Lecture 1: Introduction to Macroeconomics GAZİ ÜNİVERSİTESİ Doç. Dr. Seher Nur Sülkü Kamu Yönetimi İİBF Econometrics Department ECON 102 İktisada Giriş II (İng) Lecture 1: Introduction to Macroeconomics Sources of power point notes: *David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill, 2005 PowerPoint presentation by Alex Tackie and Damian Ward *Karl E. Case, Ray C. Fair and Sharon M. Oster, Principles of Macroeconomics, 10th edition, Pearson, Prentice Hall, 2012.Fernando & Yvonn Quijano http://ingrimayne.com/econ/ http://www.arts.cornell.edu/econ/wissink/econ102jpw/

What is Economics? Economics: The study of the allocation of scarce resources to produce commodities to satisfy infinite human wants. Classic definition. Economics is about constrained optimization. Choice under conditions of scarcity.

The Scope of Economics Microeconomics and Macroeconomics microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, business firms and households. macroeconomics The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale. Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”

Microeconomics and Macroeconomics TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns Divisions of Economics Production Prices Income Employment Microeconomics Production/output in individual industries and businesses   How much steel How much office space How many cars Price of individual goods and services Price of medical care Price of gasoline Food prices Apartment rents Distribution of income and wealth Wages in the auto industry Minimum wage Executive salaries Poverty Employment by individual businesses and industries Jobs in the steel industry Number of employees in a firm Number of accountants Macroeconomics National production/output Total industrial output Gross domestic product Growth of output Aggregate price level Consumer prices Producer prices Rate of inflation National income Total wages and salaries   Total corporate profits Employment and unemployment in the economy Total number of jobs Unemployment rate

The Method of Economics Economic Policy Criteria for judging economic outcomes: 1. Efficiency 2. Equity 3. Growth 4. Stability Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.

The Method of Economics Economic Policy Efficiency efficiency In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost. Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost. Equity equity Fairness.

The Method of Economics Economic Policy Growth economic growth An increase in the total output of an economy. Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost. Stability stability A condition in which national output is growing steadily, with low inflation and full employment of resources.

Introduction to macroeconomics

John Maynard Keynes Much of the framework of modern macroeconomics comes from the works of John Maynard Keynes, whose General Theory of Employment, Interest and Money was published in 1936.

Macroeconomic Concerns Output/Production Income/Employment Price Levels/Interest Rates Global Trade

Output & Growth: Short & Long Run The business cycle is the cycle of short-term ups and downs in the economy. Growth looks at what happens to output (inter alia) over long periods of time. The main measure of how an economy is doing is aggregate output. Aggregate output is the total quantity of goods and services produced in an economy in a given period. Note: In order to add up all the different things an economy produces, one uses a currency value. For example, in the Turkey, we use the Turkish lira value of the total quantity of goods and services produced in Turkey in a given period. This is basically what we call “Gross Domestic Product” or GDP.

Output & Growth: Short & Long Run A recession is a period during which aggregate output declines. Two consecutive quarters of decrease in output (as measured by real GDP) signal a recession. A prolonged and deep recession becomes a depression. Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.

Unemployment The unemployment rate is the percentage of the labor force that is unemployed. Unemployment is a measure of the number of people looking for work, but who are without jobs The unemployment rate is a key indicator of the economy’s health. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium. Why do labor markets not clear when other markets do?

Inflation and Deflation Inflation the rate of change of the general price level Hyperinflation is a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation. Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation. Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation). A situation of both high inflation and high unemployment.

More key issues in macroeconomics Economic growth increases in real GNP, an indication of the expansion of the economy’s total output Macroeconomic policy a variety of policy measures used by the government to affect the overall performance of the economy See Section 19-1 in the main text.

The Business Cycle An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise. A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall. A positive trend line indicates long run growth.

Inflation in the UK, 1950-2003 See Section 19-2 in the main text, and Figure 19-1. This version shows a longer period. Source: Economic Trends Annual Supplement, Labour Market Trends

Inflation in Turkey Source: Central Bank of the Republic of Turkey. See Section 19-2 in the main text, and Figure 19-1. This version shows a longer period. Source: Central Bank of the Republic of Turkey.

Inflation in UK, USA and Germany 1960 - 2004 See data from Table 19-1 in Section 19.2 of the main text.

Unemployment in the UK 1950-2003 Data relate to the claimant count. Source: Economic Trends Annual Supplement, Labour Market Trends

Unemployment in the Turkey 1988-2007 Data relate to the claimant count. Source: TURKSTAT, SPO

Unemployment in UK, USA and Germany See data from Table 19-1 in Section 19.2 of the main text.

Economic growth in UK, USA and Germany See data from Table 19-1 in Section 19.2 of the main text.

Economic growth in Turkey See data from Table 19-1 in Section 19.2 of the main text. Source: SPO

The Components of the Macroeconomy Macroeconomics focuses on four groups. To see the big picture, it is helpful to divide the participants in the economy into four broad groups: households, firms, the government, and the rest of the world.

The Circular Flow Diagram

The Circular Flow Diagram Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households and taxes to the government. The government receives taxes from firms and households, pays firms and households for goods and services—including wages to government workers—and pays interest and transfers to households. Finally, people in other countries purchase goods and services produced domestically (exports). Note: Although not shown in this diagram, firms and governments also purchase imports.

The Components of the Macroeconomy The Three Market Arenas Another way of looking at the ways households, firms, the government, and the rest of the world relate to each other is to consider the markets in which they interact. We divide the markets into three broad arenas: the goods-and-services market, the labor market, and the money (financial) market.

The Components of the Macroeconomy The Three Market Arenas Goods-and-Services Market Firms supply to the goods-and-services market. Households, the government, and firms demand from this market. Labor Market In this market, households supply labor and firms and the government demand labor.

The Components of the Macroeconomy The Three Market Arenas Money Market Households supply funds to this market in the expectation of earning income in the form of dividends on stocks and interest on bonds. Firms, the government, and the rest of the world also engage in borrowing and lending which is coordinated by financial institutions.

The Components of the Macroeconomy The Three Market Arenas Money Market Treasury bonds, notes, and bills Promissory notes issued by the federal government when it borrows money. corporate bonds Promissory notes issued by firms when they borrow money. shares of stock Financial instruments that give to the holder a share in the firm’s ownership and therefore the right to share in the firm’s profits. dividends The portion of a firm’s profits that the firm pays out each period to its shareholders.

The Components of the Macroeconomy The Role of the Government in the Macroeconomy fiscal policy Government policies concerning taxes and spending. monetary policy The tools used by the Federal Reserve to control the quantity of money, which in turn affects interest rates.