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Economics 101: Introduction and
Overview
Outline
Scope of macroeconomics
Methodology
Main macroeconomic models
Very long run
Long run
Short-run
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Scope of macroeconomics
The scope of macroeconomics
Macroeconomics is the study of the economy as a
whole.
Macroeconomics studies the economic behavior
and policies that affect macro variables such as
the total output of goods and services, inflation,
unemployment and exchange rates
Some of the questions it seeks to answer include:
What determines the rate of inflation?
How much did the economy grow this year?
What is the rate of unemployment?
How can government policies affect these trends?
Scope of macroeconomics
The job of explaining how the economy as a whole
works falls on macroeconomists
Collect data on incomes, prices, unemployment
and many other variables from different periods
and from different countries
Attempt to formulate general theories from data
While the basic principles of macroeconomics do
not change, the macroeconomist must apply these
principles with flexibility and creativity to meet
changing circumstances.
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Scope of macroeconomics
Long and Short run in Macroeconomics - Issues
that it is concerned with at different time
frames
Long-run - Macroeconomics studies the issues of
growth, in particular, the growth of the
productive capacity of the economy.
E.g. the growth of output is like the side or slope of
a mountain that is seen from afar as ascending.
In the long-run, we expect nations to grow. The
issue is how fast or how slow the nation is growing
relative to the others.
Scope of macroeconomics
In the short-run: Macroeconomics studies the
issue of why the path to growth is not smooth.
In our mountain analogy, we note that the side of
the mountain is not smooth
Translating to economic terms, we expect that the
economy would experience fluctuations in growth.
Output on a year to year basis could be increasing
rapidly or slowly, it could even decline or decline
continuously as in a recession.
Thus, the study of macroeconomics is likewise
concerned about explaining why these fluctuations
occur.
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Scope of macroeconomics
Macroeconomics vs Microeconomics
Unit of analysis:
Microeconomics is concerned with the behavior of
individual economic units such as households and
firms.
Micro concerned with outputs and prices in specific
markets
Macro concerned with aggregate markets as a whole,
e.g. goods market, (rather than the market for
pineapples), labor market (rather than the market for
female economics professors), asset markets (rather
than the market for PLDT stocks).
Scope of macroeconomics
Macroeconomics vs Microeconomics
By focusing our attention on the aggregate, we go
beyond the details of the behavior of economic
agents.
Advantage: facilitates understanding of the
variables
Disadvantage: some details matter
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Scope of macroeconomics
Macroeconomics vs. Microeconomics
Link between macroeconomics and
microeconomics:
Aggregate variables are just the sum of individual
decisions, macro theory therefore rests on a
microeconomic foundation
Optimizing behavior of households and firms are
implicit in most of the macroeconomic models -
consumers are still assumed to maximize utility,
firms are still assumed to maximize profit or
minimize costs
Micro behavior is in the background, just not shown.
Methodology
Main methodology - the use of models
Models will be utilized as the main tool in our study
of macroeconomics
Models:
Illustrate the key features of the object
Abstraction, only the essence of the object is filled
in
Explain key relationship between economic
variables
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Methodology
Main methodology - the use of models
Models contain:
Endogenous variables variables that the
model tries to explain. Also known as
dependent variables.
Exogenous variables variables that are taken
as given. Also known as independent variables.
Purpose of model is to explain how the
exogenous variables influence the endogenous
variables.
Embodied in the functional relationship between
the exogenous and endogenous variables.
Expressed as functions or graphs
Methodology
It matters what we include and what we assume
away in a model
Criterion for judging: Does the model include a
feature of the economy that is crucial to the issue
at hand?
Different questions also require different
assumptions. Endogenous variables may be
exogenous to one model and vice versa.
