Week 2 - Introduction to Macroeconomics The “dismal” side of economics usually starts with macroeconomics, in that most students would not really kasvetli understand what exactly is dismal about economics when they’re studying microeconomics. In microeconomics, we often do not talk about the bad stuff. You almost never hear about any microeconomic terms on the news, on TV or social media. If the news stories would be mentioning microeconomic concepts of, they would be saying things like: “Good news: Due to the absurdly rising prices of goods and services, MARGINAL UTILITIES ARE ON THE RISE!” If you can’t buy bananas for your child, the MU of bananas goes up. In macroeconomics, we talk about the bad stuff. Of course I’m just kidding, how could Turkish university students in 2025 ever imagine anything bad about the economy, everything is beautiful, I asked a student and he said “I just came to class from the airport because I was on trip to Tokyo on the weekend”. We call economics the dismal science because a few billions of people in the world live under poverty, unable to consume enough calories per day. The job of an economist is to find how we can prevent “poverty” and “inequality” and this is probably the most difficult job in the world, because we have politicians. If Daron Acemoğlu has no political power, then anything he could say about the economy would be in vain. The father of macroeconomics: Before “John Maynard Keynes”, there was no such thing as macroeconomics. His book titled “The General Theory” was a response to the Great Depression. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” - John Maynard Keynes Keynes is basically telling us that the world is ruled by the ideas of economists, even though many people do not realize this. Why is this statement true, or false? If this statement is true, it means the course you are currently taking is the introduction to the most important subject in the whole world. In the first semester, I asked you to find something - anything - in life that is not economic. Now: Find an aspect of your life that is not affected by the economic policies of the governments of the last 500 years. Maybe, if we tried so very hard, we could find one or two things that are not shaped by economic policy, but the 99 percent of all aspects of our lives are shaped by economic policy. Last semester, we said every aspect of our lives is economic in nature, and this semester we say, eventually, every aspect of our lives is thus shaped by the economic policy of governments. If economic policy making is so important, then why is it in such a bad shape? “Bad shape”: Only 10 to 15 countries in the world have citizens who are actually happy with their government, out of over 200 countries in the world. Why? Let’s talk about it. The first thing we will talk about in this semester is GDP. GDP: Gross Domestic Product GDP: The total value of all goods and services produced in a country in a given year. Why is GDP important? People from different countries do not differ genetically. Interestingly, people from different countries differ A LOT economically. Last week, we had a discussion in Turkish about the future that awaits you after graduation, unless you do something to improve yourself to the levels of the students that graduate from the top universities in the west. This was not a very enjoyable conversation, it was a very “dismal” conversation. I basically talked about the hamster wheel you’re going to live in, after graduation. If I were a lecturer in Netherlands, I would not be giving any such speech. Life in the Netherlands after university graduation is very different from the life in Turkey. When we divide a country’s GDP by that country’s population, we find a very simple indicator that informs us about the overall “quality” of life in that country. Note: The GDP per capita statistics we look at in the Worldbank Databank are usually higher than the actual numbers for all countries, because if income inequality. But if we’re comparing the Netherlands and Turkiye, the Turkish number is less realistic because Turkiye has a higher degree of income inequality than the Netherlands. GDP per capita in some countries 99K Lecturer asks: Does this look like a fair world? Students say: NOOOOO! 64K 13K 0.6K I personally do not like calling “GDP per capita” “average income”. When we call it “average income”, it creates a lot of room for statements like “IT’S AN UNFAIR WOOORLLDD :’(((((”. I’m not saying that there is not a lot of injustice in the world, BUT, if you look at the other side of the GDP coin, things start to look different. GDP per capita is in fact “AVERAGE PRODUCTIVITY” per person in a country. This means the average Swiss person creates 99k dollars worth of economic value in a year, the average Dutch produces 64K, the average Turk produces 13K and the average Somalian produces 0.6K worth of economic value in a year. If the business cycle of a country is SMOOTH, that means its economic policy is being made by actual, effective, expert, well-educated, “good” economists. Business Cycles (GDP) “Business cycle” is one of the most important concepts in macroeconomics. In fact, the whole study of macroeconomics is the study of business cycles. Macroeconomists would like to prevent the sharp rises and declines in business cycles. super happy, rising income GDP employed, happy nd tre business cycle The business cycle is the nature of economic activity: Economic activity has ups and downs, just like the emotional state of a human being. The whole study “macroeconomics” serves to understand and manage business cycles. Why is the business cycle so important? Time ALTERNATIVE BUSINESS CYCLES GDP 300 200 100 1900 COUNTRY A 2025 Years As an economist, if I were shown this graph for Country A, I would feel very sorry for the people of Country A. I’d say they probably went through a lot of civil war, internal and external conflicts, and a lot of economic crises due to bad policymaking, and a lot of political instability. GDP 300 200 100 1900 COUNTRY B 2025 Years As an economist, if I were shown this graph for Country B, I think that the people of this country never suffered from long periods of unemployment, never suffered economically due to bad policy making, they had economic and political stability. Most countries in the world have unstable business cycles. Remember the video I showed you in the first semester about the rise of the USA What do you think was the average annual growth rate of the US economy throughout the 20th century? Only 3 percent. So, if a country manages to grow its economy by only 3 percent in a steady and sustainable fashion for 100 years, it becomes the global superpower of the world. UNEMPLOYMENT If this were microeconomics, we would say unemployment does not exist. Because in microeconomics, we say that markets adjust immediately throught supply and demand. But in macroeconomics, markets do not clear because in some markets, especially the labor market, prices are sticky (prices in labor market are called “wages”) INFLATION & DEFLATION Inflation: An increase in the overall price level. hyperinflation: A period of very rapid increases in the overall price level. In Venezuela, in the 2010s, inflation came to a point where prices were doubling every 35 days. This is almost always a result of bad monetary policy. Deflation: A decrease in the overall price level. What is worse? 10 percent inflation or 10 percent deflation? Let’s think about it: If consumers expect that goods and services will be 10 percent more expensive next month, consumers will buy those goods and services this month. On the other hand, if consumers expect that goods and services will be 10 percent cheaper next month, they will not buy them today. Also, as long as there is deflation, people will not really buy anything as long as they can do without those things. Hence, most business will have to shut down because they cannot sell anything. The Role of the Government in the Macroeconomy The three big issues in macroeconomics are, as we said, GDP growth, inflation and unemployment. And these are product of monetary and fiscal policies of governments. In other words, economic policies of governments shape the business cycle, shape the unemployment rate and shape the inflation rate. ECONOMIC POLICY monetary policy basically the central bank setting the interest rate and determining the size of the money supply. fiscal policy government spending and taxes these two policy types determine every aspect of your lives. throughout the rest of the semester, we will study these policies. you’re responsible for studying the slides those which I have not covered in this lecture. Those slides have materials we already covered in the last semester, such as components of the macroeconomy and the types of markets. Also some other things you should read. Differently from last semester, every week I will upload some readings to Sakai. You should read these.
