topic 1

topic 1

INTRODUCTION TO MACROECONOMICS

1.1 Macroeconomics studies the way in which market interactions determine overall economic activity.

The main economic phenomena we study are:

• growth
• inflation
• business cycles

Modern macroeconomics is based on modelling the behavior the behavior of individual economic agents (households and firms) and then extending the analysis to reach conclusions about the macroeconomy. This is why macroeconomics requires a base of microeconomics.

The division between microeconomics and macroeconomics is somewhat artificial. Until the 1930s there was no separate field of macroeconomics.

1.2 How macroeconomics studies questions.

The ideal is to follow the scientific method, with facts/observations informing theory. In practice this is more difficult than is the case with microeconomics because the power of econometrics is weak.

One of the most interesting areas of macroeconomics is experiments. Experiments allow control of extraneous influences.

A standard outline of the approach is:

• document facts ("empirical regularities")
• develop a model
• compare predictions with original facts ("calibration")
• use the model to make testable predictions

Economic models use some general terms:

• parameter
• exogenous variable
• endogenous variable
• "experiment" means different things to different people

Macroeconomists commonly use "experiment" to mean changing parameters in a model and then observing the effect on endogenous variables.

1.3 Overview

The long-run is amazing - living standards have increased enormously.

Output often deviates from long-run potential output. This is the short-run business cycle.

To convert dollar ("nominal") GDP into "real" terms we need to measure inflation.

"Open economy macroeconomics" is the extension of closed economy macroeconomics to the international economy.