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Main Macroeconomic Models
Main macroeconomic models
Three time frames of concern are:
Very long run
domain of growth theory
focuses on the growth of productive capacity
Long run
treat productive capacity as given
given productive capacity determines output
fluctuations in demand determine prices and inflation
Short run
fluctuations in demand determine how much of capacity
is used and thus the level of output and employment
Models
Very long run : Growth
Growth theory as the main tool for analysis
Main issue: How the accumulation of inputs and
improvements in technology lead to an increased
standard of living
Main assumption: Labor and other resources are
fully employed
Growth theory seeks to explain growth rates
averaged over many years or decades and ignores
fluctuations that average out over the years
Growth rate: Usually measured by the rate at which
GDP or Gross domestic product is increasing
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Models
Factors that underlie growth a preview
Changes in the factors of production
changes in the available amount of resources such as
labor, and capital stock affect the growth of the
economy
labor force - increases due to increases in
population and labor force participation
capital stock - increases because of investment
Productivity increases
how efficiently we are utilizing resources also
underlies growth of the economy
increases in efficiency effectively increases the
resources that are available
increase in the stock of knowledge is one of the
factors that affect efficiency
Models
Long run: The Economy with Fixed Productive
Capacity
Features:
Level of output is determined solely by supply-
side considerations, i.e., by the productive
capacity of the economy
Price level is determined by the level of demand
relative to the output the economy can supply
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Long-run AD and AS
Y
P
P
o
Y
o
AS AD
Models
AS- depicts for each given price level the
quantity of output firms are willing to supply
AD depicts for each given price level the
quantity of output at which the goods and
money market are at equilibrium
Note the difference between the definition of the
aggregate demand and demand curves in
microeconomics.
The details of the AD curve will be derived later.
The position of the AD depends on consumer
confidence, as well as monetary and fiscal policy
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Models
Main feature of the Long Run: AS is vertical
Output is where the AS curve hits the horizontal.
Since no amount of price changes will induce
firms to supply more since they are constrained
by the capacity of the economy.
Price can take on any value
Models
Main Findings:
Output is determined by AS alone.
Prices are determined by both AS and AD.
Link with the very long-run - Growth in
productive capacities shift the AS curve to the
right
Very high inflation rates are due to changes in
the aggregate demand.
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AS in the Very Long Run
Y
Y
0
P
t
Y
Y
1
Y
3
Y
4
Y
0
Y
1
Y
3
Y
4
Models
Short Run
Main feature: AS is flat
Short-run fluctuations in output is mostly the
domain of aggregate demand.
Main Finding: In the short-run output is
determined by aggregate demand alone and
prices are unaffected by the level of output.
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AD and AS: Short-run
Y
P
P
o
Y
o
AS
AD
Organization of course
Introduction
Overview
Macroeconomic Data
The big picture
Classical theory The economy in the long run
Growth theory The economy in the very long run
The economy in the short run
The details
Aggregate demand
Aggregate supply
Macro policy issues
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Organization of the course
International linkages
The Open economy
International adjustments
The microfoundations
Consumption
Investment
Money demand and supply
Synthesis
Main reference
Mankiw, N. Gregory, (2010) Macroeconomics,
7
th
ed. New York: Worth Publishers
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Course requirements and grading
system
Exams 80%
Homework/Exercise Sets 20%
Exemption Grade 2.0
Exemption grade basis 75% exams
25% exercises
Consultation days and hours:
Tuesdays and Thursdays, 9-12, 1-5
Wednesdays or Fridays 10-12
By appointment
UPSE Rm. 314
Secretary: Ms. Baby Santos, Rm. 212
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Class policies
Attendance
University rules prescribe that those with more than 6
unexcused absences would be dropped from the class.
Attendance would matter for those on the margins
Please strive to be on time.
Exams
Early exams for those who cannot make it because of
conflicts with other exams can be scheduled, subject to
formal letter of request and excuse slip from concerned
teacher.
No make-up exams
Class policies
Please - no pagers, cellphones and other
electronic devices in class
Please - no pagers, cellphones and other
electronic devices during exams.
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Class policies
ANY ACT OF
DISHONESTY WILL NOT
BE TOLERATED