Brad DeLong
http://www.j-bradford-delong.net
delong@econ.berkeley.edu
Philosophy
- This is a go-faster do-more course
- You are guinea pigs
- Because I am writing a textbook
- Thus I am interested in your views not just on the subject but on what is pedagogically effective
- Macroeconomics an interesting piece of economics to try to teach if only because it is so unsettled--and yet also so central to policy, to journalism, et cetera...
- Having lots of discussion in the main lecture makes it much more interesting, and you are collectively smart and articulate enough to make it work...
Logistics
- Each week: two lectures, two sections
- We will run all the way up through the end of "dead week"--last class on Thursday, December 2
- But I have to cancel two classes--September 2 and October 19
- Sections meet MW 4-5, Wheeler 210; MW 5-6, Evans 47; Jean-Philippe
- Nine problem sets, one midterm (October 14), one final (December 9)
- Point allocation: each problem set can get you up to two points, thirty points for the midterm, sixty points for the final
- That adds up to 108 points, you say. Yes. Practically everyone here could take Econ 100b and be in the top tenth of the class
- Hence the curve here will take account of the fact that this is a go-faster do-more course
- Distributing the draft textbook. First two chapters for free (on the web); rest will be on sale at Copy Central
- If you want another textbook...
- Go down to the ASUC store and get Mankiw (or order Mankiw from amazon or someplace else)
- Go order Blanchard from amazon
- Course website: http://www.j-bradford-delong.net/Econ_101b_F99/Econ_101b_F99.html
- Course e-mail list:
The Subject
- Earlier today, the Federal Reserve...
- Consequences: short-term interest rates
- Consequences: long-term interest rates
- Consequences: stock market
- Consequences, production, employment, and prices
- This is the main concern of macroeconomics: the business cycle
- Maladies: high unemployment
- Maladies: inflation
- Macroeconomics is how to understand--and hopefully prevent--them
- Maladies: slow growth
- Economic growth is a more important subject, but receives less space in macroeconomics courses
- We are going to be spending a significant amount of time on economic growth in this course--up until about September 23.
- We will spend the rest of our time on fluctuations
- History of macroeconomic thought
- Nineteenth century macroeconomics
- Malthus and the possibility of a "general glut"
- Say's law--excess supply of one product must mean excess demand for some other, hence the problem is one of adjustment rather than demand
- technological unemployment: the plight of the handloom weavers
- Marx and the crisis of capitalism
- Turn of the century macroeconomics
- Free silver
- The gold standard
- "Austrian" theories
- Fisher and Keynes
- Their error (from today's standpoint: focusing too much on prices and not enough on spending)
- The Keynesian Revolution and after
- The Keynesian Revolution: theory
- The Keynesian Revolution: policy
- The Monetarist Counterrevolution
- New Classicals
- New Keynesians
Next Time
- Drop the historical development (once is enough)
- Instead, develop the subject in a way that I think makes it easiest to understand:
- Macroeconomics as trying to answer six questions:
- How much richer are we than our parents were when they were our age?
- How much richer will our children be than our grandparents were?
- Will we find it easy to change jobs in five years? Or will we find it hard to change jobs, and feel pretty much trapped doing whatever we are doing?
- Will the businesses we work for suddenly vanish?
- Will inflation impoverish us as higher prices erode the real purchasing power of savings?
- Or will inflation enrich us as higher prices erode the real value of our debts?
- What Is Macroeconomics?
- Business cycles, Unemployment, Inflation, and Growth
- Why They Matter
- The Two Branches of Economics
- Why Learn About Macroeconomics?
- What Is the Macroeconomy Doing?
- Economic Statistics and Economic Activity
- Six Key Variables
- Real GDP
- The Unemployment Rate
- The Inflation Rate
- The Interest Rate
- The Stock Market
- The Exchange Rate
- The Current Situation
- United States
- Europe (and Japan)
- Emerging Markets
Analytic Geometry
- From equations to curves and back again
- Solutions to systems of equations are "where the curves cross"
- Slopes
- Comparative statics: what happens when curves shift depends on their slopes
- A line is a special case of a curve
Simple Algebra
- Solving two equations with two unknowns
- Equations that implicitly define Y as a function of X
Calculus
- Derivatives of power functions
- Derivative of a product
- Derivative of a quotient
- Rates of change and growth rates
- Integrals of power functions
- Derivatives as slopes
- Implicit functions
- Chain rule
Differential equations
- It's an integral: if dx/dt = q(t), what is x(t)?
- exponential functions: if dx/dt = x(t), what is x(t)?
Questions that Macroeconomics Tries to Answer
- How much richer are we than our parents were when they were our age?
- How much richer will our children be than our grandparents were?
- Will we find it easy to change jobs in five years? Or will we find it hard to change jobs, and feel pretty much trapped doing whatever we are doing?
- Will the businesses we work for suddenly vanish?
- Will inflation impoverish us as higher prices erode the real purchasing power of savings?
- Or will inflation enrich us as higher prices erode the real value of our debts?
To answer these questions, we study macroeconomics.
- subject: the economy-in-the-large
- the total value of all production in the economy in-the-large
- the total number of people employed
- the total number of people unemployed
- the overall level of consumer prices
- how rapidly these prices are changing--the inflation rate.
- Macroeconomics also studies variables that have major effects on the overall level of production and employment.
