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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)