Transcript for:
Introduction to Macroeconomics - Lecture 1

okay let's uh let's start so hello everyone um welcome to 1402 uh introduction to macroeconomics um I won't teach today so that's a good news I will start on Wednesday so what I want to today is essentially tell you what macro is about macroeconomics is about and uh also the rules of of the game so what a difference a single letter makes many of you must have taken 1401 in fact some of you may be taking it concurrently it's a lecture right before mine and uh you know that's microeconomics 1401 this is macroeconomics and it doesn't take a lot of imagination to realize that this course is about big things no we don't look at small things that's what micro is about micro looks at a household at a firm at an industry ER in micro we don't do that we look at the whole economy we think about the us we think about China H we don't think about an individual price we think about inflation so the rate of change of O prices we don't think about whether a particular particular worker is employed or unemployed we think of whether the rate of unemployment is very high or low things of that kind okay when we look at two countries we look at the exchange rate which is a relative price of two currencies not two individual Goods in two different countries but the whole currency and so on so that's what mcro is about now you could think that mcro is nothing else than the sum of lots of micros no after all that's what an economy is made of a population a whole population is made of lots of individuals that can be analyzed with the tools of 1401 and and the sequence that follows 1401 but that doesn't work and there are parallels in physics about this and so on the way you want to study sort of big bodies is different from the way you want to understand the movements of a small elements and and that's the case in macro maccro there's a big line of research that has to do with the micro foundations of macroeconomics but even in that case which is very close to micro ER most of the action end up happening in the non micro part in the interactions in in the in the equilibrium aspects of the system so so it's a much more complicated object and if you were to build it from the micro it would be an incredibly complicated object so one of the things we need to do in microeconomics is take some shortcuts and and and that's what makes mcro a lot of an art it's not a science per se it's some sort of a science it has the tools of a science but it's a lot about shortcuts and tricks and so on to capture the essence of a problem that is very complex if you were to model it in in the all the Gory details okay and uh and in this course we're going to exagerate on that sense we're not going to do anything complicated I promise you that some occas conceptually things will be complicated but the math will not be complicated okay uh so we want to keep things very very simple I want to communicate the essence of the big macro economic relationships this is not a PhD course if you were to take a a PhD course in macro it would be a very mathy type course in fact most of the people that do apply micro in our PhD program complain against micro because they find it too mathy and so on okay but that's not going to be the case here that's not what this course is about my goal so if this is a successful course is not that you come out being a researcher in macro out of this hopefully you'll have a career eventually and do all the next steps that you need to do that but I want you to be able to do is to read something like this this is a world economic Outlook it's a publication that the IMF puts out every six month in which it tells you what how this sees the world and where we're heading and so on no equations there lots of tables and stuff like that I'd like you to be able to read that kind of document very clearly I would like you to be able to read something say the Wall Street Journal and read it even critically some sometimes disagreeing with what's in there Financial Times the economies that's the goal of this course it's not a lot more than that it's just that if you do a summer internship in Wall Street and you work in a macro hedge fund or whatever this is going to be a good course for that I mean this is what Traders really know they don't know a lot more than that many Traders should know that they don't but this that's a level of knowledge I not if it gets to be very complicated I'm failing that's not what I want to do here the typical lecture again this is not a lecture the next the first lecture will be on Wednesday the typical lecture and not in the first part of the course because you're not going to have the tools the definitions and so on to do it what I want to do is is er spend five to 10 minutes early on again the first part of the course we can't do that because you don't have still the knowledge to do that but as as you start building tools I want to be able to sort of talk about current events something that is happening out there that I find interesting or something I received that morning may even the morning of the lecture in which I which I find interesting and if I think you already have the tools to begin to understand it I'm going to be repetitive I'm going to sort of come back to three four times to the same topic hopefully you'll be know you'll be more advancing your knowledge in the later stages so you'll be able to understand it more and more okay so the typical lecture we have five to 10 minutes in which we'll talk about some facts something that is going on for example a picture like this this is I received it this morning I think this came from Goldman I think Goldman Sachs yes and what you have in that picture again don't worry about details today is you have two lines one of them is a measure of er wages wage growth compensation to workers and another one is a measure of inflation again all those definition will come in the next lecture and inflation so it's a rate at which you know you must have heard about inflation it's something prices are rising no and what that picture shows you is that these two series are very highly correlated okay so when wage growth is high inflation tends to be high okay and that's a big issue on these days there's a lot of concern about this stuff so let me let me try to explain a little bit what is a concern on these days again if you don't understand anything doesn't matter if you don't understand anything saying right now in the last lecture then it matters but now it doesn't matter you know I'm just trying to give you a flavor of the kind of things we'll be talking about that picture there again a variable that we'll Define in the next lecture not now shows you the unemployment rate you don't need any specific definition