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    The Science of Macroeconomics

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    Ives Lee
    The document discusses key macroeconomic variables like GDP growth, inflation, and unemployment. It then reviews the historical trends in these variables in the US, noting periods of growth and recession. The rest of the document introduces economic models, focusing on the demand-supply model. It explains the impact of changes in exogenous variables like income and material prices on the endogenous equilibrium price and quantity in the market.

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    The Science of Macroeconomics

    Uploaded by

    Ives Lee
    13 views25 pages
    The document discusses key macroeconomic variables like GDP growth, inflation, and unemployment. It then reviews the historical trends in these variables in the US, noting periods of growth and recession. The rest of the document introduces economic models, focusing on the demand-supply model. It explains the impact of changes in exogenous variables like income and material prices on the endogenous equilibrium price and quantity in the market.

    Original Description:

    macroeconomics

    Original Title

    Chapt 01

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    The document discusses key macroeconomic variables like GDP growth, inflation, and unemployment. It then reviews the historical trends in these variables in the US, noting periods of growth and recession. The rest of the document introduces economic models, focusing on the demand-supply model. It explains the impact of changes in exogenous variables like income and material prices on the endogenous equilibrium price and quantity in the market.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    13 views25 pages

    The Science of Macroeconomics

    Uploaded by

    Ives Lee
    The document discusses key macroeconomic variables like GDP growth, inflation, and unemployment. It then reviews the historical trends in these variables in the US, noting periods of growth and recession. The rest of the document introduces economic models, focusing on the demand-supply model. It explains the impact of changes in exogenous variables like income and material prices on the endogenous equilibrium price and quantity in the market.

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    You are on page 1of 25

    Chapter 1:

    The Science of Macroeconomics


    Main Macroeconomic Variables
    Economic growth rate measures the percentage
    change of the Real GDP

    Inflation rate measures the percentage change of


    the general price level (e.g., the CPI)

    Unemployment rate measures the percentage of


    the labor force who are out of work
    Historical Record of the U.S. Economy

    Real GDP per capita (or income per person) has


    increased (in 1992 prices) from about $5,000 in
    1900 to over $30,000 in 2000.

    This rapid growth, however, has been interrupted


    by periods of declining income, called recession or
    depression (e.g., 1929-33, 1990-91)
    Figure 1-1: Growth Trends
    Historical Record of the U.S. Economy

    High inflation during periods of expansion and boom (e.g.,


    WW I and II)

    Low inflation or deflation during periods of recession (e.g.,


    1920-21 and 1929-33)

    During the energy crises of the 1970s, the economy


    recorded high inflation in periods of recession (stagflation)
    Figure 1-2: Inflation Trends
    Historical Record of the U.S. Economy

    Unemployment is high during periods of recession


    and depression (e.g., 1929-33)

    Unemployment is low during periods of expansion


    and boom (WW I and II, the 1990s)
    Figure 1-3: Unemployment Trends
    Economic Models
    A model is a simplified theory that shows the relationships
    among variables.

    Exogenous variables are those that come from outside of


    the model.

    Endogenous variables are those that the model explains

    The model shows how changes in the exogenous


    variables affect the endogenous variables.
    Figure 1-4: Economic Model

    Exogenous Variables Model Endogenous Variables


    Demand-Supply Model
    Demand model: Q = D(P, Y); Supply model: Q = S(P, Pm)

    Endogenous variables are quantity (Q) and price (P) of the


    good

    Exogenous variables are consumer income (Y) and price


    of materials (Pm)

    Market equilibrium D(P, Y) = S(P, Pm) determines P and


    Q. The model explain how changes in Y and/or Pm affect
    equilibrium values.
    Market System

    Network of buyers & sellers who transact in the


    market

    Buyers demand goods & services

    Sellers supply goods & services


    Advantage of Market Economy

    Free interactions between buyers & sellers

    Full information to make decisions

    Freedom of choice between alternatives


    Demand

    Definition: quantities of a good or service


    consumers are able to buy at various prices

    Law of Demand: P and Q are negatively related

    Movement along demand is caused by a change


    in P
    Demand Line

    Price
    D

    A
    2.00
    B
    1.50

    Quantity
    1000 1500
    Increase in Demand

    Price D An increase in Y causes


    D the demand to increase

    A C
    2.00
    B
    D
    D
    Quantity
    1500 2000
    Supply

    Definition: quantities of a good or service


    producers are able to sell at various prices

    Law of Supply: P and Q are positively related

    Movement along supply is caused by a change in


    P
    Supply Line
    Price S
    2.00 B

    1.50 A

    500 1000 Quantity


    Increase in Supply
    Price S An decrease Pm causes
    the supply to increase
    B S

    A
    1.50 C

    S
    S
    500 1000 Quantity
    Equilibrium

    A condition at which the independent plans of


    buyers and sellers exactly coincide in the
    marketplace.

    At equilibrium: D(P, Y) = S(P, Pm) determine


    equilibrium P & Q
    Demand-Supply Interaction

    Price D
    Surplus S
    2.50

    Equilibrium
    2.00
    B
    1.50
    Shortage
    S D

    Quantity
    500 1000 1500
    Stability
    Shortage: at a price below equilibrium quantity
    demanded > quantity supplied

    Surplus: at a price above equilibrium quantity


    supplied > quantity demanded

    Price adjustments eliminate shortages &


    surpluses
    Increase in Demand:

    Price
    D D
    S

    Higher Price
    P B Larger Quantity

    P A

    D
    S D

    Quantity
    Q Q
    Increase in Supply:
    Price D S
    S
    A
    P Lower Price
    P B Larger Quantity

    S D
    S

    Q Q Quantity
    Increase in Demand & Supply:

    Price
    D D
    S
    S
    P B Here:
    P A Higher Price
    Larger Quantity
    D
    S S D

    Q Q Quantity

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