Macroeconomics Lecture Notes

Macroeconomics Lecture Notes

Jan 13 2009

microeconomics is the study of individual decision making by consumers, firms and governments.

macroeconomics is the study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and economic growth.

economic policies - actions taken by government to influence economic activity

quota - the maximum amount of imports for a certain good into the nation

positive economics - the study of how the economy works

normative economics - the study of how the economy should work

science of economies - the application of the knowledge leaned in positive economics to achieve the goals of normative economics.

Jan 15 2009

capitalism - an economic system based on private property and freedom of choice

the governments role in a capital economy is the protection of property rights

prices coordinate an individuals wants

Socialism - is an economic system that tries to organize society in the same way as families are organized

soviet style socialism - economic system that uses central planning to solve the coordination problems

Production possibility frontier = Production possibility curve

collaboration and specialization and trade can lead to an increase in total production

markets allow specialization and the division of labour. they allow individuals to develop their comparative advantages.

Jan 27 2009

economic growth is measured in real GDP - the market value of goods and services stated in the prices of a given year

the avg annual growth rate is called the secular growth rate

per capita real output is real GDP divided by total pop

the business cycle is the upward/downward movement of economic activity that occurs around growth trends

the unemployment rate is the number of people who are willing and able to work but do not have a job

cyclical unemployment is cause by economic restructuring that makes some skills obsolete

full employment - when every one who wants a job and can work has a job

frictional unemployment - the unemployment caused by new entrants to the job market and people who quit a job just long enough to find another

Cyclical unemployment - fluctuations in economic activity (boom and bust)

Structural unemployment - caused by economic restructuring that makes some jobs and skills obsolete

target rate of unemployment - the lowest sustainable rate of unemployment that policy makers believe is possible under existing conditions aka the natural rate of unemployment

unemployment rate = unemployed/labour force

labour force - people willing and able to work, doesn’t include the incapable or those not looking for work

discouraged workers - people who don’t look for a job because they don’t think they will get one.

labour force participation rate - the percentage of the population above 15 years of age.

the capacity utilization rate indicates how much capital is available for economic growth = output/max possible output

potential output - output that would be achieved at target unemployment and capacity utilization

Okun’s ruler of thumb is used to determine the effects or changes in income related to unemployment

inflation is a continual rise is the price level

price index is calculated by dividing the current price of a basket of goods by the price of the same basket in a base year

GDP deflator - an index of the price level of aggregate output relative to a base year

consumer price index - measures the prices of a fixed basket of consumer hoods. it is weighted according to each component’s share of an avg consumers expenditures

nominal output is the total amount of goods and services measured at current prices

real output - is the total amounts of goods and services produced adjusted for inflation real output = nominal output/ price index

hyperinflation breaks down confidence in the monetary system, government and financial institutions

Jan 29 2009

national income accounting - a set of rules and definitions for measuring economic activity in the aggregate economy. it is one way of measuring aggregate production.

Gross National Income aka GNP - is the aggregate final output of citizens and businesses in one year

Net foreign factor income - the income from foreign domestic factor sources minus foreign factor incomes earned domestically

Final output goods and services purchased for final use

intermediate goods - goods used in the production of other goods

GDP is equal to the sum of the four categories of expenditures; consumption, investment, government spending, and (exports - imports)

consumption - when individuals receive income they can either spend it on foreign or domestic goods, save it, or pay taxes with it.

personal consumption expenditures - payments by households for goods and services

investments - the portion of income that individuals save leaving the spending stream and goes into financial markets

gross private investment - business spending plus household spending on new owner-occupied housing

depreciation - the decrease in an asset’s value due to it wearing out

net private investments = gross private investment minus depreciation. it is the new investment above and beyond the replacement investment

government expenditures - gov payment for goods and services. govs borrow from financial markets to make up for deficits

net exports (exports minus imports) are added to total expenditures

net domestic product - the sum of all expenditures minus depreciation

national income consists of employee compensation, interest, rent wages and profit. it is a measure of all income of citizens and businesses in a country

personal income is income by households

personal income = national income + transfer payments - corporate retained earnings - corporate income tax - employment taxes

disposable personal income = personal income - personal taxes

purchasing power parity - adjusts for different relative prices among nations before making comparisons

GDP - doesn’t figure in illegal activities which can range from 1.5-20% of some nations GDP

Feb 3 2009

long-run growth focuses on supply. it assumes Say’s law - supply creates its own demand. demand is sufficient to buy what is produced.

in the short run, economists consider potential output to be fixed. they focus on how to get the economy operating at its potential if it isn’t

growth improves living standards b/c more goods are available to more

The rule of 72 is used to determine how long it takes to double income at different rates of growth

rule of 72 - the number of years it takes for an amount to double in value is equal to 72 divided by the growth rate.