to know that to feel at least get a sense that well if an employment is high workers aren't very happy it's not a good thing to have lots of unemployment and what that series shows you the shaded areas are recessions in in the US what that series shows you is that typically in recessions unemployment goes up so that's one of the features one of the main features of a recession is that unemployment is high this episode here is is called the Great Recession as a parall for the Great Depression the US had the Great Depression in the 30s this is the Great Recession the biggest sort of recession outside of the Great Depression in the US and it's also known as the global financial crisis because this was a recession all around the world and what you can see is that employment went very high that's a very feature a tell sign of a of of a big recession and then it took a long time this was in in sort of recovery covid was a massive shock to the labor market so not surprisingly an employment the employment rate is Spike there but then he also recover a lot faster than he recovered from that and today we have unemployment rates that are at historically low levels and that's a big issue the rate of unemployment in the US is at historically low levels okay way below what is normal forget recessions obviously way below what is in happens in recession but even way below what is normal what happens dur normal times okay closely related to that is wage growth I have just one measure of wages there is a wage it's a it's a series of wage that is that is particularly what I'm about to say is particularly sharp which is the wages of in the accommodation and Food Service sectors so wages have been rising very steadily and and very fast recently everywhere particularly in sectors like this you where we have some problems what we call Labor Supply but we'll I'll get back to that okay so those are two facts we have an employment at extremely low levels and we have wage growth at a very high Fast Pace now that sounds wonderful no I mean what else do you want an economy in which there's few people unemployed and and the and the wages are growing a lot I mean if this was micro this would be fantastic say okay look guy is employed and he's getting a high wage this is great well not so fast for macro not so fast because I already showed you in the first picture I show you to motivate there's a connection between wage growth and inflation and that's what we're experiencing the normal level of inflation for an economy like the Us is around 2% that's normal that's what central banks Target in an economy like the US in the Euro area Japan has been dreaming with 2% but it hasn't been able for decades to get it but although now they are but but they weren't for a couple of decades to get to 2% but that's about and we will discuss later in the course why 2% is about right for economies of the size of the US and so on obviously in recessions these things can go low and that's why you know in the covid recessions inflation went to zero essentially but then it began to pick up and it's now at levels which are unheard of in the US since the 80s okay so depending on the particular measure you use of inflation is around 6 and a half% to 8% that's the level of inflation we have which is way way above what is considered a normal a reasonable Target for the central banks for the inflation okay so that's a problem we have had some good news recently in that inflation clearly picked already again definition of inflation formal definition inflation happens in the next lecture but it already pick and it's declining but it's still at very very high levels and that's a problem that's a big macroeconomic problem and one of the things we want to understand in this course is well what to do about it how do you do how do you deal with that what do central banks need to do in order to deal with that now I've been talking about the US but this is not specific to the US ER this episode this recovery from covid is is incredibly common across different regions of the world I mean you see it everywhere with a few exceptions and I'm going to talk about one major exception in a minute but but it's it's it's it's WID spread it's a WID spread phenomenon that you know we had high employment then we had sort of very high well I haven't told you that part yet but then we have had sort of low inflation then inflation pick up enormously and now we're all worried about this very high levels of inflation in fact if you look at sort of what happened between the Great Recession and the co recession it was pretty normal to have 70 to 80% of the economies in the world having inflation levels at or below 2% so that's Norm you if they throw you into a country I dropped you into a country the normal thing would be well it's about 2% that's level of inflation obviously if I dropped in Argentina you're going to find a much bigger number know 10,000% but but but but the bulk of the countries we around 2% or so today you don't find any country with inflation below 2% okay not even Japan that for years were in deflation and trying to get sort of above zero that's what they all they wanted not even in Japan you have inflation below 2% today so this thing I show you and for more or less the same reason is happening everywhere not exactly the same factors it's the same episode in for example in and then with differences depending on the structure of the economy or in additional shocks in Europe for example they have very high inflation H but the problem is not the origin of the problem the bulk of the of the problem is the same as in the US but the but at the margin they're different in in Europe the Big Driver of inflation the big recent driver of inflation is unlike the US which is aggregate demand cons j s later is essentially the war in Ukraine that has increased the price of energy and the price of energy has led to lots of inflation so there are different reasons but all of them are sort of different reasons that you add on top of what is a common story which is that we overheated it coming out of the covid INF covid episode and and and now we're strugging Str with that now the main tool and we're going to talk a lot about this in this course the main tool that central banks have to deal with inflation is the interest rate okay so for reasons you'll understand later although you may have an intuition about some of those now obviously when the Central Bank lowers interest rates then that helps the economy to expand and when it increases interest rate then it does the opposite rise in interest rate makes mortgages more expensive make everything more expensive so people to consume less firms tend to invest less and so on because it's more expensive to invest to borrow to to do something