Introduction to Macroeconomics - Chapter 1 Notes

Overview of Chapter 1

• Author: Nils Gartfrids
• Topics Covered:
  • Introduction to macroeconomic models
  • Discussion on short run vs long run models
  • Overview of national accounts and macroeconomic data

Macroeconomic Model

• Components:

  1. Goods Market: Includes services; no distinction made.
  2. Labor Market: Workers sell labor; wages set price.
  3. Financial Markets: Firms borrow from households for investment.

• Decision Makers:

  • Firms: Maximize profits; assumed identical.
  • Households: Maximize utility; assumed identical.
  • Policymakers: Government (taxes, expenditure) and Central Bank (interest rates).

• Assumptions:

  • Simplified model with rational actors.
  • Use of basic mathematics for economic relations.
  • Focus on average behavior, not individual predictions.

• Exogenous vs Endogenous Variables:

  • Endogenous Variables: Determined within the model (e.g., production, wages).
  • Exogenous Variables: Not explained by the model (e.g., government spending). Changes act as shocks.

Closed vs Open Economy

• Closed Economy: Four endogenous decisions made (production, prices, wages, investment).
• Open Economy: Includes international trade, leading to six endogenous decisions. Consumers can choose domestic vs foreign goods and lending options.

Short Run vs Long Run Analysis

• Wage Setting:

  • Short Run: Wages are sticky (slow adjustment).
  • Long Run: Wages adjust fully to shocks.

• Expectations:

  • Short Run: Expectations are uncertain.
  • Long Run: Expectations are correct and stable.

• Impact of Shocks:

  • Example: Increase in government expenditure might raise production in the short run but not in the long run.

National Accounts Overview

• Importance: Provides key data about the economy, covering production, income distribution, and usage of goods/services.

Production Side

• Gross Domestic Product (GDP): Total value of goods/services produced.
• Sectors:
  • Agriculture, Industry, Construction: ~25% of production.
  • Services: ~75% of production.

Income Side

• Income Distribution: Approximately 66% of income is labor income; 33% is capital income (after adjusting for self-employed).
• Compensation of Employees: Wages, social contributions, etc.

User Side

• Consumption and Investment:

  • Private consumption: ~70% of GDP.
  • Government consumption: ~17% of GDP.
  • Private investment: ~15% of GDP.
  • Government investment: ~3% of GDP.
  • Exports: ~13% of GDP.

• International Differences: Varies by country size/structure (small economies often have higher export shares).

Current Account and Financial Integration

• Net Lending: Surplus or deficit in current account reflects savings vs investment.
  • Example: Norway's current account surplus due to oil income; US current account deficit.

Key Definitions to Remember

• Production vs. Value-Added
• Market Price vs. Base Price (Factor Price)
• Gross vs. Net Product
• Disposable Income

Rule of Thumb for Percentage Changes

• Formula: If Z = X * Y / Q, then
  • % Change in Z = % Change in X + % Change in Y - % Change in Q.

Additional Information

• Review of indexes for measuring real growth/inflation.
• Comparison of real incomes between countries.
• Appendix covers basic math concepts (functions, derivatives, logs).

Conclusion

• Simplifications in the macroeconomic model are necessary for clarity.
• Understanding national accounts is crucial for economic analysis.