Macro. Topic 1

Introduction to
Macroeconomics
Follow YTIT
Plan
INTRODUCION
What What Macroeconomist Why Macroeconomist Q&A

Macroeconomics Do Disagree
is About
Intro…
MACRO…
Intro… What
Macroeconomics
MACRO…
is About?
MACROECONOMICS
Macroeconomics (Greek makro = ‘big’) describes and explains economic processes that concern
aggregates.
It is the study of the behavior of large collections of economic agents. It focuses on the aggregate
behavior of consumers and firms, the behavior of governments, the overall level of economic activity
in individual countries, the economic interactions among nations, and the effects of fiscal and
monetary policy.
In brief macroeconomics is the study of the structure and performance of national economies
and of the policies that governments use to try to affect economic performance.
Intro… What
Macroeconomics
MACRO…
is About?
MACROECONOMICS
Macroeconomists ignore distinctions between

individual product markets and focus on national
totals.
The process of summing individual economic
variables to obtain economy-wide totals is called
aggregation.
Intro…
MACRO…
Intro… Issues Addressed by
MACRO… Macroeconomics
MACROECONOMICS
What determines a nation’s long-run economic growth?

What causes a nation’s economic activity to fluctuate?
What causes unemployment?
What causes prices to rise?
How does being a part of a global economic system
affect nations’ economies?
Can government policies be used to improve economic
performance?
LONG-RUN ECONOMIC GROWTH
In 1870, income per capita was smaller in Norway than in

Argentina. But today, income per capita is almost three times
higher in Norway than Argentina.
-So, Why?
- Rich nations have experienced extended periods of rapid economic
growth.
- Poor nations either have never experienced them or economic
growth was offset by economic decline.
Intro…
MACRO… Over the past 145 years, the annual
output of U.S. goods and services has
increased by more than 140 times.
Intro…
MACRO…

Increased Output
Why do some nations` economies grow quickly, providing
their citizens with rapidly improving living standards, whereas
other nations` economies are relatively stagnant?
Total output is increasing because of increasing population, i.e.

the number of available workers.
Increasing average labor productivity: the amount of output

produced per unit of labor input.
Intro…
MACRO… In 2014, the average U.S. worker produced more than seven times
as much output as the average worker at the beginning of the
twentieth century.
Because today’s typical worker is so much more productive,

Americans enjoy a significantly higher standard of living than would
have been possible a century ago.
Because the rates of growth of output and, particularly, of output

per worker ultimately determine whether a nation will be rich or
poor, understanding what determines growth is one of the most
important goals of macroeconomics.
But it is not easy as it looks: For example
• Why did resource-poor Japan and Korea experience growth rates that
transformed them in a generation or two from war-torn nations into
industrial powers,
• Lotin Amerikasining tabiiy boyliklarga boy bo'lgan bir necha
davlatlari so'nggi o'n yilliklarda notekis yoki hatto salbiy
o'sishga erishmoqdalar?
Rates of Growth of Output

-Rates of growth of output (or output per worker) are
determined by:
• rates of saving and investment;
• rates of technological change, and
• rates of change in other factors that help increase the productivity of
machines and workers
.
Issues Addressed by Macroeconomics
Intro…
MACRO…
BUSINESS CYCLE
A business cycle is a cycle of fluctuations in the Gross Domestic Product

(GDP) around its long-term natural growth rate.
• It explains the expansion and contraction in economic activity that an economy
experiences over time.
Intro…
MACRO…
BUSINESS CYCLE
Intro…
MACRO…
BUSINESS CYCLE
Intro…
MACRO…
BUSINESS CYCLE
Intro…
MACRO…
BUSINESS CYCLE
In Brief,
Business cycles are short-run contractions and expansions of economic
activity.
• The most volatile period in the history of Canadian output was between 1914 and
1945.
Recession is the downward phase of a business cycle when national output
is falling or growing slowly.
• Hard times for many people
• A major political concern
Intro…
MACRO…
UNEMPLOYMENT is often used as a measure of the health of the economy.

Recessions are usually accompanied by high unemployment:
• the number of people who are available for work and are actively seeking it but
cannot find jobs.
• Along with growth and business cycles, the problem of unemployment is a third
major issue in macroeconomics.
The best measure of unemployment is - Unemployment Rate 

Unemployed
 100%
Labour Force
The unemployment rate can stay high even when the economy is
doing well.
• After nine years of economic growth, in 2000, the unemployment rate in U.S. was
about 4%.
Intro… Why the unemployment rate can remain fairly high

