1010b_1_intro

Chapter 1: Introduction to Economics 1010b

Prof. Chris Foote

Harvard UniversityDepartment of Economics

Jan. 30, 2008

Foote (Ec 1010b) Introduction to Ec 1010b Jan 30, 2008 1 / 30

Outline

1 Macro vs. Micro

2 Why are you here?

3 Why am I here?

4 What is expected of you?


Macro vs. Micro

Why is macro different from micro?

In a perfect world, it wouldn’t be.What is “economics” anyway?

Individual maximizationEquilibrium

Those should be the basis (or “microfoundations”) of any goodmacroeconomic theory

“No $500 bills on the sidewalk”


Macro vs. Micro

Individual maximization and equilibrium in action


Macro vs. Micro

So why not fold macro into macro?

It turns out to be really hard to do this.

The economy can seem to stray from the level that perfectlyclearing markets would generate.

Periods of low output – like the Great Depression – do not seem tobe Pareto Optimal.


Macro vs. Micro

In the Great Depression, answers were hard to find

Figure 1. Dorthea Lange, “Migrant Mother” (1936).


Macro vs. Micro

Birth of macroeconomics: Keynes’s General Theory

Figure 2. John Maynard Keynes(1883-1946)


Macro vs. Micro

Sticky prices and the Neoclassical Synthesis

In the short-run, prices are stickyMarkets do not always clearAggregate output can stray from its natural (or “potential”) level

In the long-run, prices adjustMarkets clearEconomic output is determined by other real not nominal factors


Macro vs. Micro

The Classical Dichotomy

Nominal variables: Variables expressed in terms of moneymoney supplyprice level and inflation ratedollar wagenominal GDP

Real Variables: Variables measured in physical units, or ratios:capital and laborreal GDPreal wage and real interest rate

DefinitionClassical Dichotomy: In the long run, real variables are determinedby real factors. Changes in nominal variables (like money) do not affectreal variables (like real GDP).


Macro vs. Micro

Plan of the Course

Start with the long-run, where prices are flexible.Division of GDP among expenditure categories (C, I, G, NX )Why some countries are so much richer than othersLong-run rates of inflation and unemploymentDistribution of incomeEffect of government policies on long-run GDP and its componentsInternational terms-of-trade

Then move to short-run ...Booms and recessions in closed economiesBooms and recessions in open economiesWhen government policies can (and cannot) affect short-runeconomic outcomes


Why are you here?

1. You are interested in global economic issues

Distribution of Income among 188 countries in 2000 (PPP basis)

0

10000

20000

30000

40000

50000

60000

1 8 15 22 29 36 43 50 57 64 71 78 85 92 99 106 113 120 127 134 141 148 155 162 169 176 183

Inverse Rank

U.S

. D

oll

ars

Source: Penn World Tables (version 6.2)

Congo (Dem. Rep): $359

Afghanistan: $478

Ethiopia: $725

Niger: $807

Luxembourg: $48,217

United States: $34,365

Argentina: $11,332

Czech Rep.: $13,617

North Korea; $1379

Jordan: $3,902Iraq: $2,445

Sweden: $25,232

Bulgaria: $7,258


Why are you here?


Why are you here?

2. You want to make a lot of money


Why are you here?

2. You want to make a lot of money (con’t)

The “intermediate macro” model is the one used on Wall StreetMany of these investors are worried that we are enteringrecession right now


Why are you here?

Recessions and corporate profits


Why are you here?

3. You just want to know what’s going on

Was Alan Greenspan really a “maestro”?

Is George Bush to blame for the falling dollar (as the NY Timesclaims)?

Are we entering a recession? If so, what should we do?


Why are you here?

4. You want to graduate with an economics degree

Should you take 1010b or 1011b?

You should take 1011b if one (or more) of the following is true:You learn best when ideas are expressed mathematicallyYou are considering going to graduate school in economicsYou can’t wake up for a 9 a.m. class

You should take this class (1010b) if:You like a more intuitive, less mathematical approachYou like lots of real-world examples and “war stories” (sometimesfrom real wars!)


Why am I here?

I like macroeconomics

Ph.D from the University of Michigan (1996)

Used to teach in the Harvard economics department (1996-2002)

Spent some time on the staff of the Council of Economic Advisers(CEA) under Clinton (1994-1995) and Bush (2002-2003)

Two brief stints in Iraq in summer of 2003 and winter of 2004


Why am I here?

My day job

Senior economist at the Federal Reserve Bank of Boston

Acting director of a new “behavioral economics” center at BostonFed


Why am I here?

My bosses (whom I do not speak for!)

Figure 3. Eric Rosengren, Presidentof Boston Fed

Figure 4. Ben Bernanke, Chairman ofFederal Reserve


Why am I here?

Why I think macroeconomics is interesting

Born in 1965; parents born in 1929 and 1930

Heard lots of stories about the Great Depression

10 years old in 1975: inflation and recession at the same time

17 years old in 1982: no jobs in fast-food restaurants


Why am I here?

Real GDP


Why am I here?

Unemployment


Why am I here?

Inflation


Why am I here?

Inflation (con’t)


What is expected of you?

Class Requirements

Attendance is strongly suggested, but won’t be recordedProblem sets (25 percent of grade)

Approximately every week, due Mondays in classDiscussed in sectionsGraded check, check-plus, check-minus, or zero

Midterm (25 percent grade)

Final (50 percent of grade)

Both tests will involve multiple-choice questions


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