The Science of Macroeconomics.ppt

The Science of Macroeconomics Learning Objectives This chapter introduces you to the issues macroeconomists study the tools macroeconomists use some important concepts in macroeconomic analysis Important issues in macroeconomics Why does the cost of living keep rising? Why are millions of people unemployed, even when the economy is booming? What causes recessions? Can the government do anything to combat recessions? Should it? Important issues in macroeconomics What is the government budget deficit? How does it affect the economy? Why does the U.S. have such a huge trade deficit? Why are so many countries poor? What policies might help them grow out of poverty? U.S. Real GDP per capita (2000 dollars) U.S. inflation rate(% per year) U.S. unemployment rate(% of labor force) Why learn macroeconomics? 1. The macroeconomy affects society’s well-being. Why learn macroeconomics? Why learn macroeconomics? 3. The macroeconomy affects politics. Economic models …are simplified versions of a more complex reality irrelevant details are stripped away …are used to show relationships between variables explain the economy’s behavior devise policies to improve economic performance Example of a model: Supply demand for new cars shows how various events affect price and quantity of cars assumes the market is competitive: each buyer and seller is too small to affect the market price Variables: Q d = quantity of cars that buyers demand Q s = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input) The demand for cars demand equation: Q d = D (P,Y ) shows that the quantity of cars consumers demand is related to the price of cars and aggregate income Digression: functional notation General functional notation shows only that the variables are related. Q d = D (P,Y ) A specific functional form shows the precise quantitative relationship. Example: D (P,Y ) = 60 – 10P + 2Y The market for cars: Demand The market for cars