Hello everyone.
This is the first class of this course.
Today I shall make a brief introduction
to macroeconomic analysis.
We first discuss what macroeconomics is.
Then, we go on to look at the
two focuses of study in macroeconomics—
economic growth and business cycles.
Finally, we explain the approach
this course takes—building
macroeconomic models
with microeconomic principles,
and discuss the issue of disagreement
in macroeconomics.
In general,
macroeconomics
is the study of the behavior of
large collections of economic agents.
It focuses on
the aggregate behavior
of consumers and firms,
the behavior of governments,
the overall level of economic activity
in individual countries,
the economic interactions among nations,
and the effects
of fiscal and monetary policy.
What makes macroeconomics distinct
from microeconomics
is the issues it focuses on,
particularly long-run growth
and business cycles.
Long-run growth refers to the increase
in a nation's productive capacity
and average standard of living
that happens over a long period of time,
and business cycles
are the short-run booms and recessions
in aggregate economic activity.
In this figure,
we show real GDP per capita
for the United States
for the period
1900–2014
There are two observations
we can make in this figure.
The first is that
there has been sustained growth
in per capita GDP during this period.
The average income
for an American increased
almost ten times
over the last century.
The second important
observation is that,
while growth in real GDP was sustained
over long periods of time,
this growth was not steady.
These fluctuations in economic growth
are business cycles.
Two important business cycle events
in U.S. economic history
are the Great Depression
and World War II.
In addition to these two,
there are also some other business cycle
upturns and downturns
in the growth of per capita real GDP,
but less dramatic.
This figure raises the following
fundamental macroeconomic questions,
which motivate
much of the material in this book:
1. What causes sustained economic growth?
2. Could economic growth
continue indefinitely,
or is there some limit to growth?
3. Is there anything that governments can
or should do to change the rate
of economic growth?
4. What causes business cycles?
5. Could the dramatic decreases
and increases in economic growth
that occurred during the Great Depression
and World War II be repeated?
6. Should governments act
to smooth business cycles?
To answer these questions,
the approach we mainly use
is to build macroeconomic models.
For most economic theories,
experimental verification
is simply impossible.
For example,
suppose an economist
constructs a theory that implies that
the GDP of a country would drop by half
if there were no banks.
To evaluate this theory,
we could shut down all banks
for a year to see what would happen.
But,
it is impossible that the experiment
would be performed
because it is too costly to carry out,
especially in macroeconomics.
So we need to rely on models.
The purpose of an economic model
is to capture the essential features
of the world needed for analyzing
a particular economic problem.
To be useful, a model must be simple,
and this requires we leave out
some “realistic” features
of actual economies.
One thing need to be pointed out
is that this course emphasizes
building macroeconomic models
on microeconomic principles.
Because the macroeconomy
consists of many consumers and firms,
each making decisions at the micro level,
macroeconomic behavior
is the sum of many microeconomic decisions.
There is little disagreement
in macroeconomics
concerning the general approach
to be taken to construct models
of economic growth.
The Solow growth model
is a widely accepted framework
for understanding the economic
growth process,
and endogenous growth models
have been well received
by most macroeconomists.
However,
there is much controversy
among macroeconomists
concerning business cycle theory
and the role of the government
in smoothing business cycles over time.
Roughly, business cycle theories
can be differentiated
according to whether they are
Keynesian or non-Keynesian.
We shall study some competing theories
of the business cycle later in this course.
In this chapter,
we discussed what macroeconomics is
and the two focuses of
study in macroeconomics—
economic growth and business cycles.
We also introduced
the method mainly used
in macroeconomic analysis,
That is to construct.
construct macroeconomic models
with microeconomic principles.
Finally we discussed
the issue of disagreement
in macroeconomics.
This is the brief of this course.
See you next time.