Applied Macroeconomics Dr. Ming-Jang Weng Dept. of Applied Economics National Univ. of Kaohsiung Taiwan

Applied Macroeconomics

Dr. Ming-Jang Weng

Dept. of Applied Economics

National Univ. of Kaohsiung

Taiwan

Part 1

Introduction

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-3

Goals of Part I

Introduce students to the main concepts in macroeconomics (Ch. 1)

Introduce national income accounting and major economic magnitudes (Ch. 2)

Chapter 1

Introduction to Macroeconomics


Goals of Chapter 1

Major economic issues—growth, business cycles, unemployment, inflation, the international economy, macroeconomic policy, aggregation (Sec. 1.1)

What macroeconomists do—forecasting, analysis, research, data development (Sec. 1.2)

Why macroeconomists disagree—Classicals vs. Keynesians; the text's approach (Sec. 1.3)


1.1 What Macroeconomics Is About

Long-run economic growthGrowth of output in United States over timeSources of growth—population, average labor

productivity growth Business cycles

Short-run contractions and expansions in economic activity

Downward phase is called a recession Unemployment; U.S. experience Inflation

U.S. experienceDeflation (falling prices)Inflation rate: the percentage increase in the level of

prices


Figure 1.1 Output of the U.S. economy, 1869–2002


Figure 1.2 Average labor productivity in the United States, 1900–2002


Figure 1.3 The U.S. unemployment rate, 1890–2002


Figure 1.4 Consumer prices in the US, 1890–2002


1.1 What Macroeconomics Is About

The international economyOpen vs. closed economiesTrade imbalances; the trade deficit and surplus

Macroeconomic policyFiscal policy

Effects of changes in federal budget U.S. experienceRelation to trade deficit

Monetary policy; the FedAggregation; from microeconomics to

macroeconomics


Figure 1.5 U.S. exports and imports, 1869–2002


Figure 1.6 U.S. Federal government spending and tax collections, 1869–2002


1.2 What Macroeconomists Do

Macroeconomic forecastingRelatively few economists make forecasts Forecasting is very difficult

Macroeconomic analysis Private and public sector economists—analyze

current conditions Does having lots of economists ensure good

macroeconomic policies? No, since politicians, not economists, make major decisions


1.2 What Macroeconomists Do

Macroeconomic researchGoal: to make general statements about how the

economy worksTheoretical and empirical research are necessary for

forecasting and economic analysisEconomic theory: a set of ideas about the economy,

organized in a logical frameworkEconomic model: a simplified description of some

aspect of the economy Usefulness of economic theory or models depends on

reasonableness of assumptions, possibility of being applied to real problems, empirically testable implications, theoretical results consistent with real-world data

Data development—very important for making data more useful


1.3 Why Macroeconomists Disagree

Positive vs. normative analysis Classicals vs. Keynesians

The classical approachThe economy works well on its own; the "invisible

hand" leads people, acting in their own best interests, to maximize the general welfare

Wages and prices adjust rapidly to get to equilibrium

Result: Government should have only a limited role in the economy



The Keynesian approachThe Great Depression: Classical theory didn't

appear to workKeynes: Persistent unemployment occurs because

wages and prices adjust slowly, so markets remain out of equilibrium for long periods

conclusion: Government should intervene to restore full employment

The evolution of the Classical-Keynesian debateKeynesians dominated from WWII to 1970Stagflation led to a classical comeback in the 1970sLast 30 years: excellent research with both

approaches



A unified approach to macroeconomicsTextbook uses a single model to present both

classical and Keynesian ideasThree markets: goods, assets, laborModel starts with microfoundations: individual

behaviorLong run: wages and prices are perfectly

flexibleShort run: Classical case—flexible wages and

prices; Keynesian case—wages and prices are slow to adjust

Documents

Applied Macroeconomics Dr. Ming-Jang Weng Dept. of Applied Economics National Univ. of Kaohsiung Taiwan