Презентация Introduction to macroeconomics (Lecture 1) онлайн

Содержание слайда: Macroeconomics

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Содержание слайда: Lecture 1 Introduction to Macroeconomics The Subject Matter of Macroeconomics The History of Macroeconomics Key Macroeconomic Issues Principles of Macroeconomic Analysis Macroeconomic Agents and Macroeconomic Markets The Model of Circular Flows The Macroeconomic System

Содержание слайда: What is Macroeconomics? Macroeconomics is the branch of economics. Economics is a discipline which studies how scarce economic resources are allocated and used to maximize production for a society. It is a social science which deals with economic behavior of individuals and organizations engaged in the production, distribution and consumption of goods and services. The study of economics is subdivided into two general fields:

Содержание слайда: The History of the Term «Macroeconomics» In translation from Greek «micro» means «small», «macro» – «large»; аnd «ecоnоmics» – «housekeeping» For the first time the term “macroeconomics” was used in 1933 by the Norwegian economist-matematician Ragnar Frisch (Nobel prize, 1969) who introduced the concepts of “microeconomic” and “macroeconomic dynamics”. In 1941 Piet De Wolff divided economic theory into microeconomics and macroeconomics.

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Содержание слайда: Macroeconomics versus Microeconomics

Содержание слайда: Using Microeconomics in Macroeconomics Macroeconomics is based on microeconomics (has microeconomic foundations), because macroeconomic events are the result of the decisions of millions of individual agents, maximizing their own welfare and arise from the interaction of many people.

Содержание слайда: Macroeconomics as a Special Discipline But … despite both disciplines use the same variables, macroeconomic variables are not just a simple sum of variables that reflect individual decisions (examples: total output, aggregate demand, general price level, etc); not every statement that is true for an individual is always true for the entire economy (example: the paradox of thrift). Thus, microeconomics and macroeconomics have specific subjects and methods of analysis and are based on specific approaches and theories. They are even taught as separate disciplines.

Содержание слайда: The founder of macroeconomics as a special part of economics was a prominent British economist, lord John Maynard Keynes, who in 1936 published his famous book «General Theory of Employment, Interest and Money».

Содержание слайда: The History of Macroeconomics The ХVIII century – beginning of the ХХ century – classical school in economic theory. David Hume «Of the Balance of Trade», 1752 – the analysis of the relation between the money stock, trade balances and the price level; laid the foundation of the quantity theory of money. The main ideas and concepts of the classical approach were developed in the works of Adam Smith («An Inquiry into the Nature and Causes of the Wealth of Nations», 1776), David Ricardo («On the Principles of Political Economy and Taxation», 1817), Jean-Baptiste Say («Traité d’économie politique ou Simple exposé de la manière dont se forment, se distribuent et se consomment les richesses», 1803; «Cours complet d’économie politique pratique», 1828–1830), William Stanley Jevons («The Theory of Political Economy», 1871), Leon Walras («Elements of Pure Economics», 1874), Alfred Marshall («The Principles of Economics», 1890), John Bates Clark («The Distribution of Wealth», 1899), Arthur Pigou («The Economics of Welfare», 1920).

Содержание слайда: Classical Economists: the Gallery

Содержание слайда: Classical School: Basic Propositions Economy consists of two separate sectors: the real sector and the money sector  real variables do not depend from nominal variables = the principle of «classical dichotomy» and «neutrality of money». There is perfect competition in all the markets  economic agents cannot influence market prices, they are price-takers. All the prices are flexible and are set by the relation between supply and demand  the principle of A.Smith’s «invisible hand» and «market clearing». Government has no need to intervene in the regulation of the economy  the principle «laissez faire, laissez passer».

Содержание слайда: Classical School: Basic Propositions The main economic problem is the scarcity of resources, which hence are fully used, and the economy is always at its potential level of output. The scarcity of resources poses puts in the forefront the problem of production  the analysis of economy’s behavior from aggregate supply side («supply-side analysis»). The «Say’s law» acts in the economy: «supply creates its own demand», because each economic agent is simultaneously a seller and a buyer. The problem of expanding of production possibilities is resolving slowly, the mutual market adjustment is a long-term process  the description of economy’s behavior in the long run («long- run analysis»).

