Business Administration And International Relations
Macroeconomics
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Macroeconomics Exam Notes
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Macroeconomics
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Macroeconomics
Everything covered in the first Macroeconomics course is here. Thoroughly explained, with examples and made so that it is very easy to follow. I got a high 9/10 with these notes.
STUDY GUIDE MACROECONOMICS ERASMUS UNIVERSITY COLLEGE 2020, European perspective Blanchard, Amighini and Giavazzi, Samenvatting, summary
Summary "Blanchard, Macroeconomics, 7th global edition, Ch. 1-12
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MACROECONOMICS
Part 1
What is Macroeconomics?
Macroeconomics is the study of an economy as a whole. We take the whole economic
system and study what happens inside: activity, unemployment, inflation and income
Classical economics
● Long-term economic growth depends on the availability of factors of production (land,
labor and capital) and on their organization (international division of labor)
● The supply of factors of production (specially, capital goods) can be increased
through investment
● In order to invest, we must previously save. Countries are more prompt to save more
ability to invest.
● To save implies not to consume: more consumption is less investment.
● If more people are willing to invest, they want to borrow money and interest rates will
rise. Therefore, less people will be willing to invest, people will save more.
● If a lot of people are saving (not consuming) and less ppl want to invest, interest
rates will go down. Therefore, more people will be willing to invest so investment will
rise.
John Maynard Keynes
● For more than a century this was the economic framework.In the 30´s things started
to change.
● Modern macroeconomics starts in 1936, with the publication of John Maynard
Keynes’s General Theory of Employment, Interest, and Money .
● Great depression: failure for the economists working on business cycle theory—as
macroeconomics was then called. Few economists had a coherent explanation for
the Depression.
● Classical economists are wrong. They think economic growth depends on supply, on
increasing the resources available.
● Keynes: our economies work usually below its full potential. The problem is not lack
of resources but lack of willingness. Demand side considerations. Why accumulate
capital goods if we are not fully using the ones that we have.
● The General Theory emphasized effective demand (what we now call aggregate
demand)
● The main problem with aggregate demand was investment. Bad expectations or high
interest rates due to strong liquidity preference could plunge investment.
● Liquidity preference = demand for money (for keyness)
● A low level of investment also means a low level of consumption due the multiplier
effect (negative multiplier = decrease in injection greater impact decrease of GDP)
● The result of this lack of aggregate demand is unemployment under equilibrium.
● Even if you reduce interest rates, if there are not good prospects for the future ppl will
not invest. If expectations are good, people will invest.
, Keynesianism after Keynes
● “We are all Keynesians now”. Theoretical developments in the 50s. By the early 1950s a large
consensus had emerged, based on an integration of many of Keynes’s ideas and the ideas of
earlier economists. This consensus was called the neoclassical synthesis.
● Simon Kuznets worked on National Accounting and created the GDP measurement. (GDP
wasn't used in any economy. Difficult to compare wealth between countries)
● John Hicks formalized Keynes' ideas in the IS-LM model. "investment-savings" (IS) and
"liquidity preference-money supply" (LM) → in the initial version Expectations
played no role, and the adjustment of prices and wages was altogether
absent.
● Inflation consequence of excessive aggregate demand. Stagnation: people are not spending
too much so deflation. Keynes was not prepared to explain having stagnation and deflation.
● Solution to Increase aggregate demand. Inflation. Increase in wages. Unemployment.
Problem in the 70s. Keynes was not able to explain so he was criticized.
The revolt against keynesianism
● Friedrich Hayek: Austrian School: rejected keynesianism for not taking into account the
problems of intertemporal coordination (in the long term, Keynes’ theory does not bring
economic prosperity). Keynesian policies could create artificial economic booms and
perpetuate the disadjustments that had led initially into a depression. He was obsessed with
full employment. According to his view, fluctuations were due to manipulated interest rates.
Artificial reductions of interest created malinvestments
● Milton Friedman: Chicago School or monetarism: According to their view, fluctuations were
due to changes in the money supply (total value of money available in an economy at a point
of time), not to the lack of aggregate demand. He said Keynesian policies in the long run
create inflation. You can not reduce unemployment by pursuing economic policies. Criticized
Keynes for not taking into account that stimulative policies end up creating inflation without
any stimulus. La culpa del great depression no fue por culpa de lack of aggregate demand,
sino pq no había suficiente money supply, as a result of bank failures.
