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EC201 Intermediate Macroeconomics
EC201 Intermediate Macroeconomics
Contact details:
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Gianluigi Vernasca
Room: 5B
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ac
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1) What is Macroeconomics?
Macroeconomics is the study of the behaviour of large collections of economic agents
(aggregates)
...
By contrast, microeconomics deals with the economic decisions of individuals
(a typical consumer, a single firm, etc
...

For example: the decision by a firm to buy or not a particular machine used in its
production process is a microeconomic problem
...

Some of the questions that are addressed in Macroeconomics:
- What causes recessions?
- Can the government do anything to combat recessions? Should it?
- Why does the cost of living keep rising?
- Why are millions of people unemployed, even when the economy is booming?
- What is the government budget deficit? How does it affect the economy?
- Why there are poor countries? What policies might help them grow out of poverty?

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Therefore, the objective of macroeconomics is to explain some features of an
economy as a whole, and toward this end, macroeconomists collects data on many
aggregate variables and try to create theoretical models that can explain the behaviour
of such variables
...
There was a
persistent accumulation of wealth by one class of the society and the persistent
impoverishment of another
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Another example is John Maynard Keynes that wrote his General Theory after he saw
the Great Depression of 1929
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We will provide a more
rigorous definition of those variables in Lecture 2
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1 Real GDP per Person in the U
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Economy
Mankiw: Macroeconomics, Sixth Edition
Copyright © 2007 by Worth Publishers

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In this Figure we have the real GDP per capita
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We can say that: the real GDP per capita is
increasing over time; this fact tells us that today people enjoy a higher standard of
living than people in the past
...
There are periods, for
example during the great depression, where the real GDP falls, while there other
periods where it raises
...
In practice, the real GDP
series fluctuate over time, and the fluctuations are called Cycles
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The second series is the Inflation Rate:

Figure 1
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S
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When inflation is decreasing, we call
that a Deflation
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Furthermore, you can see that there is not a trend as in the case of the real GDP,
meaning that inflation does not tend to grow steadily over time
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3 The Unemployment Rate in the U
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Economy
Mankiw: Macroeconomics, Sixth Edition
Copyright © 2007 by W orth Publishers

Notice first of all, that unemployment is never zero in the economy (it cannot be
negative by definition)
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Below is the graph of the unemployment rate in US (% annual) from 2000 to 2010
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% Unemp
Credit crunch

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2) Why to learn Macroeconomics?
The main answer is: because macroeconomics affects the well-being of societies
...
Overall production in many countries is
contracted because of the reduced access to credit by firms
...
Moreover, it means fewer vacancies in the labour market and
therefore it is more difficult finding a job, etc
...
Think about the debt crisis in the
EURO zone, etc
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Here are some other examples
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U
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Unemployment and
Property Crime Rates

6000

10

property crime
(right scale)

%
8
6
4

per
100,000
5000 population
4000

unemployment
(left scale)

3000

2
0
1970

2000
1980

1990

2000

While the correlation is clearly not perfect, there is a strong, visible association
between unemployment, an economic indicator, and crime, a social indicator
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outcome

1976

7
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8% Carter (D)

1980

7
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5% Reagan (R)

1984

7
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3% Reagan (R)

1988

5
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1% Bush I (R)

1992

7
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0% Clinton (D)

1996

5
...
3% Clinton (D)

2000

4
...
4% Bush II (R)

2004

5
...
3% Bush II (R)
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From this table, we can see that the state of the economy (summarised by the inflation
rate and the unemployment rate) has a huge impact on election outcomes
...
For example, in 1976, the rates of inflation and unemployment were
both high, the incumbent (Ford, R) loses
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And so on
...
etc
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To that aim we construct macroeconomic models
...

It is a simplified picture of the world that addresses the particular question we want to
analyse
...
When
we do that, we describe the model economy in terms of a few variables
...
For example Y stands for
“production” or “aggregate income”, P for “the price level” and i for “the interest
rate”
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The
economic system is a system of relations between economic variables
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First we need to make some simplifying assumptions
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An important digression about notation:
General functional form: shows only that the variables are related
...
etc
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Example: D (P,Y ) = 60 –
10P + 2Y
Supply equation: QS = S (P,Ps )
The supply curve shows the relationship between quantity supplied and price, other
things equal
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In particular, when aggregate income increases, there are more resources to
spend and therefore the demand of goods (in this case the demand for cars) increases
...

Now we can ask: what happens if there is an increase in the price of steel?
We know that the price of steel affects only the supply function
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The result is the following:

P

S2

Price
of cars

S1

P2
P1
D
Q2 Q1

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Q
Quantity
of cars

Notice that we have considered the effects of changes in aggregate income and the
price of steel
...

In every economic model we distinguish between exogenous and endogenous
variables and this distinction is very important
...

The values of exogenous variables are determined outside the model: the model takes
their values and behaviour as given
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For example, our supply-demand
model of the car market:
can tell us how a fall in aggregate income affects price and quantity of
cars
...

So we will learn different models for studying different issues
...

However, because economy-wide events arise from the interaction of many
consumers and many firms, macroeconomics and microeconomics are clearly linked
...

The main idea is to derive “explicitly” macroeconomic predictions from a model that
starts from the optimizing behaviour of individual agents (firms and consumers do the
best they can for themselves giver their objectives and the constraints they face)
...


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In the first part of the course, in most of the cases, we will not model “explicitly” the
microeconomic structure behind our macroeconomic analysis
...

Another important distinction in macroeconomics:
Prices: flexible vs
...

We normally assume that in the long run prices in the economy are fully flexible and
all markets clear
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For example,
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many labour contracts fix the nominal wage for a year or longer (the wage is a
price, in particular is the price of a good called labour)

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many magazine publishers change prices only once every 3-4 years

The economy’s behaviour depends partly on whether prices are sticky or flexible
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This helps explaining
unemployment (excess supply of labor) or why firms cannot always sell all the goods
they produce
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