CHAPTER 1 The Science of Macroeconomics slide 0 Macroeconomics by G.Mankiw PART 1, CHAPTER 1 : The Science of Macroeconomics Lecture 1 Source : Slide Database by Ron Cronovich + Slides by Nathalie Bolh

CHAPTER 1 The Science of Macroeconomics slide 1 Learning objectives This chapter introduces you to  some important concepts in macroeconomic analysis  the issues macroeconomists study  the tools macroeconomists use

CHAPTER 1 The Science of Macroeconomics slide 2 What is Macroeconomics?  A global definition  Explanations and Policy prescriptions  Macroeconomics+ Microeconomics = Economics  The study of macroeconomic variables

CHAPTER 1 The Science of Macroeconomics slide 3 Important issues in macroeconomics  3 major indicators of economic performance : - GDP and Growth - Unemployment rate - Inflation rate  3 major economic areas under review : the USA, the EU and Japan

CHAPTER 1 The Science of Macroeconomics slide 4 Recent data in the USA Source: OECD (Y/Y) / 2001 Output growth rate / 1.1 Unemplo yment rate / 4.8 Inflation Rate / 2.1

CHAPTER 1 The Science of Macroeconomics slide 5 Recent Data in the EU Source: OECD / 2001 Output growth rate / 1.7 Unemploy ment rate / 7.8 Inflation Rate / 2.5

CHAPTER 1 The Science of Macroeconomics slide 6 Recent Data in Japan / 2001 Output growth rate / -0.7 Unemplo yment rate / 5.0 Inflation Rate / -1.6

CHAPTER 1 The Science of Macroeconomics slide 7 Economic models Mathematics Observation of data => simplified reality

CHAPTER 1 The Science of Macroeconomics slide 8 The example of a model of supply and demand for rice  explains the factors that determine the price of Manggo and the quantity sold.  assumes the market is competitive  Variables: Q d = quantity of rice that buyers demand Q s = quantity that producers supply P = price of rice Y = aggregate income P g = price of grapes (an input)

CHAPTER 1 The Science of Macroeconomics slide 9 The rice market  The supply for rice : Q s = S(P+, Pf-)  The demand for rice : Q d =D(P-, Y+)

CHAPTER 1 The Science of Macroeconomics slide 10 The market for rice: equilibrium Q Quantity of rice P Price of rice S D equilibrium price equilibrium quantity

CHAPTER 1 The Science of Macroeconomics slide 11 The effects of an increase in income: D2D2 Q Quantity of rice P Price of rice S D1D1 Q1Q1 P1P1 P2P2 Q2Q2

CHAPTER 1 The Science of Macroeconomics slide 12 Endogenous vs. exogenous variables:  The values of endogenous variables are determined in the model.  The values of exogenous variables are determined outside the model: the model takes their values & behavior as given.

CHAPTER 1 The Science of Macroeconomics slide 13 Prices: Flexible Versus Sticky  Market clearing: an assumption that prices are flexible and adjust to equate supply and demand.  In the short run, many prices are sticky.  In models : Prices are supposed to be sticky in the short run and flexible in the long run.

CHAPTER 1 The Science of Macroeconomics slide 14 Question  1) Macroeconomic issues in the news over the last month? 2) What would be the effect of an increase in the price of Fertilizers on the rice market equilibrium 3) Give the 2 definitions of a recession (the NBER definition and the popular definition) 4) Identify the main recession episodes in the Indonesia economy since 1900