and channels of a particular economic mechanism
• Effectiveness and welfare implications of macroeconomic policies
• Not a hard science, but substantially rigorous and scientific

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 Back to EC4307: What Do We Care?

• In this module, we particularly focus on theories of business cycles

• Modern approaches in neoclassical tradition, RBC and New Keynesian models
• Empirical validations and performance of these models

• To do so, we gradually build up the necessary elements

• Microfoundation with optimizing economic agents
• Characterization of equilibrium, in the presence of aggregate shocks
• Theoretical/econometric tools for analyzing models and data

• Eventually, extensions and applications of a basic theory help understand the

current issues in macroeconomics

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