Содержание слайда: The History of Macroeconomics But up to the ХХ century macroeconomics didn’t exist as a separate discipline. Three events had the fundamental importance for the development of macroeconomics: the beginning of the collection of economic information and systematization of aggregate data (the period of the I World War) that provided the empirical base for macroeconomic research: 1920-s – the elaboration of the System of National Income and Product Accounts (NIPA) – Simon Kuznets (Nobel prize, 1971) and Richard Stone (Nobel prize, 1984); the substantiation of the fact that the business cycle is a recurring phenomenon (1920-s – Wesley Clair Mitchell ); the Great Depression (1929–1933) – world economic catastrophe (the Great Crash) that contradicted to the postulates of classical economists about the self-correcting economy.

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Содержание слайда: Keynes’ Approach: Basic Propositions The real sector and the money sector are related to each other  money affect real variables, the interest rate is set in the money market rather than in the loanable funds (or capital) market. There is imperfect competition in the markets. Prices (nominal variables) are rigid («sticky»). Equilibrium in the markets is settled, but not on the full-employment level. Private sector expenditures are unable to provide the level of aggregate demand required to obtain the potential level of output, and, therefore, government intervention and government regulation is needed. In the conditions of underemployment of economic resources aggregate demand becomes the main problem of the economy («demand-side analysis»). Government stabilization policy affects economy in the short run, and price rigidity exists relatively for not long period  the description of the economy’s behavior in the short run («short-run analysis»).

Содержание слайда: The central point of Keynes’ theory: the market economy does not guarantee the economy’s stability, and, therefore, to counteract slumps and recessions and high unemployment government should intervene in the economic performance and conduct the stabilization policy. The central point of Keynes’ theory: the market economy does not guarantee the economy’s stability, and, therefore, to counteract slumps and recessions and high unemployment government should intervene in the economic performance and conduct the stabilization policy. During 25 years after the II World War – the period of fast economic growth in most countries – the belief that government is able to prevent recessions by actively using fiscal and monetary policy. But in the middle of 1970-x – stagflation (the combination of high inflation with stagnation, i.e. low and even negative rates of economic growth and high unemployment) – the conclusion: the key source of instability is the stabilization policy itself  «Neoclassical counterrevolution».

Содержание слайда: Schools Alternative to Keynesian Approach Monetarism (Milton Friedman, Edmund Phelps ) - the market economy is a self-correcting system and is able to return to the potential level of output by itself; - economic fluctuations are the result of the changes in the money stock, therefore, to provide stability the Central bank should maintain the constant money growth rate («monetary rule»); New Classical Macroeconomics (Robert Lucas, Thomas Sargent, Neil Wallace) (the rational expectations theory) - if the economic agents’ expectations are rational, government policy is ineffective; Real Business Cycle Theory (Finn Kydland, Edward Prescott) - the source of economic disturbances are technological shocks rather than government policy. Supply-side Economics (Arhur Laffer) - government policy should be aimed to stimulate aggregate supply rather than aggregate demand.

Содержание слайда: Schools Alternative to Keynesian Approach: the Gallery

Содержание слайда: Development of Macroeconomics Macroeconomics as a science is permanently developing  changes concern both the sense of issues and problems under study and of answers and remedies proposed. These changes are the result of the impact of two groups of factors:

Содержание слайда: Diversity of Macroeconomic Theories The diversity of approaches to the explanation of macroeconomic events and especially problems of macroeconomic policy is caused by the fact that different groups of macroeconomists construct their theories by using different assumptions, may differently interpret the same events, and therefore, come to different theoretical and practical conclusions and give different political recommendations. This diversity of ideas is due to the complexity of macroeconomic problems and allows to examine them comprehensively, thoroughly, and from different points of view.

