C27BA
Introductory Macroeconomics
Lecture 1
Introduction to Macro
Introductory Macro – Information
This is the macro equivalent of Introductory Micro, and
organised in broadly same way. See course outline
available already on VISION for further information,
including:
• course coordinator
• lecturers
• Lecture notes: incomplete hand-outs will be provided in
the lectures, and you can fill in the gaps as we go along;
these partial notes will also be available on VISION.
• Tutorial Information - see Tutorial files
Introductory Macro - Information
Assessment for this course consists of
• XXXX
• XXXX
• Examination multiple choice, short questions and applied
questions
•
The main text is Sloman J., Wride A. and Garratt D.,
Economics, 8th edition, Pearson, 2012
• You should also work on and make full use of the lecture
notes.
Introduction
Today:
• What do we mean by macroeconomics?
• What are the issues with which macro policy is
concerned ?
• Why should we study macroeconomics?
Macro Defined
• Macro analyses the economy as a whole
• Treats all outputs – supplies of different types of goods
and services – together, as if they are a single
composite good/service
• Puts together demands – for different types of goods
and services –in a few aggregates, as consumption or
investment or government spending or exports
• Refers to overall price level = average of prices for
different goods and services
• Focuses on aggregate income, aggregate output
Macro Defined
• Macro abstracts from individual markets, individual
consumers, individual producers, in order to concentrate
on the overall relationships, e.g.
• between aggregate demand and output
• between demand and interest rates
• between demand and government spending
• between output and unemployment
• between output and prices
• of course, these aggregates matter for individuals, they
affect employment opportunities, consumption
possibilities, inflation rates, wealth
Macro Policy Concerns
• Growth: growth of national income (GDP) over long term,
i.e. ‘decades’ not single years
• Inflation: % change in prices (over last 12 months)
• Unemployment: number (or rate) of people who want to
work but can’t find jobs
• Business cycles: short term fluctuations in income
• Balance of payments/exchange rate (sometimes one,
sometimes the other - see later): balance of payments is
balance of monetary flows between domestic country
and rest of world; exchange rate is value of domestic
currency relative to foreign currency (currencies)
Specific Targets
• Growth: typical target = higher growth than in past
• Inflation: typical target low = 1-3%
• Unemployment: typical target low, relative to past
• Business cycles: minimise short-term fluctuations in
income
• Balance of payments: typical target zero balance of trade
(exports minus imports)
• Exchange rate: specific fixed parity e.g. Denmark
pegging to euro; or ‘competitive’ real exchange rate
Macro Policy Instruments
• Fiscal policy: taxes, government expenditure; put
together simply in budget surpluses/deficits
• Monetary policy: interest rates, money supply (credit
growth)
• Exchange rate (could decide to change fixed parity)
Policy: government sets instruments so as to hit targets;
combination of external factors and policy generates
outcomes (performance)
What has macro performance been like in recent decades?
first, long sweep, then recent shorter term period:
GDP growth (% p.a.) 1971-2008
(IMF International Financial Statistics)
9
France
Germany
Italy
Japan
UK
US
6
3
0
-3
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Inflation (% p.a.) 1971-2008
(IMF International Financial Statistics)
25
20
France
Italy
Japan
UK
US
Germany
15
10
5
0
-5
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Standardised unemployment rates 1990-2008
(OECD Economic Outlook)
12
10
8
6
4
2
France
Japan
0
1990
1992
1994
Germany
United Kingdom
1996
1998
2000
2002
Italy
United States
2004
2006
2008
What should we take from this long sweep?
• Big fluctuations = ‘cycles’ in growth, possibly becoming
smaller by mid-2000s; Japan had high growth earlier,
low growth later
• Inflation very high in mid-1970s, with smaller peaks in
late 1970s/early 1980s and late 1980s; Japan had
negative inflation in some years of late 1990s, 2000s
• Unemployment has some fluctuations corresponding to
growth cycles, but note also trend rise for Germany,
trend fall from mid-1990s in UK, Italy
Now consider recent period including crisis:
What should we take from these shorter period data?
[note 2013 is estimate, 2014-15 are forecasts]
• Major contraction of 2009 (2008), some rebound 2010
then renewed decline for most countries in graph, with
weak recovery predicted (2% growth is below what we
assume to be long run trend growth of potential output
for most of these countries)
• Peak in inflation 2008, down most countries 2009 but up
again 2010-11; UK inflation unusual (depreciation?)
• Big rises in unemployment for all major countries except
Germany (where downward trend from 2005) and Japan;
Spain!
Typical questions which macroeconomics
addresses:
Why do economies experience booms and recessions,
with falling and rising unemployment?
Can governments and/or central banks do anything to
minimise these cycles?
Why did inflation in the UK go so high in the 1970s, and
again in the late 1980s, and how was it brought under
control from the 1990s?
What caused the current financial crisis? How has policy
responded to it, and why?
- In this course we will learn how to think about the issues
and how to answer these questions
In the UK, recent governments have tried to attain:
• inflation of around 2-3%, with some success
• growth of  2.5% (i.e. raise underlying growth), with
result of okay growth but no real rise in growth
• unemployment lower if/when possible – some
success from mid-1990s to mid-2000s
but they have largely ignored the balance of payments and
the exchange rate – balance of payments mostly more or
less okay until few years ago, then large deficits;
exchange rate appreciated ‘too much’ 1996-97, stayed
there, then (2008-9) depreciated a lot (too much?)
So why should we study macroeconomics?
for many reasons, e.g.:
• growth of economy affects life chances of its citizens
• cyclical fluctuations involve unemployment at some
times for some citizens
• inflation may have strong effects on distribution of real
income
• cyclical fluctuations affect business opportunities as well
as employment prospects
• you can’t understand modern politics without some
macro
• this stuff is actually really interesting!
• Key reading: Sloman Chapter 14
Key concepts:
macroeconomics
growth (GDP)
inflation
unemployment
balance of payments
exchange rate
all mentioned here but to be defined more precisely in
later lectures