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Macroeconomics (8th Edition) Chapter 1

This document provides an outline for a macroeconomics course covering topics such as GDP, monetary and fiscal policy, inflation, and foreign trade. It summarizes the contents of chapters 1 and 2 from the textbook Macroeconomics by Gregory Mankiw. Chapter 1 discusses what macroeconomists study, including economic growth, inflation, and recessions. It uses graphs to examine historical data on US GDP, inflation, and unemployment. Chapter 2 explains how economists use models to study issues and that they think in terms of exogenous and endogenous variables. It also discusses the assumptions of flexible versus sticky prices and the link between microeconomic and macroeconomic models.

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2K views

Macroeconomics (8th Edition) Chapter 1

This document provides an outline for a macroeconomics course covering topics such as GDP, monetary and fiscal policy, inflation, and foreign trade. It summarizes the contents of chapters 1 and 2 from the textbook Macroeconomics by Gregory Mankiw. Chapter 1 discusses what macroeconomists study, including economic growth, inflation, and recessions. It uses graphs to examine historical data on US GDP, inflation, and unemployment. Chapter 2 explains how economists use models to study issues and that they think in terms of exogenous and endogenous variables. It also discusses the assumptions of flexible versus sticky prices and the link between microeconomic and macroeconomic models.

Uploaded by

Av
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Macroeconomics

Gregory Mankiw 8/e


Lecturer: M. Avais

Course Outline
Macroeconomics
Different Concepts of GNP, GDP, NNP, NI at Factor
Cost, PI and PI,
Monetary Policy
Tools of Monetary Policy
Fiscal Policy
Tools of Fiscal Policy
Inflation
Type of Inflation
Control of Inflation
Foreign Trade
Balance of Trade

Contents to be Covered from this


book

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
IS-LM Curve and
Excerpts from the book which would be
notified during class, so attendance is
very important.

Chapter 1 The Science of


Macroeconomics
1. What Macroeconomists Study
2. How Economists Think

1 What Macroeconomists
Study
Why some countries experience higher growth
rate?
Why some have high inflation and some have
stable prices?
What are recessions and why countries
experience these?
These are the questions that might bother a
person who is affected by these issues.
Is this a part of international politics and
policies e.g., China, USA ($$$), Europe, BRICS

1 What Macroeconomists
Study
Almost all of us are affected by such issues and that is
the reason it is a mandatory part of political debate and a
government can be judged by its macroeconomics
handling and policies.
It has a major role in the lives of the country and what
quality of life they have.
It is the job of the leaders to draw the economic policies
while the explanation of the workings of the economy
belongs to macroeconomists.
They collect data and then they try to form different
theories and explain the data.
They also do not have the liberty of conducting controlled
or laboratory experiments.

1 What Macroeconomists
Study

1 What Macroeconomists
Study
The Historical Performance of US
Economy Case Study (Fig. 1.1)
Real GDP grows over time and in the
latest year it is about eight time
higher than that of 1900 and also the
growth is not steady.
Recession is lack of growth and if it
severe it is called depression.

1 What Macroeconomists
Study

1 What Macroeconomists
Study
Figure 1.2 shows the inflation rate. In the first
half of the 20th century it was slightly above
zero (averaged) and periods of falling prices
(deflation) was almost same as periods of rising
prices.
In figure 1.3, there is U.S unemployment rate,
notice that there is always some
unemployment rate in the economy. Highest
was during 1930s.
In the following chapters we may refer to these
variables and discuss those.

1 What Macroeconomists
Study

2 How Economists Think


Economists often study politically
charged issue yet economics has its
own set of tool, terminology, data,
and way of thinking.
I. Theory as Model Building
II. The Use of Multiple Models
III. Prices: Flexible vs. Sticky
IV. Microeconomics Thinking and
Macroeconomics Models

2 How Economists Think


Theory as Model Building
Model is a copy of real world
situation to understand the what and
how things in the real world can be
happening.
It is like a child playing with a toy
(car, airplane etc.) and with that the
child gets to know a lot of
information about the actual car and
airplane.

2 How Economists Think


As the real economics can be very difficult to
understand, so economists use models that try
to copy the real world situation.
In social sciences, the behaviors are converted
into numbers for empirical analysis (analyzing
a phenomenon through numbers NOT just
theoretical explanation).
Economics also tries to make models of
different happenings and then tries to
understand and attempts to know what can be
the outcomes of a model.

