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ECON 702, Introduction
INTRODUCTION
ECON 702
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ECON 702, Introduction
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Fields of Economics
Economics
Microeconomics (study of individual
consumers and markets)
Macroeconomics
(study of aggregate economy)
Growth
Industrial organization, labor
economics, health economics,
financial economics, urban
economics, environmental
economics, game theory, family
economics,…
Business
Cycles
Real Business Cycles,
Monetary economics,
International finance
ECON 702, Introduction
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Real GDP per capita in U.S. (1929 - 2015)
60000
Chained 2009 dollars
50000
40000
30000
20000
10000
0
1929 1939 1949 1959 1969 1979 1989 1999 2009 2019
Years
ECON 702, Introduction
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Real GDP per capita in U.S. (1929 - 2015)
60000
Chained 2009 dollars
50000
40000
Growth trend
30000
Business cycles
20000
10000
0
1929 1939 1949 1959 1969 1979 1989 1999 2009 2019
Years
ECON 702, Introduction
Business cycles
5
6
ECON 702, Introduction
Chained 2009 Dollars
Real gross domestic product per capita
62000
57000
52000
47000
42000
37000
32000
27000
22000
17000
12000
1947
1957
1967
1977
1987
Source: US. Bureau of Economic Analysis/FRED
1997
2007
2017
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ECON 702, Introduction
Chained 2009 Dollars
Real gross domestic product per capita
62000
57000
52000
47000
42000
37000
32000
27000
22000
17000
12000
1947
1957
1967
1977
1987
Source: US. Bureau of Economic Analysis/FRED
Growth trend based
on pre-recession
1997
2007
2017
ECON 702, Introduction
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Course outline
• We start with basic growth theory
• Solow model
• Neoclassical Growth Model (NGM)
• Next, we introduce some random components into the
NGM, to study business cycles (Stochastic NGM)
• Other topics (money, exchange rates, asset pricing, labor
markets, lifecycle choices) will be discussed if time
permits.
ECON 702, Introduction
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Growth Facts
1.
2.
3.
4.
5.
6.
7.
Per capita output grows over time, and its growth does not
tend to diminish in developed countries.
Physical capital per worker grows over time. Capital/output
ratio is approximately constant.
The rate of return to capital is nearly constant over time.
The shares of labor and physical capital in national income
are nearly constant over time.
The standard of living differ substantially across countries
(see the next figure).
The growth rate of output per worker differs substantially
across countries (see the next figure).
There is no systematic relationship between standards of
living and growth rates across countries (poor countries do
not tend to grow faster and catch up). In other words, there
is no absolute convergence.
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ECON 702, Introduction
ln(Real GDP per capita)
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10
9
8
7
6
5
4
1950
1960
ln(rgdp_ARG)
1970
ln(rgdp_TCD)
1980
Years
ln(rgdp_CHN)
1990
ln(rgd_KOR)
2000
2010
ln(rgdp_USA)
ECON 702, Introduction
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Questions
What factors determine which countries prospered?
2. Can we point to specific economic policies?
3. Are there specific country characteristics that determine
economic fate?
4. Is prosperity just a result of luck?
1.
ECON 702, Introduction
Robert Lucas (1988)
• "Once one starts to think
about [these questions], it is
hard to think about anything
else".
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ECON 702, Introduction
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Our approach
Micro foundations. The modern approach to
macroeconomics requires a strong theoretical
foundation. The economy consists of individuals and
firms, who pursue certain objectives - micro.
2. Computational Experiment.
1.
• A theory is a “lab” (a mathematical model) for performing controlled
experiments.
• Macroeconomic models often do not have analytical solution. In
such cases, we resort to numerical computation.
ECON 702, Introduction
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How to do well in ECON 702
1.
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3.
4.
5.
6.
7.
Do the math. You must practice deriving and proving
the results in the notes. Reading the notes is not
enough.
Attendance. Attending all the classes on time is
crucial.
Read the notes in advance.
Review previous material before every class.
Homework. You must solve all the homework.
Ask me. Highlight parts of the notes that you did not
understand, and visit me during office hours.
Understand, not Memorize.