MACRO…
even when the economy as a whole is
BUSINESS CYCLE doing well?
Intro… Issues Addressed by Macroeconomics
MACRO…
INFLATION
When prices of most goods and services are rising over time it is inflation.
• When they are falling it is deflation.
The inflation rate is the percentage increase in the average level of prices.
• If the inflation rate in consumer prices is 10% per year, for example, then on
average the prices of items that consumers buy are rising by 10% per year .
• Effects of Inflation
• When the inflation rate reaches an extremely high level, with prices changing daily or
hourly, the economy tends to function poorly.
• High inflation also means that the purchasing power of money erodes quickly. This
situation forces people to scramble to spend their money almost as soon as they
receive it.
MACRO…
MACRO…
MACRO…
THE INTERNATIONAL ECONOMY
An economy which has extensive trading and financial relationships with

other national economies is an open economy. An economy with no
relationships is a closed economy.
• International trade and borrowing relationships can transmit business cycles
from country to country.
Another issue for which international considerations are central is
trade imbalances.
• Trade imbalances (trade surplus and deficit) affect output and employment.
• Trade surplus: exports exceed imports.
• Trade deficit: imports exceed exports.
• The trade balance is affected by the exchange rate
Intro…
MACRO…
MACRO…
MACROECONOMIC POLICY
A nation’s economic performance

depends on:
• natural and human resources;
• capital stock;
• technology
• economic choices made by citizens;
• macroeconomic policies of the government.
MACRO…
Macroeconomic policies:
• Fiscal policy: government spending and taxation at different
government levels.
• Monetary policy: the central bank’s control of short-term interest
rates and the money supply.
Budget Deficits
• The economy is affected when there are large budget deficits: the
excess of government spending over tax collection
Intro…
MACRO…
MACRO…
The large budget deficits of the 1980s and early 1990s are
unusual.
• Borrowing from the public might divert funds from more productive uses.
• Federal budget deficits might be linked to the decline in productivity
growth.
The emergence of large Federal deficits in the 1980s coincided with
the emergence of large trade deficits
• The Federal budget deficit and the trade deficit have been called the “twin
deficits.”
Are these deficits related? If so, what can be done about them?
Intro… What Macroeconomists Do
MACRO…
MACROECONOMICS
Macroeconomic forecasting
Macroeconomic analysis
Macroeconomic research
Data development
MACRO…
MACROECONOMIC FORECASTING
Macroeconomic forecasting – prediction

of future economic trends - has some
success in the short run. In the long run
too many factors are highly uncertain.
MACRO…
MACROECONOMIC ANALYSIS
Macroeconomic analysis - analyzing and

interpreting events as they happen –
helps both private sector and public
policymaking.
MACRO…
MACROECONOMIC RESEARCH
Macroeconomic research - trying to

understand the structure of the economy
in general – forms the basis for
macroeconomic analysis and forecasting.
MACRO…
DATA DEVELOPMENT
Macroeconomists use data to assess the

state of the economy, make forecasts,
analyze policy alternatives, and test
theories.
MACRO…
DATA DEVELOPMENT
Macroeconomists use data to assess the state of the economy,

make forecasts, analyze policy alternatives, and test theories.
Providers of data must:

• Decide what types of data should be collected based on who is expected to
use the data and how.
• Ensure the measures of economic activity correspond to economic concepts.
• Guarantee the confidentiality of data.
MACRO…
ECONOMIC THEORY
Economic theory: a set of ideas about the economy to be

organized in a logical framework.
Economic model: a simplified description of some aspects of
the economy.
• Developing and Testing a Theory
• State the research question.
• Make provisional assumptions.
• Work out the implications of the theory.
• Conduct an empirical analysis.
• Evaluate the results.
Intro… Why Macroeconomists
MACRO… Disagree
ECONOMIC THEORY
A positive analysis examines the economic consequences of

an economic policy, but it does not address its desirability.
A normative analysis tries to determine whether a certain
economic policy should be used.
• Economists can disagree on normative issues because of differences
in values.
• Economists disagree on positive issues because of different schools
of thought.
MACRO… Disagree
ECONOMIC THEORY
The Classical Approach

The invisible hand of Economics: General welfare will be
maximized (not the distribution of wealth) if:
• there are free markets;
• individuals act in their own best interest.
MACRO… Disagree
ECONOMIC THEORY
The Classical Approach -

• To maintain markets’ equilibrium – the quantities
demanded and supplied are equal:
• Markets must function without impediments.
• Wages and prices should be flexible.
Thus, according to the classical approach, the government should

have a limited role in the economy.
MACRO… Disagree
ECONOMIC THEORY
The Keynesian Approach-

• Keynes (1936) assumed that wages and prices adjust slowly.
• Thus, markets could be out of equilibrium for long periods of
time and unemployment can persist.
• Therefore, according to the Keynesian approach,

governments can take actions to alleviate unemployment.
MACRO… Disagree
ECONOMIC THEORY
The Keynesian Approach-

• The government can purchase goods and services, thus
increasing the demand for output and reducing
unemployment.
• Newly generated incomes would be spent and would
raise employment even further.
MACRO… Disagree
ECONOMIC THEORY
Evolution of the Classical-Keynesian Debate -