2 How Economists Think


Models help us to simplify the complex
situation of real life and economics models
are shown in the form of symbols and
equations.
Economists make their own model
economies that would help explain
different variables like GDP, Inflation,
Unemployment etc.
In models one can skip irrelevant details
and focus on the ones we need.

2 How Economists Think


There are two kinds of variables in a model.
Exogenous variables are those that model takes as
given and,
Endogenous variables that a model tries to explain.

The purpose of the model is to know that how the


exogenous variables affect the endogenous
variables.
In other words, as Figure 1-4 illustrates, exogenous
variables come from outside the model and serve
as the models input, whereas endogenous
variables are determined within the model and are
the models output.

2 How Economists Think

2 How Economists Think


Lets review the most celebrated of all economic
modelsthe model of supply and demand.
Imagine that an economist wants to figure out what
factors influence the price of pizza and the quantity of
pizza sold.
He or she would develop a model that described the
behavior of pizza buyers, the behavior of pizza sellers,
and their interaction in the market for pizza.
For example, the economist supposes that the quantity
of pizza demanded by consumers Qd depends on the
price of pizza P and on aggregate income Y. This
relationship is expressed in the equation:

2 How Economists Think

Qd = D(P, Y ),
where D( ) represents the demand function.
Similarly, the economist supposes that the quantity of pizza
supplied by pizzerias Qs depends on the price of pizza P and on
the price of materials Pm, such as cheese, tomatoes, flour etc.
This relationship is expressed as
Qs = S(P, Pm),
where S( ) represents the supply function. Finally, the economist
assumes that the price of pizza adjusts to bring the quantity
supplied and quantity demanded into balance:
Qs = Qd.
These three equations compose a model of the market for pizza.

2 How Economists Think

2 How Economists Think


Figure 1-5.The demand curve shows the relationship between the
quantity of pizza demanded and the price of pizza, holding aggregate
income constant.
The demand curve slopes downward because a higher price of pizza
encourages consumers to switch to other foods and buy less pizza.
The supply curve shows the relationship between the quantity of pizza
supplied and the price of pizza, holding the price of materials constant.
The supply curve slopes upward because a higher price of pizza makes
selling pizza more profitable, which encourages pizzerias to produce
more of it.
The equilibrium for the market is the price and quantity at which the
supply and demand curves intersect.
At the equilibrium price, consumers choose to buy the amount of pizza
that pizzerias choose to produce.

2 How Economists Think

2 How Economists Think


The model shows that both the
equilibrium price and the equilibrium
quantity of pizza rise.
Similarly, if the price of materials
increases, then the supply of pizza
decreases, as in panel (b) of Figure 16. The model shows that in this case
the equilibrium price of pizza rises and
the equilibrium quantity of pizza falls.

2 How Economists Think


This model of the pizza market has
two exogenous variables and two
endogenous variables.
The exogenous variables are
aggregate income and the price of
materials.
The endogenous variables are the
price of pizza and the quantity of
pizza exchanged

2 How Economists Think


The Use of Multiple Models
Economists use different models to
answer different questions but no
single model can answer all the
questions.
The model is only as good as its
assumptions

2 How Economists Think


Prices: Flexible vs. Sticky
It is assumed that the prices change
quickly for the equilibrium as shown in
pizza example.
This assumption, called market clearing.
Although market-clearing models assume
that all wages and prices are flexible, in
the real world some wages and prices are
sticky.

2 How Economists Think


Microeconomic Thinking and
Macroeconomic Models
Microeconomics is the study of how
households and firms make decisions
and how these decision makers
interact in the marketplace.

2 How Economists Think


Firms and individuals optimize, they
try to maximize their benefits or
satisfaction in a given set of options
or constraints.
And satisfaction or profit or benefits
in economics can be called utility.
And microeconomics assume that
every micro unit of the economy tries
to maximize their utility in a given
set of constraints.

2 How Economists Think


We should try to understand that it is
the unit that make the whole and
microeconomics is the basis of
macroeconomics.
One cannot neglect the units to
decide about macro units or
variables.

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