okay and uh and there there you see it I mean this was the level of the interest rate in the US before covid when covid came boom they brought it all the way down it happens that you cannot bring interest rate a lot lower than zero as a reason it stay close to zero there we're going to talk about that later on but then eventually they realized that we're behind the curve inflation had picked up a lot and the central banks were behind behind the curve so they began to hike rates in a hurry okay and that's what we have been experiencing for for the last ER year or so okay very fast increase in the interest rate now this is of course about macroeconomics but I happen to do a lot of research between macro and finance so I'm going to put a little bit more of a component of Finance into in the in the LA I think I'm going to do most of that in the last third of the course but monetary policy has lots of implications for for for for finance for Equity values for the stock market and stuff like that so what you see here is the the is this line here is the is the XX 500 is the index the main index of equity in the US of shares okay there are several indexes NASDAQ S&P da and so on this is the main index the most comprehensive the one that takes the largest the largest companies and so on so forth and when you can see what happens here is that when covid happened the surprise that we we had really a pandemia then the stock market crash decline like 30% or something like that at the time that's interesting of assets I mean that's one one characteristic of of equity that I like a lot other risky assets as well but but but but they like a lot they anticipate what happens what happened there is the stock market the shareholders realized that something big was negative and big was happening in front of us so it was sign to sell you know and so the equity Market collapsed what happens next is even more interesting for a microeconomist which is this this big boom here it's an enormous Boom the economy here still was at levels of activity below what it had before covid but the stock market the value in the stock market had way exceeded the level we had before the pandemic okay and the main driver of that I've shown that in some papers the main driver of that is not I mean people tell lots of stories you know you know Amazon and so on but Tesla blah blah if you look at the aggregate the main reason for that rise was monetary policy was you can explain all that increase in the equity value in the US of the index not individual shares of the index by the of interest rates okay so monetary policy plays a big role if you care about Finance well it plays a huge role in the value of assets when monetary policy very loose that tends to increase the the value of assets and that's one of the mechanism the central banks use to expand aggregate demand when they want to expand aggregate demand they want people to feel if you have in a recession you want people to feel richer so they spend more and so on so forth what happened here this decline you can also explain it fully with the hiking interest rate remember I show you that the interest rate began to rise very rapidly here well last year the equity Market in the US and most major Equity markets around the world declined by 20% or more you can explain all that decline simply by the increase in the interest rate so that's another thing we need to understand is why is that the interest why is the interest rate matters so much for something like Equity so we're want to Value assets and we want to see what is the effect of the interest rate and then we're want to think about well why would the Central Bank worry or not worry about these things and so on so forth but the truth is that financial markets and the central banks interact all the time I mean if you are in again into Wall Street type thing you're going to be watching every day every time that the monetary minutes the minutes of the central banks are released you're going to be watching because it has a big implication for the value of your Equity actually something very interesting of this nature happened last week on Friday er last Friday um the there was a release of payroll numbers so it's an employment index okay employment numbers and er people expected ER and the the payroll to increase to so to add nonfarm payroll we'll talk about this things later by about 190,000 workers at 8:30 well and this you're seeing here is the behavior of the same index I showed you before but the Futures so the same things you can trade before the market actually opens the market in the US opens at 9:30 a.m. but you can trade Futures since Asia times okay anyway so this is the path it's all very quiet tranquil everyone is waiting the release of this news at 8:30 a.m. at 8:30 a.m. great news for the labor market not only not the the the actual change in the payroll was not 190k it was over 500,000 k so enormous addition of jobs to the economy and look what happens to the equity Market boom it imploded immediately so this is wonderful news now for the economy lots of jobs the equity Market imploded as a result of that why do you think that happened I already given you a little bit of the ingredients for why for an answer in in in in the previous slides the reason I'm showing you this is because it's a in in in one in 15 minutes it summarizes all that I was talking about in the previous 30 minutes why do you think that happened this is wonderful news why why the so Market Should Crash like 2% from top to bottom as a result of that there a lot more labor because um that gives a lot more um supply of um that thing and thus it Dees price because High Supply No but ah okay that's an interesting okay that that's an interesting explanation is not the one I have in mind it's a the explanation says look that means firms hire lots of people so the price the that means there going to be lots of supply of whatever Goods they're producing the price of those goods is going to decline and that's going to be bad for profits that's the story you had in mind yeah maybe some of that but I I'm willing to bet that it's not the main thing so the only clue I give you is that I already talk about these things five minutes ago employment is um very closely um related to inflation rates yes up to 0.81 so this could be result of expectations of high Contin High inflation okay you're are very close one step more yes that that means that that means that so okay that there you are so what happens the bank the the the shareholders wouldn't have done anything if they thought that the FED would not be able to see this data but they know that the FED also sees this data and say whoa these guys are going to be worried because the econom is going to keep overheating they're