• After stagflation – high unemployment and high inflation – of
the 1970s, a modernized classical approach reappeared.
• Substantial communication and cross-pollination is taking
place between the classical and the Keynesian approaches.
MACRO… Disagree
ECONOMIC THEORY
Evolution of the Classical-Keynesian Debate –

• Because the Great Depression so strongly shook many economists’ faith in
the classical approach, the Keynesian approach dominated macroeconomic
theory and policy from World War II until about 1970.
• 1970-yillardan boshlab stagflyatsiyadan so`ng - yuqori ishsizlik va yuqori
inflyatsiyadan so'ng, modernizatsiya qilingan klassik yondashuv yana
paydo bo'ldi.
• Substantial communication and cross-pollination is taking place between
the classical and the Keynesian approaches.
MACRO… Disagree
ECONOMIC THEORY
Evolution of the Classical-Keynesian Debate –

• Because the Great Depression so strongly shook many economists’ faith in
the classical approach, the Keynesian approach dominated macroeconomic
theory and policy from World War II until about 1970.
• After stagflation – high unemployment and high inflation – of the 1970s, a
modernized classical approach reappeared.
• Substantial communication and cross-pollination is taking place between
the classical and the Keynesian approaches.
MACRO… Disagree
ECONOMIC THEORY
Unified Approach to Macroeconomics –

• Individuals, firms and the government interact in goods, asset and
labour markets.
• The macroeconomic analysis is based on the analysis of individual
behavior.
• Keynesian and classical economists agree that in the long run prices
and wages adjust to equilibrium levels.
• The basic model will be used either with classical or Keynesian
assumptions about flexibility of wages and prices in the short run.
Q&A…
MACRO…
REVIEW OF 1ST TOPIC
What is a business cycle?

Define inflation and deflation.
Define trade deficit and trade surplus.
List the principal professional activities of macroeconomists.
What was stagflation, and when did it occur?
Q&A…
MACRO…
REVIEW OF 1ST TOPIC
Which of the following statements are positive in nature and

which are normative?
• a. A tax cut will raise interest rates.
• b. A reduction in the payroll tax would primarily benefit poor and middle-class
workers.
• c. Payroll taxes are too high.
• d. A cut in the payroll tax would improve the President’s popularity ratings.
• e. Payroll taxes should not be cut unless capital gains taxes are also cut.
Q&A…
MACRO…
REVIEW OF 1ST TOPIC
In 2002, President George W. Bush imposed tariffs on certain types of

imported steel. He argued that foreign steel producers were dumping their
steel on the U.S. market at low prices. The foreign steel producers were able
to sell steel cheaply because they received subsidies from their
governments. The Bush administration argued that the influx of steel was
disrupting the U.S. economy, harming the domestic steel industry, and
causing unemployment among U.S. steel workers.
• What might a classical economist say in response to these claims?
• Would a Keynesian economist be more or less sympathetic to the imposition of tariffs? Why?

Macro. Topic 1

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Macro. Topic 1

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Introduction to

What What Macroeconomist Why Macroeconomist Q&A

Macroeconomists ignore distinctions between

What determines a nation’s long-run economic growth?

LONG-RUN ECONOMIC GROWTH

In 1870, income per capita was smaller in Norway than in

LONG-RUN ECONOMIC GROWTH

Total output is increasing because of increasing population, i.e.

Increasing average labor productivity: the amount of output

Because today’s typical worker is so much more productive,

LONG-RUN ECONOMIC GROWTH

Because the rates of growth of output and, particularly, of output

LONG-RUN ECONOMIC GROWTH

Rates of Growth of Output

A business cycle is a cycle of fluctuations in the Gross Domestic Product

UNEMPLOYMENT is often used as a measure of the health of the economy.

The best measure of unemployment is - Unemployment Rate 

Intro… Why the unemployment rate can remain fairly high

THE INTERNATIONAL ECONOMY

An economy which has extensive trading and financial relationships with

A nation’s economic performance

Macroeconomic forecasting – prediction

Macroeconomic analysis - analyzing and

Macroeconomic research - trying to

Macroeconomists use data to assess the

Macroeconomists use data to assess the state of the economy,

Providers of data must:

Economic theory: a set of ideas about the economy to be

A positive analysis examines the economic consequences of

The Classical Approach

The Classical Approach -

Thus, according to the classical approach, the government should

The Keynesian Approach-

• Therefore, according to the Keynesian approach,

The Keynesian Approach-

Evolution of the Classical-Keynesian Debate -

Evolution of the Classical-Keynesian Debate –

Evolution of the Classical-Keynesian Debate –

Unified Approach to Macroeconomics –

REVIEW OF 1ST TOPIC

What is a business cycle?

REVIEW OF 1ST TOPIC

Which of the following statements are positive in nature and

REVIEW OF 1ST TOPIC

In 2002, President George W. Bush imposed tariffs on certain types of

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