Markets, specialization and the division of labour increase productivity and growth

specialization - the concentration of individuals on certain aspects of production

division of labour - the splitting up of a tasks to allow for specialization of production

productivity = output/units of input

per capita output increases when output increases faster than the total population.

per capita growth - producing more goods and services per person

= %change in output - % change in population

in many developing nations the population is rising much faster than the GDP resulting in a lower per capita growth rate.

sources of growth

capital accumulation - investment in productive capacity

available resources

growth of compatible institutions - economic development boards

technological development

entrepreneurship

years ago it was thought that physical capital was the key to growth. The flow of investments led to the growth of the stock capital. However capital accumulation does not necessarily lead to growth. products change and useful buildings and machines become useless

capital includes the skills embodied in workers through experience, education and on the job training

social capital - the habitual way of doing things that guides people in how they approach their position

technology - changes the way we make goods and supply services as well as the goods and services be buy. technology translates into growth and is visible through the total factor productivity (TFP) - the weighted avg of real GDP per worker and real GDP per $1000 of capital stock

entrepreneurship is the ability to get things done. it involves creativity, vision, and a talent for translating that vision into reality

the production function shows the relationship b/w the quantity of inputs used in production and the quantity of outputs resulting from production

the production function has land, labour, and capital as factors in production

“A” is an adjustment factor that captures the effect of technology on production

Output = A times F(labour, capital, land)

scale economies describe what happens in a production function when all inputs increase equally

constant returns to scale - increases in outputs = increases in inputs

increasing RTS - increases in outputs > increases in inputs

decreasing RTS - increases in outputs < increases in inputs

diminishing marginal productivity describes what happens when more of one input is added w/o increasing any other inputs

law of diminishing marginal production - increasing one input, keeping all others constant will lead to smaller and smaller gains in output - increasing at a decreasing rate

the classical growth model focuses on capital accumulation in the growth process. the more capital an economy has, the faster it will grow. B/c of this emphasis on capital our economic system is called capitalism

classical economists focused on how to increase investment by saving

saving => investments => increase in capital => growth

classical growth model focused on how diminishing marginal productivity of labour placed limitations on growth.

Feb 5 2009

Diminishing Marginal productivity of capital (DMPC) - capital grows faster than labour => capital is less productive => slower economic output => per capita growth stagnates => per capita income stops rising

DMPC is stronger for developed nations than undeveloped b/c they already have lots of capital and therefore their growth rate is slower with the addition of capital

poor countries w/ little capital grow faster w/ increases in capital

it shold then be expected that per capita incomes in rich and poor nations should converge but they don’t

economists separate labour into two components

standard labour - the actual number of hours worked

human capital - the skills embedded in workers through experience, education and on-the-job training

increases in human capital have allowed labour to keep pace w/ capital and this allows economies to avoid DMPC

if skills are increasing faster in a rich nation than in a poor nation incomes in the two nations would not be expected to converge

technology overwhelms DMPC so that growth rates can increase over time

New Growth theory (NGT) - emphasizes the role of tech rather than capital in the growth process

tech is the result of investments in creating tech (r and d) investments in tech increases the technological stock of an economy

NGT - separates investment in capital and investment in tech. increases in tech are not as directly linked to investment as capital

increases in tech often have an large positive spill over effect

technological advances in one sector of the economy can lead to advances in a completely different sector

technological advances have positive externalities - positive effects on others not taken into account by the decision maker

NGT also highlights learning by doing - which increases worker productivity and can overcome DMPC

technological lock-in - the economy doesn’t use the best tech available as it has become intrenched in an older tech.

network externalities - an externality in which the use of a good by one individual makes it more valuable to others

Economic policies to encourage per capita growth

encourage savings and investment

improve incentives to work

control pop growth

increase the level of education

create institutions that encourage technological innovations

provide funding for basic research

increase the economies openness to trade

modern growth theories have downplayed the importance of capital in the growth process although they still recognize its importance

Canada uses tax incentives to increase savings (RRSP, TFSA)

it is difficult for poor countries to generate savings and investments as money is often invested abroad

forging investment provides another source of savings

developing nations can borrow money from the IMF or the World Bank or even private banks but this money often comes with large strings attached

income tax cuts to increase labour is known as supply-side economics. it results in the substitution effect and the income effect which are opposites

when the substitution effect outweighs the income effect, then the tax cut will increase labour supplied

nations who’s pop is rapidly growing have difficulty supplying capital and education for everyone and thus per capita income decreases

some economists argue that to reduce pop growth, a nation must economically grow first. the opportunity cost for women of having children is then high enough to discourage it.

increasing the educational level and skills of the workforce increases labour productivity, in developing nations the return on education is higher than in developed nations b/c of diminishing marginal returns. although the education must be of the correct type

Feb 10 2009

macroeconomics and aggregate demand are tools used to deal with recessions. during the depression in the 30’s output fell by 30% and unemployment rose by 25%

the classical economists approach to the depression was to let the market work it out and for the gov to do nothing. they applied microeconomic theories to the depression. their solution to the high unemployment was to eliminate the labour unions and high wages.

after the depression most people believed that the gov should take a role in regulating the economy. People believed that the depression was caused by over supply. they wanted the government to hire the unemployed even if the work was not needed.

classical economists oppose deficit spending arguing that the money to create jobs had to be borrowed. this money would have financed private economic activity and jobs so everything would cancel out in the end.

according to Keynes a decrease in spending lead to job layoffs which would lead to a fall in consumer demand and a further decrease in production and more job layoffs. the economy would get stuck in a feedback cycle.

income is not fixed at the economy’s long run potential income - it can fluctuate

for Keynes there was a difference b/w equilibrium income and potential income