Keynesian economists believed that there was a reliable trade-off between unemployment
and inflation, even in the long run. Milton Friedman and Edmund Phelps disagree.
● Robert Lucas: stagflation in the 1970s → Rational Expectations School: criticized Keynes
for not taking seriously into account expectations. They believed that people form
expectations as rationally as they can, therefore stimulative policies do not work,
not even in the short run (as long as they can, are anticipated). Expectations →
reaction:
- If you sell more, profits increase. If you increase prices. If workers see an increase in
prices, demand for higher wages. Then benefit won´t increase
- An expansionary fiscal policy leads to later rising taxes in order to pay the
extra debt we are currently issuing. → People and companies see
expansionary policies. They are able to anticipate that they will pay higher
taxes. They might restrict today the spending to pay the taxes in the
future.
,Only unanticipated changes in money should affect output
Macroeconometric models based on past behavior will not be very useful in formulating policy
New Classical Economics
Rational Expectations School opened the path to a New Classical Economics tradition, with
two main ideas:
1) Money is neutral (money supply changes do not have an effect) on real variables, as
long as their fluctuations are properly anticipated thanks to rational expectations.
2) Fluctuations in output are not the result of market imperfections, but of exogenous
supply shocks(ex: Technological advances). This is known as Real Business Cycle
Theory.
● Monetary and fiscal policy are mostly inefficient as they are normally anticipated by
economic agents.
● Only when politicians cheat economic agents, they are not anticipated. But politicians
who normally cheat are not trusted anymore and their policies become even more
inefficient.
New Keynesian Economics
New Keynesians argue that fluctuations are the result of market imperfections, but not due to
bad expectations among economic agents. Three mechanisms can create fluctuations:
○ Nominal rigidities: Even with correct forecasts, prices may not be as flexible
as needed to restore macroeconomic equilibrium.
Los precios no cambian independientemente del cambio en supply o demanda, sino que
permanecen rígidos. Por lo que el ecosistema económico no se regula.
○ Efficiency wages: In some markets, employees are paid more than the
equilibrium wage so as to boost their productivity. Therefore, unemployment
appears.
○ Imperfections in credit markets: Banks may ration credit to potential
borrowers in certain times.
● The aim of fiscal and monetary policy should be to stimulate GDP and employment
when these imperfections create a recession.
● Keynes said: Business cycle fluctuations were due to marketing. New Keynesian:
People are not stupid. Market expectations can create fluctuations. People form
expectations rationally.
Part 2
Chapter 2 book + class notes + ppoint lesson 3
THREE KEY VARIABLES
, A) Aggregate output: how many goods and services have we produced during a
period of time.
- At the end of World War II (1947) national income and product
accounts (also called national income accounts), both measures of
aggregate output were published on a regular basis in the United
States.
How to measure aggregate output? → GDP
1) Value of the Final Goods and Services Produced in the Economy during a
given period.
- Intermediate goods don´t count for GDP. They are goods that
throughout the year have been used to produce other goods.
2) The sum of the value added in the economy during a given period.
- Value added: value firm´s production minus the value of the
intermediate goods used in production. (Its revenue minus its costs of
intermediate goods)
3) The sum of incomes in the economy during a given period.
- Labor income (wages)+ Capital income (profits)
Rise in GDP
A) An increase in the production of goods and services
B) An increase in the price of goods and services (inflation)
Types of GDP
1) Nominal GDP:(also called dollar GDP or GDP in current dollars) final goods
produced times their current price. It increases over time because: production
of most goods increases over time + the price of most goods also increases.
2) Real GDP: (also called: GDP in terms of goods, GDP in constant dollars,
GDP adjusted for inflation, or GDP in chained (2009) dollars or GDP in 2009
dollars) final goods times constant price (price of a base year). Eliminate the
effect of increasing prices allowing us to measure the real growth.
- Real GDP in chained dollars: price of a base year. Year where
Nominal and Real GDP match.
Rate of Growth
- Periods of positive GDP growth → expansions.
- Periods of negative GDP growth → recessions.
(Yt - Yt-1)/Yt-1
To the right of the base year:
if Nominal GDP larger than Real GDP → lnflation
If Real GDP larger than Nominal GDP → Deflation
To the left of the base year:
If Real GDP higher than Nominal GDP → Inflation
If Nominal GDP is higher than Real GDP → Deflation
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