- interest rates
- stock market index prices
- exchange rates
Why Do We Care?
- A first important reason is that the macroeconomy matters to us.
- What happens to the macroeconomy shapes all of our lives
- It is much easier to get a job during a high-employment boom than a recession.
- Real incomes rise faster when government policies accelerate long-run growth.
- If you are unlucky enough to lose your job during a deep recession, you have a high chance of staying unemployed for a long time and seeing your income fall by a lot when you do find another job.
- There is a second important reason to care about the macroeconomy.
- We can make the answers to these macroeconomic questions better. We elect a government.
- The government has a macroeconomic policy.
- Macroeconomic policy matters because
- it can accelerate (or decelerate) long-run economic growth
- it can stabilize (or destabilize) the course of the macroeconomy.
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The State of the Economy and Political Popularity Politicians strongly believe that their success at reelection depends on the economy doing well when they are in office. They think that--fairly and unfairly--they get the credit when the economy does well, and suffer the blame when the economy does badly. The political leader who was most outspoken about this was American politician Richard M. Nixon, who blamed his defeat in the 1960 American presidential election on an economic slump and on the Eisenhower administration's unwillingness to take preemptive action:
Economic historians continue to dispute the degree to which the "stagflation"--the combination of relatively high inflation and relatively high unemployment--was the result of Richard Nixon's determination, as president, never again to run for office in a recession year. |
Growth policy
- In the long run few things matter more
- Think of a country like Argentina--one of the most prosperous nations in the world in 1929, ranking perhaps fifth among all nations in the number of automobiles per capita
- Now ranked well down, among the "developing" countries, because of nearly half a century of economic policies destructive of growth.
- Think of countries like Norway and Sweden
- relatively poor at the start of the twentieth century
- where economic policies supportive of growth throughout the century have led to extraordinary prosperity.
Source: Angus Maddison (1995), Monitoring the
World Economy (Paris: OECD), as updated.
Stabilization policy
- the historical record does not show a steady, stable, smooth upward march as higher production, better technology, and higher employment make all of us better-off.
- The levels of production and employment (and the rate of unemployment) fluctuate above and below their long-run trends.
- Production can easily rise several percent above, or fall five percent or more below its long-run trend.
- These fluctuations about trend have long been called business cycles.
- Periods in which production grows and unemployment falls are booms, or macroeconomic expansions.
- Periods in which production falls and unemployment rises are recessions, or--worse--depressions.
- Booms are to be welcomed; recessions are to be feared.
- Today's governments have powerful abilities to improve economic growth or reduce the size of the business cycle.
- Good macroeconomic policy can make almost everyone's life better.
- Bad macroeconomic policy can make almost everyone's life much worse.
- Thus the stakes at risk in the study of macroeconomics can be high.
- Bad doctrines and ways of thinking--for example, excessive attachment to the gold standard as an international monetary system in the years of the Great Depression--can be the source of enormous human catastrophe.
[Possible Photo: bread lines during the Great Depression]
- Inflation and deflation
- Interest rates, the level of the stock market, and other economic variables as well rise and fall roughly in phase with the principal business cycle fluctuations about trend in production and employment.
The Two Branches of Economics
- Macroeconomics examines the economy in-the-large
- focuses on feedback from one component of the economy to another
- studies what determines the total level of production and employment.
- By contrast microeconomics, which was (probably) the subject of your last economics course, deals with the economy in-the-small.
- Microeconomics studies markets for single commodities.
- It examines the behavior of individual households and businesses.
- It focuses on how competitive markets work to efficiently allocate resources and create producer and consumer surplus, and on how markets can go wrong.
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The Two Branches of Economics |
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Macroeconomics |
Microeconomics |
| Focuses on the economy as a whole. | Focuses on markets for individual commodities, and on the decisions of single economic agents. |
| Considers the possibility that decision makers might change the quantities they produce before they change the prices they charge. | Assumes that economic adjustment occurs first through prices: prices move to restore equilibrium by balancing supply and demand, and only afterwards do producers and consumers react to the changed prices by changing the quantities they make, buy, or sell. |
| Spends much time analyzing how total incomes change, and how changes in income cause changes in other modes of economic behavior. | Holds total incomes constant. |
| Spends a great deal of time and energy investigating how expectations are formed and change over time. | Doesn't worry too much about how decision makers form their expectations. |
- Microeconomics assumes that imbalances between demand and supply are resolved by changes in prices. Rises in prices bring forth additional supply and falls in prices that bring forth additional demand until they are once again in balance. Macroeconomics considers the possibility that imbalances between supply and demand can be resolved by changes in quantities rather than in prices. Businesses may be slow to change the prices they charge, and faster to expand or contract production until supply balances demand.
- This difference means that less may carry over from micro to macro than one might expect or hope. Be careful when you try to apply principles and conclusions gained in micro to macro questions--and vice versa! Every generation of economists attempts to integrate microeconomics and macroeconomics. Every generation tries to provide "microfoundations" for macroeconomic topics of inflation, business cycles, and long-run growth.
- No one believes that the bridge between microeconomics and macroeconomics has been soundly built. Economists are divided--roughly evenly--between those who think that the failure (so far) to successfully integrate microeconomics and macroeconomics is a horrible flaw that needs to be corrected as rapidly as possible, and those who think it is regrettable but not terribly relevant.