Applied Macroeconomics Dr. Ming-Jang Weng Dept. of Applied Economics National Univ. of Kaohsiung Taiwan
Dec 21, 2015
Applied Macroeconomics
Dr. Ming-Jang Weng
Dept. of Applied Economics
National Univ. of Kaohsiung
Taiwan
Part 1
Introduction
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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
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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)
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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
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Figure 1.1 Output of the U.S. economy, 1869–2002
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Figure 1.2 Average labor productivity in the United States, 1900–2002
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Figure 1.3 The U.S. unemployment rate, 1890–2002
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Figure 1.4 Consumer prices in the US, 1890–2002
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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
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Figure 1.5 U.S. exports and imports, 1869–2002
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Figure 1.6 U.S. Federal government spending and tax collections, 1869–2002
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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
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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
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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
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1.3 Why Macroeconomists Disagree
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
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1.3 Why Macroeconomists Disagree
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