Macroeconomics I

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Macroeconomics I

• Term/Time Winter/ThursdayFriday (1645-1815),
  Classroom B
• Lecturer Eiichiro KAWABE
• Contact Room 110, 03-3341-0674 or Ext. 8110
• ekawabe_at_grips.ac.jp
• Web http//www3.grips.ac.jp/ekawabe/
• Office hour Thursday (1300-1500)
• Textbook Mankiw, N. Gregory. Macroeconomics, 5th
  ed., Worth Publishers, 2003
• Grading Midterm Exam (50 tentative)
• Problem Sets You do not have to hand the answers
  in
• Questionnaire (Mandatory) By February 4

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Course Outline

• ltClassical Theory The Economy in the Long Rungt
• Feb 3 Introduction and the Data of
  Macroeconomics (Ch 12)
• Feb 4 National Income (Ch3)
• Feb 10 National Income (Ch3)
• Feb 17 Money and Inflation (Ch4)
• Feb 18 Open economy (Ch5)
• Feb 24 Review session
• Feb 25 Midterm Exam
• Prof. Okita will explore the business cycle
  theory the economy in the short run

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1. The Science of Macroeconomics

• Macroeconomics is the study of the economy as
  a whole economic growth, inflation, and
  unemployment.
• The most important macroeconomic variables
• Output/Income (Y)
• The total income of everyone in the economy
• (Real GDP)
• Price level (P) and inflation (p)
• The inflation rate measures how fast prices are
  rising.
• (GDP deflator, CPI)
• Unemployment
• How many people cannot get jobs even if they
  want.
• (Unemployment rate)

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The income/output per person (US)

• Recessions (mild) or Depressions (severe)

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The Inflation rate (US)
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The Unemployment Rate (US)
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How Economists think
An economist must be mathematician, historian,
statesman, philosopher in some degree. as
aloof and incorruptible as an artist, yet
sometimes as near the earth as a politician.
(Keynes)
Economists use models to simplify the real world
and understand what goes on in the economy.
No single model can answer all questions. Always
keep in mind what kinds of assumptions are used.
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The Model of Demand and Supply for pizza
Relationship between buyers and sellers in the
market.
Qd D(Price, Income) Qs S(Price, Tomatos
price)
In this model, is exogenous.
The point of intersection is called an Market
equilibrium.
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Market Equilibrium
A demand and supply curve for pizza
Demand the price increases, the quantity
demanded decreases.
Supply the price increases, the amount supplied
will increase.
A is where market decisions reach an equilibrium.
Suppose a sudden increase in the demand for
pizza. Demand will shift from D to D.
Upward pressure on the price to point B since the
shortage
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Market Clearing Process

• Economists typically assume that the market will
  go into an equilibrium of supply and demand
  instantly. (quickly enough to reach equilibrium)
• But, evidence suggests that prices often adjust
  slowly. Market clearing models assume that prices
  are flexible, in actuality, wages and some prices
  are sticky

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How to Understand an Economic Model

• Understand which variables are related to the
  phenomena.
• Examine the relationship between variables.
• Express the relationship as an equation (or a
  function)
• Understand the basic idea behind the equation.
• Especially, keep in mind whether positively or
  negatively related. Sometimes, the shape,
  whether straight or curved, is important.
• Find which variables are fixed.
• Exogenous variables (assumed or given by polices)
• Variables directly decided by the exogenous
  variables
• Using graphs, typically the demand and the supply
  in a certain market, explain how the endogenous
  variables are decided.
• It is sometimes assumed that markets are
  incredibly almighty, so markets can reach the
  equilibriums instantly.
• Examine how the endogenous variables are changed
  if one of the exogenous variables is changed.
  Compare the before and after.
• Especially, how the line expressing the
  relationship shifts is important.

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Three types (periods) of Macroeconomics

• Classical Theory The Economy in the Long Run
• Prices are enough flexible to reach equilibrium.
• Growth Theory The Economy in the Very Long Run
• Prices are enough flexible to reach
  equilibriums. Then, where and how does the
  economy at equilibrium go?
• ? Why does an economy grow?
• Business Cycle Theory The Economy in the Short
  Run
• Some prices are not flexible enough (sticky)

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Images of the three periods
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Macroeconomics and Microeconomics

• Macroeconomics
• The study of the economy as a whole economic
  growth, inflation, unemployment and external
  balance.
• Because macroeconomic events arise from many
  microeconomic interactions, we must consider its
  microeconomic foundation.
• Microeconomics
• The study of how households and firms make
  decisions and how these decision makers interact.
• Households and firms choose to maximize their
  utilities (profits) subject to their budget
  constraints.