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What is Macroeconomics


Macroeconomics studies the economic
aggregates, such as general price
level/inflation, unemployment, national output,
trade balance, etc.
Microeconomics studies the behavior of
individual economic units, such as individual
consumers, firms, and markets.
Economic Theory



We use economic theory to explain economic
behavior and try to make an prediction.
An economic theory is a simplification of
relationships whose purpose is to explain how
those relationships work.
Economic model is an economic theory.
Economic models are expressed in
three possible forms



In words
In graphs
In equations
Mathematical Review
• Variables
It is something measured by a number
which can vary.
• Example: price of gasoline and
gallons of gasoline purchased.
P(price)
Q(quantity)
1
200
2
150
3
100
The two-variable case
• Example
C = 2 + 0.5 I
where C is consumption and I is
income.
we have these associated values:
I
C
0
2
1
2.5
2
3
3
3.5
4
4
Plot an equation in a graph
C
C = 2 + 0.5 I
4
2
0
2
4
I
Hypothetical Demand Curve
for Gas
6
6
5
5
Price
Price
D
4
a
P
3
b
2
1
4
P
3
a
b
2
D
1
0
20
40
60
Q
80 100 120 140
Quantity
(a)
0
20
40
60
Q
80 100 120 140
Quantity
(b)
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Plot an equation in a graph
C
C = 2 + 0.5 I
Vertical axis
4
2
Horizontal axis
0
Origin
2
4
I
Plot an equation in a graph
C
C = 2 + 0.5 I
Slope=0.5
rise
run
Intercept = 2
0
I
Negative Slope: X and Y are
negatively related
Y
Negative
slope
0
X
Positive Slope: X and Y are
positively related
Y
Positive
slope
0
X
Movement along a line
• If we change the value of I, at the
same time holding other parameters
(slope, intercept) constant. This
produces a movement along the line.
The position of the line does not
change.
Movement along a line
C
C = 2 + 0.5 I
4
2
0
2
4
I
Shift in a line
• If the value of a parameter changes,
say, the value of slope or intercept
changes, the position of the line
changes: there is a shift in the line.
Shift in a line
C
C = 4 + 0.5 I
C = 2 + 0.5 I
C = 2 + 0.25 I
4
2
0
2
4
I
The U.S. Economy
Largest in the World
Gross Domestic Product (GDP)
= $14.6 trillion dollars (2010)
GDP per capita
= $47,284
Gross Domestic Product (GDP)
is the money value of all the goods and
services produced in a year.
Gross National Income (GNI)
GDP – Depreciation – Indirect
Business Tax
GDP per capita
GDP per person
GNI per capita
GDP by exchange rate (2010)
(billion $)
14,657
United States
5878
China
5459
Japan
3315
Germany
France
2582
United Kingdom
2247
Brazil
2090
Italy
2055
India
1537
Russia
1465
International comparison
Need a common currency unit to make
comparison, commonly $ is used
Convert local currency to the U.S. dollar
But cost of living or the price level differ
from country to country
Law of one price
International Comparison
A watermelon costs
In the U.S.
In Japan
US$5.00
Yen 1500
Exchange rate: US$1=Yen 100, by
exchange rate, a watermelon costs
In the U.S.
In Japan
US$5.00
US$15
International comparison
To take into account of the price level
difference, we use Purchasing Power
Parity (PPP) to convert local currency to
the U.S. dollar
PPP is an exchange rate corrected for the
price difference.
According to the law of one price, for
watermelon, PPP implies $1 = Yen 300
Big Mac Index (2010)
Big Mac prices
local currency
Under (-)/over (+)
in dollars
valuation against
the dollar, %
United States
$3.73
3.73
Yuan 13.20
1.95
-48
Rouble 71.00
2.33
-38
Switzerland
SFr6.50
6.19
66
Mexico
Peso 32
2.50
-33
China
Russia
GDP 2010
by purchasing power parity (PPP)
(billion $)
14657
United States
10086
China
4309
Japan
4060
India
Germany
2940
Russia
2223
United Kingdom
2172
Brazil
2172
France
2145
Italy
1773
GDP Per Capita PPP$ (2010)
56522
Singapore
47284
United States
United Kingdom
34920
Germany
36033
Japan
33805
France
34077
Russian Federation
15837
Brazil
11239
China
India
Liberia
7519
3339
392
GDP Growth Rate (2007)
Other measures for the well-being
Life expectancy
= number of the years a resident
expect to live
Security (personal, social, community,
national)
Income distribution
Environment
Education
Life Expectancy (2009est)
Source: CIA World Facebook 2009 estimates
Life Expectancy (2004)