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Intermediate*Macroeconomics - Amazon Web Services · PDF fileIntermediate*Macroeconomics! Chapter!1:!The!Science!of!Macroeconomics! What!Macroeconomists!Study!

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  • Intermediate*Macroeconomics!Chapter!1:!The!Science!of!Macroeconomics!What!Macroeconomists!Study!

    State%of%economy%affects%everyone,%macroeconomic%issues%play%a%central%role%in%national%political%debates.%

    Macroeconomic%issues%are%central%to%world%politics.% Macroeconomists%make%use%of%the%data%that%history%has%given%them.% Macroeconomists%observe%that%economies%differ%across%countries%and%that%they%change%over%

    time.%These%observations%provide%both%the%motivation%for%developing%macroeconomic%theories%and%the%data%for%testing%them.%

    Knowledge%of%economy%is%important%for%explaining%economic%events%and%for%formulating%economic%policy.%

    Three%important%variables%used%to%measure%economy%performance%are:%o Real%[email protected]%total%income%of%everyone%in%the%economy.%%o Inflation%[email protected]%measures%how%fast%prices%are%rising.%o Unemployment%[email protected]%the%fraction%of%the%labour%force%that%is%out%of%work.%

    Macroeconomists%study:%o How%these%variables%are%determined%o Why%they%change%over%time.%o How%they%interact%with%each%other.%

    Real!GDP! Grows%over%time.% When%GDP%falls%recessions%occur.% When%GDP%falls%severely%then%a%depression%occurs.% Recessions%and%depressions%are%associated%with%high%unemployment.%

    Inflation!rate! Periods%of%falling%prices%is%called%deflation.% Inflation%is%around%[email protected]%%each%year.%

    How!economists!think! Economists%often%study%politically%charged%views.%

    Theory!as!model!building! Model%represents%the%essence%of%the%real%object%it%is%designed%to%resemble.% Economists%use%models%to%explain%economic%variables.% Models%have%to%kinds%of%variables:%

    o Endogenous%variables

  • o !"#$!!"# =!"#$!1!!"#$%!!"!!""#$!!!!"#$!2!!"#$%&%'!!"!!""#$ +!"#$!2!!"#$%!!"!!""#$!!!!"#$!1!!"#$%&%'!!"!!""#$ .%

    GDP!Deflator! GDP%Deflator

  • Chapter!3:!National!Income!Most%important%macroeconomic%variable%is%GDP.%Measures%both%the%total%output%of%goods%and%services%and%its%total%income.%

    What!Determines!the!Total!Production!of!Goods!and!Services?! The%GDP%depends%on:%

    o Its%quantity%of%inputs,%called%the%factors%of%production%o Ability%to%turn%inputs%into%output%as%represented%by%the%production%function.%

    The!Factors!of!Production! Factors%of%Production

  • The!Firms!Demand!for!Factors! More%the%firm%employs%the%more%output%it%produces.% Marginal%product%of%labour%(MPL)%

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