Содержание слайда: Key Questions Macroeconomists Try to Answer

Содержание слайда: Questions Macroeconomists Try to Answer Why interest rates fluctuate? What impact have the changes in the money and stock markets on the economy? What are the determinants of the exchange rates? Is it good to have a strong or a weak domestic currency? Is government policy able to affect long-term economic growth? Can it eliminate or at least smooth economic fluctuations during the business cycle? How economic changes in one country effect the situation in others? Answer: study macroeconomics and be informed!

Содержание слайда: Key Macroeconomic Issues Overall output - long-run changes – economic growth - short run fluctuations – business cycle Unemployment Inflation Interest Rates Government Budget Balance of Payments and Exchange Rates Macroeconomic Policy

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Содержание слайда: The Importance of Macroeconomics Macroeconomic theory reveals and explores the regularities of macroeconomic processes and events; aims to explain macroeconomic phenomenon; helps to understand the cause-and-effect relations in the aggregate economy; serves the base for elaboration of principles, tools and measures of macroeconomic policy that might prevent or improve economic performance and can in the best way serve to the needs of the society; provides the framework to make forecasts of future economic development, to predict future economic problems. Macroeconomics represents a fascinating intellectual occupation that has great practical importance.

Содержание слайда: Principles of Macroeconomic Analysis Macroeconomics is the social science and the controlled experiment is impossible. Besides, economic phenomena are very complex. That’s why economists use models. Economic model is a stylized representation of the economy, a generalization and abstraction of reality that seeks to isolate a few of the most important determinants (causes) of an economic event in order to provide a better understanding of that event. Economic models are constructed and used to simplify the analysis of complex economic reality; to examine the relationship between economic phenomena and the regularity of their development; to understand what goes on in the economy and how the economy works; to develop policies that might prevent, correct, or alleviate economic problems and improve the situation in the economy; to forecast future development of economic process.

Содержание слайда: Macroeconomic Models To study the most important elements that explain how the whole economy works, economic models are based on assumptions, which cut off details unimportant for the analysis of a certain economic process or phenomenon and reduce the complexity of economic behavior. Once modeled, economic behavior may be presented as a relationship between a dependent (endogenous) variable and a few independent (exogenous) variables.

Содержание слайда: Frequently, the endogenous variable is presented as depending upon only one exogenous variable, with the assumption that all the other exogenous variables are held constant. This principle is called by the Latin term ceteris paribus, meaning «other things being equal». Frequently, the endogenous variable is presented as depending upon only one exogenous variable, with the assumption that all the other exogenous variables are held constant. This principle is called by the Latin term ceteris paribus, meaning «other things being equal». Models should be simple and focused on the examination of the phenomenon or process under study. They do not need to be «realistic», but should be consistent with the facts. There must be the possibility of the transition from one model to the other depending on the context. There can be no one grand «true» model that exactly and completely describes the economic reality.

Содержание слайда: Types of Relationship between Variables An economic model specifies whether the dependent and independent variables are positively or negatively related.

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Содержание слайда: Importance of Using Graphs A graph is a way of: visual presentation of the relationship and links between economic variables or of the behavior of a variable over time; visual demonstration of ideas and theories, which are less clear and even may be misinterpreted or misunderstood, when are only verbally explained; visual illustration of models proposed by economists. In the course of economics graphs are used for the better perception of theoretical propositions by students.

Содержание слайда: Types of Visual Data Presentation

Содержание слайда: Types of Analysis Economic analysis is the combination of: functional (algebraic) analysis; graphical (visual) analysis; intuitive (substantial verbal) analysis. In our course of macroeconomics the intuitive analysis (intuition) will be of primary importance, because the main goal of the economist is not simply to declare relations between macroeconomic phenomena, but first of all and what is more – to explain its economic sense.

Содержание слайда: Algebraic and Graphical Analysis: Correlation For simplicity sake in our analysis we will use the assumption about linear relationship between variables that can be represented by the following equations: y = a + bx or y = a – bx

Содержание слайда: Algebraic and Graphical Analysis: Correlation signs «+» or «–» characterize the type of the relationship between exogenous and endogenous variable (positive or negative, respectively) that is represented by the positive or negative slope of the line; b – the sensitivity (the extent of reaction) of the endogenous variable to the change of the exogenous variable, measured as the tangent of the angle ; its change results in the change of the slope of the line.

