Lecture 2 Part I

Macroeconomic Goals and Macroeconomics in Context

Micro vs. Macro?

• Economics: the study of the way people organize themselves to sustain life and enhance its quality

• Microeconomics: the study of the economic activities and interactions of individuals, households, businesses, and other groups at sub-national level

• Macroeconomics: the study of how economic activities at all levels create a national (and global) economic environment

Macroeconomic goals

1. Living standards

2. Stability and security

3. Sustainability

Positive questions: How things are

Normative questions: How things should be

Well-being as a goal in economics: how to promote and sustain flourishing of life

Living standards

• How to achieve growth in living standards?How to improve people’s diet, housing, medical attention, education, working conditions and access to care, transportation, communication, entertainment, self-actualization, happiness, sense of meaning in life…

• Is economic growth = raising living standards?

– Economic growth: increase in the level of production of a country/region

Living standards

• Economic development: Overcoming poverty and deprivation and achieving increased production via investments and changes in the organization of work

• Labor productivity: the level of output produced per worker

• Does economic growth benefit all?

– What is produced?

– How is it produced?

– For whom does economic growth occur?

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

GD

P (

Co

nsta

nt

2010 U

S$,

measu

red

in

bil

lio

ns)

Global Production, 1960-2010

Source: The World Bank Group, World Development Indicators Online

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

GD

P p

er

cap

ita (

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nsta

nt

2010 U

S$)

Global Production Per Capita, 1960-2010

Source: The World Bank Group, World Development Indicators Online

Macroeconomic data on Turkey

GDP (Million US dollars)

GDP per capita (US dollars/capita)

GDP growth rate

Source: https://www.weforum.org/agenda/2016/07/greenest-happiest-country-in-the-

world?utm_content=buffer693da&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Happy Planet Index: The most successful countries are those where

people live long and happy lives at little cost to the environment.

Stability and security

• Business (trade) cycle:

Recurrent fluctuations in the level of national production, with alternating periods of recession and boom

• How to achieve sufficient economic stability?

$0

$2

$4

$6

$8

$10

$12

$14

1800 1825 1850 1875 1900 1925 1950 1975 2000

Real G

DP

(T

rill

ion

s o

f 2000 U

S $

)GDP in the United States, 1800-2010

Source: Louis D. Johnston and Samuel H. Williamson, “The Annual Real and Nominal GDP for the United States,

1790–Present.” Economic History Services, http://www.eh.net/hmit/gdp/.

Updated with data from the World Bank Development Indicators. http://data.worldbank.org/indicator

Sustainability

1. Financial sustainability: What is the level of sustainable debt of a country?

2. Social sustainability: How to overcome the disparities between «haves» and «have nots»? What about the income and wealth of future generations?

3. Ecological sustainability: Can natural environment sustain life in the future? How quickly are natural resources depleted?

Can economic growth and technological progress improve standard of living without limits?

270

290

310

330

350

370

390

410

1832 1862 1892 1922 1952 1982 2012

CO

2(p

art

s p

er

mil

lio

n)

Growth in Atmospheric Carbon Dioxide, 1815-2010

Source: Carbon Dioxide Information Analysis Center, http://cdiac.ornl.gov/ftp/trends/co2/siple2.013 and http://cdiac.ornl.

gov/trends/co2/sio-mlo.htm.

Updated using NOAA ESRL data. ftp://ftp.cmdl.noaa.gov/ccg/co2/trends/co2_mm_mlo.txt

Major historical developments in macroeconomics

The Classical Period

Classical economics:

– Division of labor and specialization, technological progress and capital accumulation lead to «wealth of nations»

– Laissez-faire economy: an economy with little government regulation

– Say’s Law: supply creates its own demand

– Adam Smith, Karl Marx, Jean-Baptiste Say, Robert Malthus, David Ricardo

Adam Smith

1723-1790

Karl Marx

1818-1883

The Great Depression, Keynes and Monetarism

• Great Depression (1929), stock market crash

• John Maynard Keynes’ book: The General Theory of Employment, Interest, and Money

• Keynesian economics: the school of thought arguing for the active use of fiscal policy to keep aggregate demand high and employment rates up

– Aggregate demand: total demand for all goods and services in a national economy

– Fiscal policy: the deliberate change in the level of government spending and/or taxation to raise or lower aggregate demand

John Maynard Keynes

1883-1946

Monetarism:

• University of Chicago, Milton Friedman

• Bad monetary policies lead to bad economic situations

• Governments need to aim for a steady level of monetary supply rather than playing an active role in economics

– Monetary policy: tools of governments regarding banking regulations, printing money, trying to affect money supply, interest rates, and credit to eliminate business cycles

The Great Depression, Keynes and Monetarism

Milton Friedman

1912-2006

Classical and Keynesian Economics: A Synthesis

• In the 1970s, a new problem emerged: unemployment rose without a decrease in inflation

• Many macroeconomists used elements from both Classical and Keynesian theory by distinguishing between long-term and short-term.

• According to classical theory (long-run):

-Economies will eventually settle at full-employment in the long-run

-If money supply changes, this will affect only inflation

• According to Keynesian theory (short-run):

-Wages and other prices can be «sticky», they do not change quickly

-Fiscal and monetary policy needed to deal with unemployment and recessions

Recent challenges for macroeconomists

• Supply shocks: OPEC (Organization of Petroleum Exporting Countries) cut oil production drastically, oil prices went up heavily

• Environmental impacts of fossil-fuel-based economic growth problematic in the long-run

• Persistence of substantial global poverty