MacroeconomicsCourse GoalsCourse StrategySlide 4What is Macro & What is Micro?Slide 6Slide 7Slide 8Why are you taking macroeconomics?Why do you care about macroeconomics?The Issues of MacroeconomicsSlide 12Slide 13Slide 14The Central Model of a MacroeconomyThe Central ModelSlide 17A First ModelSlide 19A Pure “Forecaster’s “ Use of the ModelA Pure Policy-Maker’s Use of the ModelBRINNER1902mit01.pptMacroeconomicsCourse OutlineBRINNER2902mit01.pptCourse GoalsYou, your teaching assistants and I will collaborate, seeking to make this the most thought-provoking and useful course you will take in economics or any social science.You will come to appreciate the science, the art, the politics of macroeconomics. You will laugh and groan at my occasional feeble humor.BRINNER3902mit01.pptCourse StrategyDefine the important concepts, magnitudes and questions in the real worldLearn alternative theories suggesting answers and explaining behaviorEvaluate data to test and then choose among theoriesPut you in position to have a serious opinion on important topicsBRINNER4902mit01.pptBRINNER5902mit01.pptWhat is Macro &What is Micro?Microeconomics examines the economic behavior of individuals--their responses to prices, income, tastes, opportunities.Macroeconomics examines the sum of microeconomic actions......and then adds the not-necessarily- economics-driven actions of government......to determine how the entire dynamic economic system operates.BRINNER6902mit01.pptWhat is Macro &What is Micro?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, and give needed information by creating an understanding of an integrated system of Micro behavior.BRINNER7902mit01.pptWhat is Macro &What is Micro?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 than political debates.»The media cares about these issues and wants to find/exaggerate controversy to sell itself.BRINNER8902mit01.pptWhat is Macro &What is Micro?Why is there so much controversy about macro theory and policy and so little about micro?»Most controversy does not really stem from an absence of testable data but from an absence of open-minded common sense. This as true in economics as in any science.BRINNER9902mit01.pptWhy 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.BRINNER10902mit01.pptWhy do you care about macroeconomics?Better reasons:»You know that, today or tomorrow, you will really need the information as:–an investor–a political animal–a manager or employee–an intellectually curious person.»You trust or hope that economics, and macroeconomics in particular, can give you this necessary information.BRINNER11902mit01.pptThe Issues of MacroeconomicsFor the investor:»Where are interest rates and profits headed?»Which sectors of the economy will do best and worst during the next quarter, year, and decade?»What will be the distinguishing differences across countries?»Can any of this be predicted with useful accuracy?BRINNER12902mit01.pptThe Issues of MacroeconomicsFor the political animal--the citizen and government policy maker:»What determines interest rates and what are appropriate monetary targets?»What are the appropriate taxes to raise or lower?»How will the level and composition of the budget affect family incomes?»How will international trade impact jobs, inflation, and credit?BRINNER13902mit01.pptThe Issues of MacroeconomicsFor the business manager:»What growth will my current markets provide if I maintain my share?»Can I raise my prices as rapidly as my costs?»What opportunities are emerging in the developing nations?»All of the questions posed by investors.BRINNER14902mit01.pptThe Issues of MacroeconomicsFor the intellectually curious person»Why do cycles exist/persist in all economies?»Are macro relationships stable?»Can nonlinear mathematics and chaos physics help to understand economics?»How can growth and environmental concerns be reconciled?BRINNER15902mit01.pptThe Central Model of a MacroeconomyA system of logical equations with behavioral (endogenous) and fixed (exogenous) variables producing a unique dynamic solution through time.»“N” equations for “N” behavioral variables.»As many exogenous variables as the modeler needs to adequately represent the external influences on behavior.BRINNER16902mit01.pptThe Central ModelThe Key Behavioral Actors:»Domestic Households, buying consumer goods and housing»Domestic Businesses, buying machines or building factories & offices or stocking goods in inventory»Foreign buyers and suppliers»Some Government Agencies Whose Behavior is “Regular”BRINNER17902mit01.pptThe Central ModelThe Key Exogenous Influences»Domestic Government tax, transfer and purchasing decisions (that change on an irregular basis)»Domestic Central Bank “control” of the money supply and interest rates»The International Counterparts to these»International Commodity Markets and Cartel BehaviorBRINNER18902mit01.pptA First Model7 Endogenous/ Behavioral Variables (Including ID’s) and 7 Equations»Consumer Spending : C=f ( YD, i ) »Business Spending : I = f ( d GNP, i)»Imports : M = f ( C, I , i )»Exports : X = f ( GNPW, i )»Total Output=Spending : GNP = C+I+X-M+G»After-tax Income : YD = GNP - T»Inflation : R P = f ( GNP )BRINNER19902mit01.pptA First Model4 Exogenous/Policy Variables»Government Purchases : G»Taxes (Net of Transfers) : T»Interest Rate : i»Rest-of-World Demand : GNPWOmitted Variables»Wealth»Supply CapacityBRINNER20902mit01.pptA Pure “Forecaster’s “Use of the ModelA “forecaster” hopes to be given or to be
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