Содержание слайда: Positive and Normative Economics

Содержание слайда: The Model of Supply and Demand This is the basic economic model. It describes the ubiquitous relationship between buyers (demanders of goods and services, or consumers) and sellers (suppliers of production, or producers) in the market and serves to determine market equilibrium. Equilibrium is the state in the market when the quantity that consumers wish to purchase exactly equals the quantity producers wish to supply, and there is no pressure for change. Geometrically it is the point of intersection of the market demand curve (D) with the market supply curve (S). The price and the quantity that equate quantity demanded with quantity supplied, are known, respectively, as the equilibrium price and the equilibrium quantity.

Содержание слайда: How Market Equilibrium is Reached When there is the disequilibrium, and the price is equal either to P1 that is higher than PE, or to P2 that is lower than PE, the price will start to change in order to equate the quantity demanded by the buyers with the quantity supplied by the producers.

Содержание слайда: Market Clearing Market clearing is an alignment process whereby decisions between suppliers and demanders reach an equilibrium. When there is the change either in the market demand, or in the market supply, the new equilibrium in the market will be attained via price adjustment.

Содержание слайда: Prices: Flexible versus Sticky Economists typically assume that the market will go into an equilibrium of supply and demand. But, assuming that markets clear continuously is not realistic. For markets to clear continuously, prices would have to adjust instantly to changes in supply and demand, i.e. must be fully flexible. But, evidence suggests that prices and wages often adjust slowly and in actuality, some of them are sticky. The difference between macroeconomic theories is primarily based on the assumption of how quickly the prices change and thus how quickly all the markets clear. .

Содержание слайда: Long-run and Short-run Analysis Long-run issues are analyzed under the assumption of flexible prices (market clearing). The level of output is determined by the amount of all available economic resources and by the existing in the economy technology (i.e. by the production function or aggregate supply). Such level is called potential output. Its changes are associated with the long-run economic growth. Short-run issues are analyzed under the assumption of rigid (or sticky) prices. The level of output is mainly determined by the aggregate expenditures in the economy (or aggregate demand). Such level is called actual output. Its changes are associated with the business cycle.

Содержание слайда: Long-run Growth versus Business Cycle

Содержание слайда: Types of Economic Resources The amount of output that can be produced in the economy is determined by the quantity, quality and productivity of economic resources, or factors of production, that are commonly separated into four groups: Labor: the physical and mental effort of people. This can be increased by education, training and experience (human capital); Physical capital: the stock of manmade equipment (like machinery, tools, vehicles, computers) and structures (buildings, constructions, real estate) that are used to produce goods and services; Land or Natural resources: inputs provided by nature, such as land, rivers, mineral deposits, oil and gas reserves. They come in two forms: renewable and non-renewable. Entrepreneurial ability: the ability to identify opportunities and organize production (that is the effort and know-how to put the other resources together in a productive venture), and the willingness to accept risk in the pursuit of rewards.

Содержание слайда: Time Intervals in Macroeconomics Olivier Blanchard in his textbook distinguishes three time periods:

Содержание слайда: Aggregation The subject matter of macroeconomics is to study aggregate economic behavior, i.e. behavior of aggregate (macroeconomic) agents on aggregate (macroeconomic) markets. There are four macroeconomic agents and four macroeconomic markets.

Содержание слайда: Macroeconomic Agents Households the owners of economic resources (suppliers of factors of production); the earners of national income; the main consumers of goods and services (demanders for aggregate output); the main savers (lenders).

Содержание слайда: Macroeconomic Agents Government the producer of public goods; the consumer of the part of aggregate output (purchaser of goods and services); the redistributor of national income (through collecting taxes and making transfer payments); lender or borrower in the financial markets (depending on the state of government budget); the regulator of economic activity: - establishes and supports institutional basis for the economic performance (“rules of the game”); - conducts macroeconomic policy.