going to have to hike interest rates even more in order to cool down this economy okay I already show you that what happens in the labor lab Market is very connected to what happens in with inflation the the Central Bank knows that and now you get this big surprise that means they're not really being able to they're not been successful at really slowing down one of the main drivers of inflation and so financial markets are very forward looking they whoa this is coming this is only means that not going the financial markets were betting that that the Fed was going to begin to cut interest rate in four month more or so and if you look at qu the forward did that there so the what the market you can you can extract what the market thinks right after this it all got immediately pushed out to the end of of the Year okay so so it's precise it's the anticipation that the central bank will have to do something and and so I thought it was very interesting for that point of view recessions well look and these are all very good news but everyone knows that the FED needs to cool off the economy so despite the fact that we're getting good news now ER people expect the majority of people expect a recession in the US for this year I'm not going to explain this bar graphic here but these are forecasters these are professional forecaster and and and more than half of them so the median of them thinks that there is a 65% probability that there is a recession in the US this year I'm a little well we're going to talk a lot about this and and probably are going to be getting news about this while we're taking the course so this is going to be a sort of picture that we're going to discuss extensively and the reason for that recession is nothing else than the reason you ask this forecast why do you think we may have a recession well because the FED is trying to fight inflation it's going to keep hiking interest rate and at some point it may break something okay and and and that's that's the reason but we're going to all these things you are going to be able to understand very very clearly hope through Ms the last thing I want to say before uh telling you a little bit the rules of the game is that I said before that the story I told you about the US is more or less what it's happened all around you know I was in Chile a month ago I'm Chilean and and they have the same story they start hiking interestate a little earlier because they had more inflation than the us but they're going through the same cycle um there's one big economy the second largest economy in the world that has not been part of this which is China China was very aggressive in the covid uh policy no so zero covid policy so they really slowed down their economy that's a consequence they didn't want to do that but as a result of a very strict Co policy they essentially shut down big parts of the economy for a long time that by the way had big impact in the rest of the world through the network of production the chains of production and stuff like that that was inflationary in itself that part is dissipating but but for the their own economy for the domestic economy that really slowed down China an economy that you know grew typically at five and a half to six% a lot higher 15 years ago we're going to try to understand why later on but last year I don't know it was 3% or or less numbers in China difficult to to figure out they're not equally trans paring to other numbers but but in any event but it's very clear that China slowed down a lot and that policy recently changed okay the zero Co policy change and so there's great expectation that now there's going going to be a big boom in China because they're lagging behind I mean in in in the US when Co began to dissipate we got a huge boost to growth and that's part of the reason we got all this inflation is because we had lots of growth coming out of the recession that happening in Co and more or less the same is expected in China and one of the big reasons behind those big bounce backs is where people are desperate they want to spend on something they want to go to restaurants and Cinemas and stuff like that and the other one is they have the means to do it because they couldn't spend on anything for a while know and so they can travel and stuff like that so so people expect and this is a m very large economy that suddenly sort of wakes up you know that's a big thing for China but it's also big thing for the world you know what what happens in China doesn't stay in China it's a big giant so it moves and for some countries is very very important in this picture here it shows you what is the impact on different regions of the world on the growth rate in different regions of the world of an increase in by 1% in the rate of growth of China One of the the most obviously all the neighbors are benefit a lot but Latin America benefits even more why is that well because Latin America produces lots of Commodities and China consume lots of commodity when it's building and and stuff like that and so that's Reon big impact on Latin America so this is a piece of good news for the world in the sense that activity will go up but it's good news on average but it may be too much of a good thing as well why because many economies are going through what we described before they're trying to bring down inflation they don't want more demand they want want less for now because we're going to understand that connection later on how demand connects to inflation but but you want less and now you're going to get this this impulse from China which is going to fuel more inflation it's okay for China because they don't have an inflation problem but it may be a problem for many of the countries that are trying to ER undo ER the inflationary consequences of the previous expansion the expansion that follow covid okay anyways but this is the kind of things we're going to be talking about the I said the course is not going to be mathy but it's going to be all about moles the next lecture is the most boring lecture of the course I I I tell you in advance because it's definitions I I need to go through definition at least I get bored but but the rest there's always with a little model but simple models okay but the models are going to try to explain the kind of things I I I discuss today so that's what this course is about is is is is ideally if we're successful you're going to be able to read something like the world economic Outlook which will have lots of pictures like this and you're going to be able to write a little equation very simple on the side to try to understand what is going on there and to catch the mistakes as well okay the wi has less mistakes than the World stre Journal but but you will catch mistakes you'll see you'll be proud of them