1. 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

2. 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.

3. 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.”

4. 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

5. 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.

6. 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.

7. 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.

8. Introduction to macroeconomics

9. 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.

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

11. 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.

12. 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.

13. 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?

14. 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.

15. 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.

16. 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.

17. Inflation in the UK,
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

18. 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.

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

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

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

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

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

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

25. 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.

26. The Circular Flow Diagram

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.