C27BAIntroductory Macroeconomics

Lecture 1

Introduction to Macro

Introductory Macro – Information

This is the macro equivalent of Introductory Micro, and organised in broadly same way. See course outline available already on VISION for further information, including:

• course coordinator • lecturers • Lecture notes: incomplete hand-outs will be provided in

the lectures, and you can fill in the gaps as we go along; these partial notes will also be available on VISION.

• Tutorial Information - see Tutorial files

Introductory Macro - Information

Assessment for this course consists of

• XXXX

• XXXX

• Examination multiple choice, short questions and applied

questions

• The main text is Sloman J., Wride A. and Garratt D.,

Economics, 8th edition, Pearson, 2012

• You should also work on and make full use of the lecture

notes.

Introduction

Today:

• What do we mean by macroeconomics?

• What are the issues with which macro policy is

concerned ?

• Why should we study macroeconomics?

Macro Defined

• Macro analyses the economy as a whole

• Treats all outputs – supplies of different types of goods and services – together, as if they are a single composite good/service

• Puts together demands – for different types of goods and services –in a few aggregates, as consumption or investment or government spending or exports

• Refers to overall price level = average of prices for different goods and services

• Focuses on aggregate income, aggregate output

Macro Defined

• Macro abstracts from individual markets, individual consumers, individual producers, in order to concentrate on the overall relationships, e.g.

• between aggregate demand and output

• between demand and interest rates

• between demand and government spending

• between output and unemployment

• between output and prices

• of course, these aggregates matter for individuals, they affect employment opportunities, consumption possibilities, inflation rates, wealth

Macro Policy Concerns

• Growth: growth of national income (GDP) over long term, i.e. ‘decades’ not single years

• Inflation: % change in prices (over last 12 months)

• Unemployment: number (or rate) of people who want to work but can’t find jobs

• Business cycles: short term fluctuations in income

• Balance of payments/exchange rate (sometimes one, sometimes the other - see later): balance of payments is balance of monetary flows between domestic country and rest of world; exchange rate is value of domestic currency relative to foreign currency (currencies)

• Growth: typical target = higher growth than in past

• Inflation: typical target low = 1-3%

• Unemployment: typical target low, relative to past

• Business cycles: minimise short-term fluctuations in income

• Balance of payments: typical target zero balance of trade (exports minus imports)

• Exchange rate: specific fixed parity e.g. Denmark pegging to euro; or ‘competitive’ real exchange rate

Specific Targets

• Fiscal policy: taxes, government expenditure; put together simply in budget surpluses/deficits

• Monetary policy: interest rates, money supply (credit growth)

• Exchange rate (could decide to change fixed parity)

Policy: government sets instruments so as to hit targets; combination of external factors and policy generates outcomes (performance)

What has macro performance been like in recent decades?

first, long sweep, then recent shorter term period:

Macro Policy Instruments

GDP growth (% p.a.) 1971-2008(IMF International Financial Statistics)

-3

0

3

6

9

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

France Germany Italy Japan UK US

Inflation (% p.a.) 1971-2008(IMF International Financial Statistics)

-5

0

5

10

15

20

25

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

France Italy

Japan UK

US Germany

Standardised unemployment rates 1990-2008(OECD Economic Outlook)

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

France Germany ItalyJapan United Kingdom United States

• Big fluctuations = ‘cycles’ in growth, possibly becoming smaller by mid-2000s; Japan had high growth earlier, low growth later

• Inflation very high in mid-1970s, with smaller peaks in late 1970s/early 1980s and late 1980s; Japan had negative inflation in some years of late 1990s, 2000s

• Unemployment has some fluctuations corresponding to growth cycles, but note also trend rise for Germany, trend fall from mid-1990s in UK, Italy

Now consider recent period including crisis:

What should we take from this long sweep?

What should we take from these shorter period data?

[note 2013 is estimate, 2014-15 are forecasts]

• Major contraction of 2009 (2008), some rebound 2010 then renewed decline for most countries in graph, with weak recovery predicted (2% growth is below what we assume to be long run trend growth of potential output for most of these countries)

• Peak in inflation 2008, down most countries 2009 but up again 2010-11; UK inflation unusual (depreciation?)

• Big rises in unemployment for all major countries except Germany (where downward trend from 2005) and Japan; Spain!

Typical questions which macroeconomics addresses:

Why do economies experience booms and recessions, with falling and rising unemployment?

Can governments and/or central banks do anything to minimise these cycles?

Why did inflation in the UK go so high in the 1970s, and again in the late 1980s, and how was it brought under control from the 1990s?

What caused the current financial crisis? How has policy responded to it, and why?

- In this course we will learn how to think about the issues and how to answer these questions

In the UK, recent governments have tried to attain:

• inflation of around 2-3%, with some success

• growth of 2.5% (i.e. raise underlying growth), with result of okay growth but no real rise in growth

• unemployment lower if/when possible – some success from mid-1990s to mid-2000s

but they have largely ignored the balance of payments and the exchange rate – balance of payments mostly more or less okay until few years ago, then large deficits; exchange rate appreciated ‘too much’ 1996-97, stayed there, then (2008-9) depreciated a lot (too much?)

for many reasons, e.g.:

• growth of economy affects life chances of its citizens

• cyclical fluctuations involve unemployment at some times for some citizens

• inflation may have strong effects on distribution of real income

• cyclical fluctuations affect business opportunities as well as employment prospects

• you can’t understand modern politics without some macro

• this stuff is actually really interesting!

So why should we study macroeconomics?

• Key reading: Sloman Chapter 14

Key concepts:macroeconomics

growth (GDP)

inflation

unemployment

balance of payments

exchange rate

all mentioned here but to be defined more precisely in later lectures