Macroeconomics Understanding the Global Economy, 3rd Edition By Miles, Scott, Breedon
CHAPTER 1
What is Macroeconomics?
CHAPTER 1: WHAT IS MACROECONOMICS? INTRODUCTION As might be expected, this first chapter sets the scene for the whole textbook and attempts to motivate the study of macroeconomics. Although there is probably only enough material here for about fifteen minutes of lecture, it obviously needs to be well delivered. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER This chapter is likely to form only the first part of a lecture and should probably be combined with the material in Chapter 2. The chapter can be tailored to your audience. For example, if the students are mainly working in business, give examples of how macroeconomics influences business decisions. Think about touching on the key macroeconomic issues in the news at the time e.g. tax policy, the business cycle etc. CHAPTER GUIDE 1.1 What is Macroeconomics About? It is a good idea to contrast a recent short-term macroeconomic issue (like the latest change in monetary policy) with the longer-term issue of growth and inequality between regions. The Background Material below gives more information on comparative world growth since 1500. 1.2 But What about that Definition? Milton Friedman’s favorite description of the wonders of the price mechanism (the invisible hand) is “I Pencil” by Leonard Reed (see www.econlib.org/library/Essays/rdPncl1.html ). However, business students may find it a little patronizing. 1.3 The Difference between Macro and Microeconomics. Like most distinctions, this one is somewhat blurred around the edges. It may be worth underlining that good macroeconomics tend to have strong microfoundations (i.e. based on microeconomic analysis and built up to macroeconomic behavior). 1.4 Why Should People Interested in Business Study Macroeconomics? There are many good examples of how macro economic analysis can help solve real world problems. The case study below gives a lighter example; how macroeconomics can help to predict the next U.S. president.
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CHAPTER 1
What is Macroeconomics?
CASE STUDY: ECONOMIC EVENTS AND PRESIDENTIAL VOTING Introduction Not only is economic policy a key issue in presidential politics, the state of the economy is a key determinant of the outcome of the election. To illustrate this point, Professor Ray Fair has devised a simple model of presidential voting based on macroeconomic and political variables. The model correctly predicted the outcome of 20 out of 22 elections since 1916 (NixonKennedy 1960 and Bush-Clinton 1992 were its two failures). Its prediction for the 2012 election (made in early 2012) was for an Obama victory with a marginally reduced share of the vote The Model Fair’s original model considers the following questions in respect of each presidential candidate ➢ Is your party already in power and has the economy been doing well in the last three quarters? – Positive impact ➢ Is your party already in power and has the economy grown 3.2% p.a. or more in the last 15 quarters? – Positive impact. ➢ Is your party already in power and has inflation been low over the last 15 quarters? – Positive impact. ➢ Are you an incumbent? – Positive impact. ➢ Is America involved in a world war? – Forget the economy. It is perhaps troubling that such simple determinants seem to explain so many election results, particularly since short term factors - such as growth over the last 9 months - seem so important (see also “It’s the economy stupid” in the Background Material for Chapter 2). Source Fair(1998) “The Effect of Economic Events on Votes for President” http://fairmodel.econ.yale.edu/vote2012/index2.htm Discussion Questions 1) Why is voting so influenced by economics events? Can politicians really improve/worsen economic outturns over a normal electoral cycle? 2) If economics is the key to political success how come so few politicians have an economics training? Additional Questions Question 1) Look at the chart below of per capita GDP (1990 US dollars) for a number of regions. 1) Why did the world economy grow so slowly before the 20th Century? 2) Why was growth concentrated in a few regions? Africa and the US had the same output per capita in 1500. 3) Is increasing inequality between countries inevitable? .. . 3
CHAPTER 1
What is Macroeconomics?
GDP per capita 1500-1998 (in 1990 US dollars) 30000 25000
United States Japan Western Europe
20000
Latin America Former USSR
15000
China Africa
10000 5000 0
00 530 560 590 1 1 1 15
20 650 680 1 1 16
10 740 770 17 1 1
00 830 860 18 1 1
90 920 18 1
50 980 1 19
Source: OECD Answer 1) There is of course no accepted answer to these questions. A poor reflection on economics as a science
Question 2) If per capita income in Ethiopia grows 3% per annum for the next fifty years and per capita income in the US grows at 3% per annum for the next fifty years, what will happen to the income gap (in dollars) between Ethiopia and the US? Answer 2) the gap will widen. 3% of a big number (i.e. US GDP) is more than 3% of a small number (i.e. Ethiopian GDP)
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CHAPTER 2
The Language of Macroeconomics: The National Income Accounts
CHAPTER 2: THE LANGUAGE OF MACROECONOMICS: THE NATIONAL INCOME ACCOUNTS INTRODUCTION This chapter is more interesting than its title implies as it offers opportunities to discuss current issues. As with several chapters, one can either give a worldwide view with lots of comparative statistics or focus on aspects of a particular economy. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER This chapter takes the logical route of discussing how to measure output before going on to its time series properties – it is hard to teach any other way. Output trends and business cycles naturally combine with material from Chapters 4 and 14. Welfare and output can be discussed either at the beginning or end of a lecture and can be extended by discussing the Human Development Index in more detail. It is useful to point out the two types of problem with GDP measures. First, it is simply a narrow measure of what is produced in the economy and so would not correspond precisely to welfare even if well measured. Second, it does not even measure output properly since it cannot include components such as non-remunerated services and the underground economy. CHAPTER GUIDE 2.1 What Do Macroeconomists Measure? The discussion concerning output versus welfare (which reappears at the end of the chapter) is easy to motivate. The ecological damage of higher output is a current example and can be used to extend the discussion to missing markets (i.e. properly measured output could include pollution costs if these were tradeable). 2.2 How do Macroeconomists Measure Output? URL’s for National Accounts data: USA http://www.bea.gov/ Euro-Area http://sdw.ecb.europa.eu/browse.do?node=2018805 Japan http://www.esri.cao.go.jp/index-e.html UK http://www.statistics.gov.uk/hub/economy/national-accounts/national-income-expenditure-and-output/index.html Canada http://www.statcan.ca/ 2.3 Output as Value Added Figure 2.2 in the main text is worthy of discussion. By showing how rich countries tend to have small agriculture sectors (i.e. only a small proportion of value added comes from agriculture), it illustrates why many economists have argued that industrialization is the key to growth. Certainly, the Asian tigers followed this route to .. . 5