1. Introduction
Chapter #1

2. Micro vs Macro Economics
Micro: behavior of individual economic units (households, firms)
Issues include product and input price determination
Market supply and demand (for specific product) vs AS and AD (GDP)
Downward slopping DC (wealth and substitution) and IDC (Law of DMU)
Macro: aggregates individual markets, looks at economy as a whole
Issues include economic growth, inflation, unemployment, BOP and ForEx
Long-run econ growth and short-run fluctuations constituting business cycle
Interaction between 3 main markets and nation vs rest of the world
Understand how econ works to make it perform better (government policies)
AS (output firms willing to supply at different price levels) vs AD (level of output at which goods and financial markets are simultaneously in equilibrium for any price level, position determined by monetary and fiscal policy together with consumers’ confidence)
AD in RGDP downward slopping (assuming fixed money supply) due to effects: wealth ↑ prices ↓ purchasing power of money, poorer consumers buy less interest rate - ↑ prices ↑ prices of money or interest rate (mortgages, car loans) net exports - foreign/domestic goods cost less/more at home/abroad, NX ↓ and hence RGDP = Y = C + I + G + NX

3. Macroeconomics In Three Models
Study of macroeconomics is grounded in three models, appropriate for a particular time period (described by AS)
Very Long Run Model: growth theory  focuses on production capacity (potential output - when resources are fully employed) vertical AS accumulation of capital and improvements in technology
Long Run Model: a snapshot of the very long run model, in which capital and technology are largely fixed, but allow for temporary shocks
Level of capital & technology are fixed and determine potential output level
Output is fixed, but prices (inflation) determined by changes in AD
Short Run Model: business cycle theories with flat AS
Changes in AD determine how much of the productive capacity is used and the level of output and unemployment
Prices are fixed in this period, but output is variable
Long Run Model: a snapshot of the very long run model, in which capital and technology are largely fixed
Level of capital & technology determine level of potential output
Output is fixed, but prices determined by changes in AD
Short Run Model: business cycle theories
Changes in AD determine how much of the productive capacity
is used and the level of output and unemployment

4. Very Long Run Growth
Figure 1-1a illustrates growth of income per person in the U.S. over last century  smooth growth of 2-3% per year on average smoothing short run changes
Growth theory examines how the accumulation of inputs and improvements in technology lead to increased standards of living (ignore short run fluctuations – tend to average over the years)
Average rate of growth is important (2% vs 4% over 20 or 100 years - TVM)
Rate of saving (vs consumption) is a significant determinant of future well being and economic growth

5. Zimbabwean inflation rates since independence
The Long Run Model
Long run AS is vertical, at the potential level of output (slow growth, 2-3% annually)
Output is determined by the supply side of the economy and its productive capacity
Price is determined by the demand relative to the productive capacity of the economy
Conclusion: high rates of inflation always due to changes in AD (can be substantial)
Zimbabwean inflation rates since independence
Date
Rate
1980 7%
1986
15%
1992
40%
1998
48%
2004
133%
1981
14%
1987
10%
1993
20%
1999
57%
2005
586%
1982
1988
1994
25%
2000
55%
2006
1.2K%
1983
19%
1989
1995
28%
2001
112%
2007
66.2K%
1984
1990
17%
1996
16%
2002
199%
07/08
231M%
1985
1991
1997
2003
599%
11/08
79.6B%

6. The Short Run Model
Short run fluctuations in output are largely due to changes in AD
The AS curve is flat in the short run due to fixed/rigid prices, so changes in output are due to changes in AD
Changes in AD in the short run constitute phases of the business cycle
In the short run, AD determines output and thus unemployment, leaving prices unaffected

7. The Medium Run
How do we get from the horizontal short run AS curve to the vertical long run AS curve?
The medium run AS curve is tilting upwards towards the long run AS curve position
When AD pushes output above the sustainable level, firms increase prices
As prices increase, the AS curve is no longer pegged at a particular price level
Firms start to rise price and AS begins to move upward
How steep is AS is the main controversy in macroeconomics

8. The Phillips Curve
The speed of price adjustment to increase in AD is critical for understanding economy
Prices tend to adjust slowly  AD drives the economy in the meantime
The speed of price adjustment is illustrated by the Phillips curve, which plots the inflation rate against the unemployment rate
Unemployment decrease from 6 to 4% will increase inflation by only 1% over one year
In the short run, AS curve is relatively flat, and movements in AD drive changes in prices, output, and unemployment

9. Growth and GDP
The growth rate of the economy is the rate at which GDP is increasing
Most developed economies grow at a few percentages per year
Growth in GDP is caused by:
Increases in available resources (labor and capital)
Increases in the productivity of those resources

10. The Business Cycle and the Output Gap
Business cycle: somewhat regular pattern of expansion and contraction in economic activity about the path of trend growth
Trend GDP is potential GDP realized if factors of production were fully utilized Econ not physical concept - physical labor full employment when everyone works 16 hours econ when everyone who want to work has a job (unprecise) Defined by convention, e.g. labor fully employed when unemployment is 5%
Deviation of output from the trend is referred to as the output gap
Output gap = actual output – potential output or trend
Measures the magnitude of cyclical deviations of output from the potential level
Commonly recession refers to economy in bad shape
Econ definition measures recession from peak to through.
So when recession is over it does not imply end of tough times but that economy is turning

11. Inflation and the Business Cycle
Inflation of 1960s and 1970s
Prices > septupled (on average $1 in 1960 worth $7.76 by 2012), most of the price increase during 1970s
The inflation rate estimated as percentage change in CPI (cost of a basket of goods bought by average household)
If AD is driving the econ, periods of growth cause inflation, while periods of contraction reduced prices and produce inflation < 0.