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Содержание слайда: Macroeconomic Markets

Содержание слайда: Model of Circular Flows We begin with the simple or private or two-sector model, consisting of two macroeconomic agents (households and firms) and two macroeconomic markets (goods market and resource market).

Содержание слайда: Simple (Private Sector) Diagram of Circular Flows

Содержание слайда: Private Sector Model of Circular Flows Goods flow from firms to households through the goods (product) market and economic resources flow from households to firms through the resource (factor) market. Firms pay factor incomes (wages, rent, interest and profits) to households - the owners of economic resources and households spend their incomes buying goods and services. Hence, aggregate income is equal to aggregate expenditures (all income is spent, all expenditures translate in somebody’s income); aggregate expenditures are equal to aggregate product aggregate product is equal to aggregate income. Movement of income, expenditures and product form a circle. Thus, we have circular flows.

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Содержание слайда: a deposit in a bank, or a purchase of a security (an equity or a bond), issued by firms. Saving of households are used by firms to buy investment (or capital) goods (equipment and structures), necessary to maintain and to expand the level of output. Spending, made by firms for the purchase of investment goods, are called investment spending. To obtain funds, firms take loans from the banks or issue and sell securities to households. Financial markets connect saving and investment.

Содержание слайда: Expenditures are now divided into two parts: - consumption spending of households (C); - investment spending of firms (I). AE = C + I Income is also divided into two parts: - consumption spending (C); - saving (S). Y = C + S

Содержание слайда: The equalities between aggregate expenditures (AE) and aggregate income (Y), and between aggregate income and aggregate product are still held: The equalities between aggregate expenditures (AE) and aggregate income (Y), and between aggregate income and aggregate product are still held:

Содержание слайда: The Role of the Government Adding government to our analysis, we get a three-sector model. The influence of the government sector is executed through:

Содержание слайда: Diagram of Circular Flows with Government (Mixed Closed Economy)

Содержание слайда: The Three-Sector Model of the Economy Now the sum of aggregate expenditures consists of three elements: AE = C + I + G and aggregate income Y = C + S + Tx – Tr We get two injections – G and Tr and a leakage – Tx: AE  Y  C + I + G  C + S + Tx – Tr  I + G + Tr  S + Tx With the appearance of the government sector aggregate income, earned by households, (national income Y) differs from the income that they can use for consumption and saving (disposable income YD): YD = Y – Tx + Tr YD = C + S

Содержание слайда: Government Budget Taxes represent the revenues of the government. Government purchases of goods and services and transfers are its expenditures. The balance between the government revenues and expenditures is called government (or public) budget. If revenues exceed expenditures (Tx > G + Tr), there is budget surplus. If they are equal (Tx = G + Tr), the budget is balanced. If expenditures exceed revenues (Tx < G + Tr), government runs budget deficit. To finance budget deficit government either takes a loan (borrows funds) from financial market, issuing and selling government bonds to the public or prints money. If there is budget surplus, government is a saver. The excess of government revenues over government expenditures is called public (or government) saving (SG): SG = Tx – (G + Tr)

Содержание слайда: Diagram of Circular Flows with Government and with Foreign Sector (open economy)

Содержание слайда: The Role of the Foreign Sector Now aggregate product Y ≡ C + I + G + (Ex – Im) This equation is known as the national accounts identity Difference between exports and imports is called net exports (NX) NX = Ex – Im and represents country’s trade balance. The country can have trade surplus (Ex > Im) or trade deficit (Im > Ex). In the case of trade surplus the country is a saver (a lender) and there is capital outflow. In the case of trade deficit the country is a borrower and there is capital inflow: foreign sector saving (SF) move to the country’s economy. SF = Im – Ex

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Содержание слайда: Stock and Flow Variables

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Содержание слайда: The Macroeconomic System

Содержание слайда: Macroeconomic Policy

Содержание слайда: Aggregate Demand and Aggregate Supply