ECO 121 MACROECONOMICS

Lecture One

Aisha KhanSection F & G

Spring 2009

Aisha Khan Office: Centre for Research in Economics and Business (CREB) Email: aisha@lahoreschool.edu.pk Office hours:

Mondays 9:00- 10:30 am Tuesdays 11:00-12:30 pm

Teaching Assistants: Section F: Taha Ahmed

V4ever85@hotmail.com Section G: Nida Zahid

nida_zahid1@hotmail.com

Classroom Etiquette

Cell phones must be turned off during class hours.

Quizzes and Assignments will not be retaken.

Cheating in exams/quizzes and any form of plagiarism will be penalized.

Five absences are allowed for the term after which attendance marks will be affected.

Attendance will be taken in the first half and after the break. If you miss either half of the session, you will be marked absent for the entire session.

If you would like to meet at a time other than the office hours, email in advance to setup up an appointment.

Assessment

(tentative)

Final Examination 35%

Mid Term Examination 25% Quizzes (best 3 out of 4)

15% Assignments (2)

10% Review Paper/ Presentation 10% Class Attendance 5%

Syllabus

I. Introduction: Macroeconomic IssuesII. National Income and OutputIII. Money, Banking and Monetary Policy

Core Reading List: I. McConnell and Brue, Economic Principles, Problems

and Policies

II. Lipsey, An Introduction to Positive Economics

Course Pack: Available at the Photocopier

What is Economics?

What is the economy? Economics?

Scarcity Resources of individuals Resources of countries

Opportunity Costs

Positive economics Focuses on facts, description, theory

development

Normative economics Incorporates value judgments- what the

economy should be like (policy economics)

Macro vs. Micro

Allocation decisions take place at various levels

Two different points of observation

Macroeconomics total output of a nation, allocation of land, labor, capital

Microeconomics similar issues but at the level of individuals and firms

Macroeconomics

Economic measures of the macro economy Monitor the production of the nation Help determine inputs to the production

process Examples

Total output/income of a nation (GDP) Population

Workforce (labor) Unemployment

Prices CPI, WPI Inflation

Savings Investment new capital

Production Process

Production function Inputs: Land/Capital, Labor Other factors are assumed to be fixed

(technology etc)

Y = f ( K , L )

Y = f ( K , L )

Shape?

Y

K, L

Diminishing marginal productivity As inputs increase initially, output increases

by a large factor As inputs increase in the latter half, output

increases but at a decreasing rate

Population

All ages make up the entire population Ages 15-65 constitute the working force

can be employed as labor

Unemployment? Large numbers unemployed as is taking

place in the US today what significance does it hold?

Prices

Measuring prices Consumer Price index (basket of

consuemr goods) Wholesale Price Index

Inflation Percentage change in prices

Savings

Portion of income saved(not consumed) Investment Leads to greater capital accumulation

Helps increase production Helps the economy grow

State Bank of Pakistan (SBP) report – First Quarterly Report 2008-09

Global Inflationary Trends

Economic Growth and Instability M&B- Chapter 8

What is Economic growth? (define)

Why is it important for economic growth to take place?

Economic Growth

An increase in real GDP occurring over some time

An increase in real GDP per capita occurring over some time period

“Growth lessons the burden of scarcity”

A goal for countries?

“Growth lessons the burden of scarcity”

A goal for countries?

Rule of 70

Mathematical approximation of the effect of growth

Approximate number of years required to double GDP = 70/ (annual percentage rate of growth)

Sources of Growth

1. Increasing its inputs of resources2. Increasing productivity of inputs

Productivity (real output per unit of input) rises by increasing health, sanitation, training, education, motivation

The Business Cycle

Does growth take place persistently?

Case of Pakistan: episodic growth between 2000-2005

Now?

Phases of economic growth/ activity are characterized as business cycles

Peak: temporary maximum in activity

Recession: a period of decline in employment, trade, income

Trough: bottom lowest in the temporary cycle

Recovery: rise in output and employment towards full employment

Causes of business cycles Changes in productivity changes in spending levels

Growth trend is the overall trend of the business cycles Expansionary Contractionary

Who is affected the most through a cycle? Capital goods/ consumer durables can be

put off to a later date e.g. car industry in the US

Whereas, Non-durable consumer goods (services)

harder to remove oneself from e.g. medical, legal services

Unemployment

Those part of the labor force which are not employed must be actively seeking work to be

considered unemployed

Calculate

Types of unemployment

1. Frictional In search of employment In between jobs, fresh graduates

2. Structural Changes in consumer preferences,

demand and in technology e.g sewing3. Cyclical

Caused by changes in spending , less demand and less income causes higher unemployment e.g. Credit Crunch 2008

Full Employment

The maximum population that can be employed at a time (considering only structural and frictional unemployment)

Natural Rate of Unemployment (NRU) unemployment rate at full employment

level

Economic cost of unemployment Large unemployment has costs

Causes a GDP gap The amount by which actual GDP falls short of

potential GDP (at full employment levels) Okun’s law: for every 1percentage point

unemployment rises above NRU a GDP gap of 2 percent occurs

Cost of unemployment is unequally distributed Different groups experience different

unemployment rates

Unemployment varies by Occupation Age Race and ethnicity Gender Education Duration

Non-economic costs: depression, socio-political unrest, lowering

morale, poverty, ethnic and racial tension

Inflation

Rise in the general level of prices

Measuring inflation Price indices Calculate

Types of inflation Demand-pull inflation Cost-push inflation

Types of Inflation

Demand-pull Excess demand for goods, can push up prices “too much spending chasing too few goods”

Cost-push Rising per-unit production costs Reduces profits and thus reduces output Prices rise Also known as supply shocks