Topic One:  Introduction, Where Macroeconomics Is and How it Got There

 

Macroeconomics: 

 

The standard trends of macroeconomics: 

 

  1.  

  2.  

  3.  

  4.  

 

Economists differ over the “correct” model.

 

However, most economists have the same normative goals (as per Milton Friedman):

 

1.

2.

3.

 

How these goals are achieved is where the disagreement comes into play.

 

There are actually several ways by which we could categorize the different schools of thought (with some overlap):

 

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

 

The Historical Context

 

Prior to 1930s:  Adam Smith

 

 

 

Marx, Malthus –

 

Then:  The Great Depression

 

John Maynard Keynes

Unemployment became the focus. 

 

 

 

 

 

 

 

 

Although there were economists, especially F. A. Hayek and his teacher Ludwig von Mises, who were fighting the ideas, Keynesian economics won the day.  Why?

            Different theories:

1.        

2.        

3.        

4.        

 

Why the depression?  Keynes focused on aggregate demand – and this focus stuck! 

 

 

So did Keyne’s policies work?  

 

 

The Fall of the Keynesian Consensus: 

 

Most economists agree that from the end of WWII to 1973, industrial market economies enjoyed unparalleled prosperity.  But why? 

 

 

Theoretical Schizophrenia in Post-War Economics

 

The mainstream microeconomics teaches market clearing with flexible prices.  This contradicted Keynesian macroeconomics.

 

 

“Neoclassical Synthesis” (via Samuelson).  This blending of classical and Keynesian ideas became the standard approach to macroeconomics. 

 

 

A real split between micro and macroeconomics. 

 

By the 1960s, Phillips Curve:

 

Then came the 1970s and stagflation (simultaneous increase in both inflation and unemployment): 

This paved the way for monetarist and new classical counter-revolutions.

 

But, the undisputed reign of Keynesian economics is over.

 

Schools of Thought in Modern Macroeconomics

 

  1.  

  2.  

  3.  

  4.  

  5.  

  6.  

  7.  

 

 

 

 

 

 

 

Some Basics Before We Get Started

 

  1. Normative vs. Positive: 

 

 

  1. Politics and Economics: 

 

 

  1. Feasible Goals: 

 

 

Important Concepts and Measures in Macroeconomics

 

Potential Output: 

 

Business Cycle: 

 

Unemployment Rate: 

 

Natural Rate of Unemployment: 

 

frictional and structural unemployment

 

Inflation: 

 

Nominal Interest Rate: 

 

Real Interest Rate:

 

Monetary Policy: 

 

Fiscal Policy: 

 

Balanced Budget: 

 

Budget Surplus: 

 

Budget Deficit: 

 

The Deficit: 

 

Balance of Payments:

 

Trade Balance: 

(exports)

(imports)

 

 

Trade Policy: 

 

Demand-Side Policies: 

 

Supply-Side Policies: 

 

 

 

 

Measuring the Economy

 

Gross Domestic Product (GDP): 

 

Can be calculated in two ways:

 

1. 

2. 

 

The Income-Output Identity

 

            The Circular Flow Diagram

 

 

 

 

 

 

 

 

 

Accounting identity for the National Income and Product Accounts.

 

Four Categories of Expenditures: 

           

           

Real vs. Nominal GDP: 

 

Recession: 

 

Inflation Rate:

 

The Consumer Price Index (CPI): 

 

 

The Producer Price Index (PPI):

 

Unemployment Rate:

 

            Problems: 

 

 

Labor Force Participation Rate: 

 

 

Labor Productivity: