Introduction to macroeconomics: definitions, inflation, and unemployment

TOPIC 1: Introduction to macroeconomics

TOPIC 1. INTRODUCTION TO MACROECONOMICS

The main ingredients of macroeconomics

The main open issues Capitalism Economic modeling GDP and national accounting Price indexes and inflation Unemployment

Some definitions

0 Economy The system of trade and industry by which the wealth of a country is made and used. (Cambridge) The state of a country or region in terms of the production and consumption of goods and services and the supply of money. (Oxford)

Economics

The way in which trade, industry, or money is organized, or the study of this. (Cambridge) The branch of knowledge concerned with the production, consumption, and transfer of wealth. (Oxford)

Macroeconomics (Coined by Ragnar Frisch, 1933)

The study of financial systems at a national level. (Cambridge) The branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity. (Oxford)

Microeconomics (Coined by Ragnar Frisch, 1933)

The study of the economic problems of businesses and people and the way particular parts of an economy behave. (Cambridge) The part of economics concerned with single factors and the effects of individual decisions. (Oxford)

Welfare across countries

Welfare across centuries

32,000- 16,000 Ratio scale: GDP per capita CHINA 8,000 4,000- INDIA 2,000- ITALY CHINA 1,000 BRITAIN 500 JAPAN 250- 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000-

The importance of technology

The Technological Revolution

Technological progress increases productivity and thus living standards, i.e, how much light (lumen-hours) an hour of work can buy. 10,000,000 1,000,000 10,000,000 1,000,000 100,000 100,000 10,000 10,000 1,000 100- 1800 + 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 1,000 1800 100 10- 100,000 80,000 60,000 40,000 20,000- Years ago Ratio scale: Lumen-hours per hour of labour

The importance of technology and information flows

Technological progress also greatly increased the speed of information flows. The speed of news (miles per hour) 12 10 8 00 News of Lincoln's election reaches west coast of US from Washington DC in east (1860) 3.7 MPH: News of the Indian mutiny reaches London from Delhi (1857) 2 0 1000 1100 1200 1300 1400 .1500 1600 1700 1800 1900 ·1 MPH: Between Egypt and Italy (50-222) 1 MPH: Between Venice and Damascus, Alexandria, Lisbon and Palermo (1500) 12 MPH: News of Lincoln's assassination travels across the US (1865) 7 MPH: 6 4 > 2.7 MPH: News of battle of Trafalgar, off coast of Spain, reaches London (1805)

Population growth

Population growth Population has also experienced quick growth during industrialization (stages 2 and 3) due to falling death rate Growth is currently slowing down in many industrialized countries (stage 4) due to falling birth rate Our World in Data Birth and death rates (per 1,000 people per year) Birth rate 40 Death rate 30 Natural Increase 20 10 | Total Population Natural Decrease Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Birth rate High High Falling Low Very low Death rate High Falls rapidly Falls more slowly Low Low Natural increase Stable or slow increase Very rapid increase Increase slows down Stable or slow increase Stable or slow decrease The author Max Roser licensed this visualisation under a CC BY-SA license. You are welcome to share but please refer to its source where you find more information: http:/www.OurWorldInData.org/data/population-growth-vital-statistics/world-population-growth

Climate change

Environmental consequences

Deviation from 1961-1990 mean temperature 0.6 0.4 0.2 0 -0.2 - -0.4 -0.6 -0.8 - 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 - 0.2 - 0.4 - 0.6 - 0.8 - 1.0 - 1.2 - 1.4 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Annual series Annual series smoothed with a 21-point binomial filter Increased production and population growth affects the environment Global impacts - climate change Local impacts - pollution in cities, deforestation May technology provide the solution?

Capitalism

We will study capitalist economies but ... What is capitalism? an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state (Oxford) an economic, political, and social system in which property, business, and industry is privately owned, directed towards making the greatest possible profits for successful organizations and people (Cambridge) an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market (Merriam-Webster)

Capitalism: Economic System

Capitalism: an economic system in which the main institutions are private property, markets, and firms. Other institutions e.g. governments, families are also important. An economic system with private property and markets and firms Self-sufficient family- based production Market economy with family-based production Capitalist economic system

Capitalism: Key Concepts

Key Concepts in Capitalism

Private property: ownership rights over possessions Does not include some essentials e.g. air, knowledge Markets: a way for people to exchange products and services for their mutual benefit. Firms: a business organization that uses inputs and technlogy to produce outputs, and sets prices to at least cover production costs. Inputs and outputs are private property Firms use markets to sell outputs

The capitalist revolution

Private incentives for innovation deriving from market competition and secure private property. Firms led by those with proven ability to produce goods at low cost. Public policy supporting these conditions, and supplying other essential goods and services.

Capitalism: The role of governments

The role of governments

There are many varieties of capitalism, depending on the particular political system The government's importance in the capitalist economy differs among nations because political systems differ. Total government revenues as a share of GDP (%) (2012) 0 10 20 - 30 40 50 60 Mexico US Japan South Korea Australia Ireland Colombia Israel Spain Canada UK Poland Russia Netherlands Germany Greece Hungary Italy Austria Belgium Sweden France Finland Denmark Norway

Inequality around the world

A world of difference

Countries vary widely in inequality Compiled by Emily Underwood The world Gini data, collected between 2008 and 2012, cover 117 countries and were prepared for Science by researchers Branko Milanovic and Janet Gornick of the Luxembourg Income Study Center at the City University of New York's Graduate Center. U.S. data are based on 2012 U.S. Census Bureau surveys of 122.459 households.

A sharp divide

Shares of U.S. income by quintile, 2012 50% Winners take all Top 1% income share in the United States 25% Including capital gains 20% 15% 10% 5% Excluding capital gains 0% Lowest Second Third fifth fifth fifth fifth fifth 1913 1930 1945 1960 1978 1995 2011 Source: Piketty and Saez, 2013

Quantifying inequality

Economists use a metric called the Gini coefficient to estimate inequality on a scale from perfectly equal (0) to perfectly unequal (1). 0.23-0.274 0.455-0.499 0.275-0.319 0.5-0.544 More equal Less oqual 0,545-0.599 0.365-0.409 0,6-0.644 0.41-0,454 0,655-0.699 No data Source: U.S. Census Bureau 51 40% 30% 23 20% 14.4 10% 8.3 3.2 Fourth Highest 0.32-0.364

Trends in inequality across countries

There are cross-country differences in the level of inequality, but also common trends e.g. a fall in inequality over 1920-1980. Countries differed in what happened after 1980 though but in general inequality increased • • Income share of the top 1% 0 5 10 15 20 25 30 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 -Denmark -Netherlands -Sweden -France -Italy -Japan -Germany

Technology and inequality

Automation increases demand for some skills and reduces demand for others. Effects: • Machines replace routine labour, increasing unemployment. • Workers whose skills are complementary earn higher wages, increasing inequality. • Profits share increase, increasing inequality. Initial Gini coefficient: 0.38 Post polarization Gini: 0.53 100 Cumulative share of income (%) 60- Effect of 1 10 robots 0 0 5 10 65 95 100 Unemployed Skills Skills Employers (and owners of robots) substitutable by complementary robots to robots Cumulative share of the population from lowest to highest income (%)

Basic contributions to macroeconomics

AN INQUIRY INTO THE Nature and Caufes OF THE WEALTH OF NATIONS. By ADAM SMITH, LL. D. and F. R. S. Formerly Profifor of Mural Pantofopily in the University of Genius. IN TWO VOLUMES VOL. 1. LONDON: TRINTED FOR W. STRANAN ; AND T. CADELI , IN THE ATRASO. MOCCLXXVI. Adam Smith "The wealth of nations", 1776 The General Theory of Employment, Interest, and Money John Maynard Keynes John Maynard Keynes "The general theory of employment, interest, and money", 1936

Objectives of Macroeconomics/Political Economy

O What are the objectives of the Macroeconomics/Political Economy? (Historical exponents of political economy: Adam Smith, John Stuart Mill, David Ricardo, Henry George, Karl Marx, John Maynard Keynes, among others) Studying production and trade, and their relations with law, custom, governments and public institutions, as well as with the distribution of national income and wealth > Studying the intervention of public institutions in the economic system and suggesting the instruments to use to achieve some socially desirable goals 0 How do we reach these objectives? By collecting and analyzing data from the real world By designing economic models What is a model? A description or analogy used to help visualize something (such as an atom) that cannot be directly observed (Merriam-Webster) A simplified description, especially a mathematical one, of a system or process, to assist calculations and predictions. (Oxford) O And an economic model?