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QUANTS TEXTBOOK SUMMARYWHAT IS MACROECONOMICS?
Macroeconomics = study of the behavior of large collections of economic agents.
Focuses on:
- The aggregate behavior of consumers and firms,
- The behavior of governments,
- The overall level of economic activities in individual countries,
- The economic interactions among nations,
- The effect of monetary and fiscal policy.
Distinct from microeconomics in that it deals with the overall effects on the economies of
the choices that all economic agents make, rather than on the choices of individual
consumers or firms.
Distinction blurred: economic models of macroeconomists are built up from
macroeconomic principles.
What makes macro distinct = it focuses on:
- LR growth = increase in a nation’s productive capacity and average standard of living
that occurs over a long period of time.
- Business cycles = the SR ups and downs, or booms and recessions, in aggregate
economic activity.
GDP, ECONOMIC GROWTH, AND BUSINESS CYCLES:
GDP:
- Quantity of goods and services produced within a country’s borders during some
specified period of time.
- Quantity of income earned by those contributing to domestic output.
KEY TERMS:
Economic model = description of consumers and firms, their objectives and constraints, and
how they interact.
Trend = the smooth growth path around which an economic variable cycles.
Models = artificial devices that can replicate the behavior of real systems.
Optimize = the process by which economic agents do the best they can given the constraints
they face.
Equilibrium = the situation in an economy when the action of all the consumers and firms
are consistent.
Competitive equilibrium = equilibrium in which firms and households are assumed to be
price-takers, and market prices are such that the quantity supplies equals the quantity
demanded in each market in the economy.
Rational expectations revolution = macroeconomics movement of 1970s, introducing more
microeconomics into macroeconomics.
, Lucas critique = the idea that macroeconomic policy analysis can be done in a sensible way
only if microeconomic behavior is taken seriously.
Endogenous growth models = models that describe the economic mechanism determining
the rate of economic growth.
Keynesian = describe macroeconomists who are followers of J. M. Keynes and who see an
active role for government in smoothing cycles.
Non-Keynesian = describes macroeconomists who pursue business cycle analysis that does
not derive from the work of J. M. Keynes.
Real business cycle theory = implies that business cycles are caused primarily by shocks to
technology and that the government should play a massive role over the business cycle.
Coordination failures = a modern incarnation of Keynesian business cycle theory positing
that business cycles are caused by self-fulfilling ways of optimism and pessimism, which may
be countered with government policy.
New Keynesian economics = a modern version of Keynesian business cycle theory in which
prices and/or wages are sticky.
Inflation = the rate of change in the average level of prices over time.
Federal Reserve System = CB of the USA.
Philips curve = a positive relationship between the deviation of aggregate output from trend
and the inflation rate.
Average labour productivity = quantity of aggregate output over produced per worker.
Beveridge curve = a negative relationship between the unemployment rate and the vacancy
rate.
Crowding out = the process by which government spending reduces private sector
expenditures on investment and consumption.
Government surplus = differences between taxes and government spending.
Government saving = identical to government surplus.
Government deficit = the negative of the government surplus.
Ricardian equivalence theorem = theory asserting that a change in taxation by the
government has no effect.
Nominal interest rate = the interest rate in money terms.
Real interest rate = approximately equal to the nominal interest rate minus the rate of
inflation.
Current account surplus = ex – im + net factor payments to domestic residents from abroad.
Net exports = exports of goods and services – imports of goods and services.
Net factor payments = payments received by domestic factors of production from abroad –
the payments to foreign factors of production from domestic sources.
Current account deficit = situation in which the current account surplus is negative.
MEASURING GDP
3 approaches:
1. Product approach
2. Expenditure approach
3. Income approach
Example: island economy with:
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