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Introduction to Macroeconomics
Intermediate Macroeconomic TheoryMacroeconomic Analysis
University of North Texas
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
1 What Macroeconomists Study
2 The Data of MacroeconomicsMeasuring the Value of Aggregate Economic ActivityMeasuring the Cost of LivingMeasuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
1 What Macroeconomists Study
2 The Data of MacroeconomicsMeasuring the Value of Aggregate Economic ActivityMeasuring the Cost of LivingMeasuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
What Macroeconomists Study
Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:
1 Economic growth
2 Inflation
3 Unemployment
Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
1 What Macroeconomists Study
2 The Data of MacroeconomicsMeasuring the Value of Aggregate Economic ActivityMeasuring the Cost of LivingMeasuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
The Data of Macroeconomics
1 Economic growth rate: g = %∆ value of aggregate economicactivity (Y)
2 Inflation rate: π = %∆ cost of living (P)
3 Unemployment rate: u = # of unemployedlabor force × 100
ECON 3560 / 5040 Introduction to Macroeconomics
The Data of Macroeconomics
1 Economic growth rate: g = %∆ value of aggregate economicactivity (Y)
2 Inflation rate: π = %∆ cost of living (P)
3 Unemployment rate: u = # of unemployedlabor force × 100
ECON 3560 / 5040 Introduction to Macroeconomics
The Data of Macroeconomics
1 Economic growth rate: g = %∆ value of aggregate economicactivity (Y)
2 Inflation rate: π = %∆ cost of living (P)
3 Unemployment rate: u = # of unemployedlabor force × 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic Activity
Gross Domestic Product (GDP)
1 Sum of money (market) values of
2 all final goods and services
3 produced within a country
4 in a given period of time (usually a calendar year)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices
Changes in nominal GDP can be due to
1 changes in prices
2 changes in quantities of output produced
⇒ Not a good measure of economic well-being
Real GDP (Y): the value of goods and services measured atconstant prices
Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP
The Bureau of Economic Analysis (http://www.bea.doc.gov)
U.S. Real & Nominal GDP, 1967-2001
01,0002,0003,0004,0005,0006,0007,0008,0009,000
10,00011,000
1965 1970 1975 1980 1985 1990 1995 2000
(bill
ions
of U
.S. d
olla
rs)
NGDP (billions of $) RGDP (billions of 1996 $)
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
Real GDP per person (y = YN ): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts1 Long-run upward trend2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
Real GDP per person (y = YN ): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
Real GDP per person (y = YN ): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Value of Aggregate Economic ActivityRGDP per person
Real GDP per person (y = YN ): income of the average person in
the economy
U.S. real GDP per person in 1996 dollars
Stylized Facts
1 Long-run upward trend
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of Living
1 Consumer Price Index (CPI)
2 Producer Price Index (PPI)
3 GDP Deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
CPI is measured by pricing the items on a list representative ofa typical urban household budget
CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
CPI is measured by pricing the items on a list representative ofa typical urban household budget
CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
CPI is measured by pricing the items on a list representative ofa typical urban household budget
CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
CPI is measured by pricing the items on a list representative ofa typical urban household budget
CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)How the BLS constructs the CPI
1 Survey consumers to determine composition of the typicalconsumer’s basket of goods
2 Every month, collect data on prices of all items in the basket;compute cost of basket
3 CPI in any month equalscost of basket in that monthcost of basket in base period
× 100
most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
CPI is measured by pricing the items on a list representative ofa typical urban household budget
CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)
How the BLS constructs the CPI
most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI
The composition of the U.S. CPI’s basket
16.2%
40.0%
4.5%
17.6%5.8% 5.9%
2.8%
2.5%
4.8%
Food and bev.
Housing
Apparel
Transportation
Medical care
Recreation
Education
Communication
Other goods andservices
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI Inflation
Inflation rate (π = %∆P): the percentage change in the averagelevel of prices from the year before
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex
A price index (P) can be used to
1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =money wage in 2000
CPI of 2000× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex
A price index (P) can be used to
1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =money wage in 2000
CPI of 2000× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex
A price index (P) can be used to
1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =money wage in 2000
CPI of 2000× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex
A price index (P) can be used to
1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =money wage in 2000
CPI of 2000× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingDeflating
Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex
A price index (P) can be used to
1 measure inflation
2 deflate nominal values to adjust for inflation
real wage in 2000 =money wage in 2000
CPI of 2000× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingGDP Deflator
GDP Deflator: price index used to deflate GDP
real GDP =nominal GDPGDP deflator
× 100
The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business
Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket
However, the discrepancy is usually minor
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring the Cost of LivingCPI versus GDP Deflator
Two measures of inflation
16
14
12
10
8
6
4
2
0
- 2
Percentagechange
1948 1953 1958 1963 1968 1973Year
1978 1983 1988 1993 1998
CPI
GDP deflator
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
Unemployment: the macroeconomic problem that affectspeople most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each monthby the BLS (http://www.bls.gov)
u =# of unemployed
labor force× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
Unemployment: the macroeconomic problem that affectspeople most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each monthby the BLS (http://www.bls.gov)
u =# of unemployed
labor force× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
Unemployment: the macroeconomic problem that affectspeople most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each monthby the BLS (http://www.bls.gov)
u =# of unemployed
labor force× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
Unemployment: the macroeconomic problem that affectspeople most directly and severely
How well an economy uses its resources
Unemployment rate is calculated and announced each monthby the BLS (http://www.bls.gov)
u =# of unemployed
labor force× 100
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
U.S. unemployment rate
Stylized Facts1 There is always some unemployment (even in the LR)2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Measuring JoblessnessUnemployment Rate
U.S. unemployment rate
Stylized Facts
1 There is always some unemployment (even in the LR)
2 Short-run fluctuations
ECON 3560 / 5040 Introduction to Macroeconomics
Okun’s Law
Employed workers help produce GDP, while unemployedworkers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okun’s Law
Employed workers help produce GDP, while unemployedworkers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okun’s Law
Employed workers help produce GDP, while unemployedworkers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okun’s Law
Employed workers help produce GDP, while unemployedworkers do not
So one would expect a negative relationship betweenunemployment and real GDP
This relationship is clear in the data
ECON 3560 / 5040 Introduction to Macroeconomics
Okun’s Law
19511984
1999
2000
1993
1982
1975
Change in unemployment rate
10
-3 -2 -1 0 1 2 43
8
6
4
2
0
-2
Percentage change in real GDP
Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP
Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP
ECON 3560 / 5040 Introduction to Macroeconomics
Outline
1 What Macroeconomists Study
2 The Data of MacroeconomicsMeasuring the Value of Aggregate Economic ActivityMeasuring the Cost of LivingMeasuring Joblessness
3 How Economists Think
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics
How Economists Think
Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables
Economic variables
1 Endogenous variables: those that the model explains
2 Exogenous variables: those that come from outside the model
An economic model can show how the exogenous variablesaffect the endogenous variables
1 The model of supply and demand
2 The circular flow of dollars through the economy
ECON 3560 / 5040 Introduction to Macroeconomics