14.02 RecitationContentsI. Course IntroductionI(a) Course StrategyI(b) Macro vs. MicroI(c) Why Are You Taking Macroeconomics?I(d) Course OutlinesII. Mathematical backgroundII(a) LinearityII(b) Curves, which way do they shift?II(c) Changes and LogarithmII(d) ElasticityIII. Real vs. Nominal & Growth RateYou are required to calculate:You have 5 minutesIII(b). Nominal vs. RealNotice:Also notice that:1(a). Paasche Index1(b). Paasche Average Annual Inflation Rate2(a). Laspeyres Index2(b). Laspeyres Average Annual Inflation Rate3(b). Real GDP Annual Growth RateIV. The National AccountingIV(a) Key playersIV(b) Counting the GDPIV(c) Counting the GDP- an exampleIV(d) Other definitionsIV(e) A Summary: The relationships among the basic spending and income categories(V) The Government BudgetV(a) DefinitionsV(b) The Federal BudgetVI. Basic Macroeconomic Model– Kenyes ModelVI(a) Key playersExercise:Notes:VII. The Investment Saving Equilibrium(VIII) IS CurveIX. LM CurveX. IS-LM114.02 RecitationBySamer HajYehia2ContentsI. Course IntroductionII. Mathematical BackgroundIII. Real vs. Nominal & Growth RateIV. National AccountV. Government BudgetVI. Basic Macroeconomic Model–Kenyes ModelVII. The Investment Saving EquilibriumVIII.The IS CurveIX. LM CurveX. IS-LM Model3I. Course Introductiona) Course Strategyb) Course Outlinesc) Macro vs. Microd) Why Are You Taking Macroeconomics?4I(a) Course Strategy• Define the important concepts, magnitudes and questions in the real world.• Learn alternative theories suggesting answers and explaining behavior.• Evaluate data to test and then choose among theories.• Put you in position to have a serious opinion on important topics.5I(b) Macro vs. Micro• Microeconomics examines the economic behavior of individual households and firms-- their responses to prices, income, tastes, opportunities and other fundamental variables.• Macroeconomicsexamines the sum of microeconomic actions, their dynamics & interactions.• Therefore Macro must be fully compatible with Micro in its explanations of behavior: to trust any Macro answer, you must be sure of each of its Micro roots. Usually, this requires common sense and introspection.• The power and elegance of Macro is its ability to confront important questions, resolve paradoxes, explain past and predict future dynamics.• Why is there so much controversy about macro theory and policy and so little about micro?• Macro hits us in the pocketbook through its policy prescriptions so we may want certain answers to be true even if not.• Macro gets intimately involved in politically sensitive issues, and only religious arguments are more emotional than political debates.• The media cares about these issues and wants to find/exaggerate controversy to sell itself.6I(c) Why Are You Taking Macroeconomics?• Possible reasons:•It’s required for economics majors.•You’ve heard it’s as good a way as any to meet distribution requirements in the social sciences since this will at least involve mathematics.•Economist jokes are better than lawyer or computer nerd jokes.•You want to call in to talk- show radio hosts and sound important.• Better reasons:•You know that, today or tomorrow, you will really need the macroeconomic analysis skills as:¾ An investor:¾ a politician¾ a manager or employee¾ an intellectually curious person7• Your interest might be as following:¾ An investor:9 Where are interest rates headed?9 Which sectors of the economy will do best and worst during the next quarter, year, and decade?9 What will be the distinguishing differences across countries.¾ A politician9 What determines interest rates and what are appropriate monetarytargets?9 What are the appropriate taxes to raise?9 How will the level and composition of the budget affect family incomes?9 How will international trade impact jobs, inflation and credit?9 What is the cost of low inflation or low unemployment?8¾ a manager or employee9 What growth will my current markets provide if I maintain my share?9 Can I raise my prices as rapidly as my costs?9 What opportunities are emerging in the developing nations?¾ a manager or employee9 Why do cycles exist/ persist in all economies?9 Are macro relationships stable?9 Can nonlinear mathematics and chaos physics help to understand economics?9 How can growth and environmental concerns be reconciled?9I(d) Course Outlines•Output- level, growth, trend, fluctuations (recessions and expansions).•Great Depression•Stagflation in the 1970s•Current long expansion and low unemployment•High stock markets and bubbles•From budget deficit to budget surplus•Who is Greenspan? Why is he worry? Why we care?•Asian 1980’s miracle and 1990’s crisis and the political consequences•Russia and Latin America financial crises•European Community (EC)•Foreign trade•Financial markets•Globalization10II. Mathematical backgrounda) Linearityb) Curve shiftingc) Changes and Logarithmd) Elasticity11II(a) LinearityFor simplicity, we usually assume linearity only to get the notion and intuition (specially the sign and factors that affect the endogenous variables).• Example:C = α + β Y ⇒β= ∂C/∂YYtβαCt12II(b) Curves, which way do they shift?13II(c) Changes and LogarithmYtYtYdY∆=−−≡• )1( ()YttYtYtYtYRY&≡∂∂≡−−−≡•11 tZtYtXtWtZtYtXtW&&&&−+=⇒=• / if ttitYAtCeiYAtttεγβεγβ )ln( )ln( )ln( )ln( C if t+−+=⇒=•−14II(d) Elasticity•DefinitionηC,Y=The percentage change of C due to one percentage change in Y= % ∆C / % ∆Y = [∆C/C] / [∆Y/Y]ηC,Y= [∆C/∆Y]*[Y/C] = MPC * Y/C -How is it represented in the graph?• If the economic theory assumes an exponential model (instead of previous linear model), then:•Ct= A Ytβit-γeεt15• Therefore, in order to estimate our theoretical model we can run log_log model:9 ln(Ct) = Ln(A) + β ln(Yt) - γ ln(it) + εt–where: β = ∂ ln(Ct) / ∂ ln(Yt) • Which means that, instead of assuming a constant propensity to consume (and increasing elasticity of consumption with respect to the disposal income) as in the linear model, the exponential model assumes a constant elasticity of consumption with respect to the disposal income (and decreasing propensity to consume).• Proof: Apply the chain rule:9 β = [∂ ln(Ct) / ∂C] * [∂C/∂Y] * [∂Y / ∂ ln(Yt)]= [1/C] * [∂C/∂Y] * [Y / 1]= [∂C/∂Y] * [Y / C]= ηC,YCtYt16III.
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