Summary of the Lecture Slides per Week – Macroeconomics (ECB1 MACR)
Week 1:
Economics concerned with the production, use, and management of resources.
Macroeconomics as a whole (large) it lags behind as a science, because there is less
data compared to other fields opinions matter.
Macroeconomic choices shape society as a whole the societal relevance might be larger.
Emergent Properties present when there is something in large quantities but not in small
quantities it requires interaction.
General Equilibrium Effects individual behaviour affects the price level the price level
is an input for individual behaviour.
Economy-wide Actors economic sectors, governments, central bank(s).
Short-Run Macroeconomics this involves the business cycle 4 – 7 years it
dominates the economic news and short-term policy making shocks and fiscal or
monetary policy affect the economy and the economy returns towards a well-defined
equilibrium.
Long-Run Macroeconomics understanding the structure of an economy changes in
institutions or laws, technology and incentives affect the structure of the economy no well-
defined equilibrium.
Economic Fluctuations economic shocks from output move away a variable from the
equilibrium deviations from a steady state, followed by a return towards the equilibrium
over time.
Model simplified description of reality that allows for analysis of a usually complicated
issue understanding, validation, forecasting, and policy options (counterfactual analysis).
Large-scale Macroeconomic Models macro aggregates, equations, flexible / workable /
inconsistent, used for forecasting.
Small Theoretical Models specific economic processes, only with the necessary
equations, used to explain characteristics of the economy.
Empirical Work tests relations between economic variables macroeconomic
interpretation cumbersome used in forecasting.
Agent-based Models preferences and constraints of agents aggregate up to the economy
as a whole.r
GDP (Gross Domestic Product) everything that has been produced in a certain country
in a year (or a quarter of a year), without discount for depreciation there are three
approaches to calculate the GDP, namely income, output / production and expenditure
these are all equal to each other.
Components national income Y, consumption C, investments I, government spending G,
export X and import M Y = C + I + G + X – M.
Usage measure for: size of tax base, economic growth, relative economic power,
productivity (per capita).
Opinions some economists say that the GDP is a good statistical measure / indicator of
development, whereas others say that welfare cannot be measured by solely the GDP.
GDP is a bad measure for wellbeing, because of missed trade-offs labour vs leisure,
production vs environmental issues, income vs inequality the consequences are that
society focuses more on production than on wellbeing.
, Okun’s Law this law explains the linear relationship between changes in domestic output
and unemployment fluctuations the law holds the linear formula ΔY = a + b * Δu or Δu = a
+ b * ΔY a high GDP has a negative correlation (relationship) with unemployment.
- With higher unemployment, firms have more bargaining power vis-à-vis employees
leading to a relative fall in wages firms can implement lower wages, because the
reservation wage for employees is low due to the high unemployment (so finding
another job is more difficult).
- With lower production, consumers have more bargaining power vis-à-vis firms leading
to a relative fall in prices firms still want to sell their produced goods, so
decreasing the price will attract more consumers.
- With lower prices, demand for goods increases leading to an increase in output Y and
a decrease in unemployment u.
- All these steps can also happen vice versa low unemployment = less bargaining
power for firms = rise in wages & high production = consumers have less bargaining
power = rise in prices & high prices = demand for goods decreases = increase in
unemployment.
Okun’s coefficient with what percentage the unemployment will decrease when GDP
grows with 1% in other words, when unemployment falls, production / output will increase,
leading to a higher GDP (and vice versa).
Week 2:
GDP is more volatile than consumption shocks / fluctuations are larger.
Idiosyncratic Shocks only affect one household these shocks are not macro-relevant.
Economy-wide Shocks affect most households macro-relevant with input for policy.
Consumption Smoothing decreasing marginal returns to consumption consuming
average consumption all the time increases utility as compared to consuming a lot once and
not being able to consume enough later.
Permanent Income Hypothesis if people can freely trade current and future income,
optimal current consumption = the effect of a wealth
shock is small on current consumption.
Wealth financial wealth (+ expected future earnings from employment), housing wealth
(home equity = value of house – debt) and human capital.
Target Broad Wealth the wealth that you want to obtain (without debt).
Value of House = home equity + debt.
Net Worth = financial wealth + home equity.
Smoothing Consumption through the Financial Market:
- Saving in good times when it is known that bad times are coming and dissaving in the
bad times (might lead to willpower) some households cannot ‘control’ themselves
and do not smoothen consumption weakness of will.
- Borrowing in bad times and repaying when incomes increases again some
households are not allowed to borrow money and do not smoothen consumption
constrained / financial constraints.
Insurance pay now reduce effect of negative outcome on income and consumption in
the future (Social Security System).
Housing vs Consumption when household wealth falls, housing values decrease and
mortgage debts over income rise consumption falls.
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