International Economics Lecture 1

Introduction

• Course taught by Prof. Georg Statman, European University Viadrina, Germany (currently residing in Denmark)
• Course structure focuses on macroeconomics using the Menq textbook

Topics Covered

1. What Macro-economists Study

   • Focus on aggregate economic activity rather than individual markets
   • Key questions include:
     • Why do industrialized countries grow over time?
     • What causes recessions?
     • Difference in inflation rates (e.g., Venezuela vs. Denmark)
     • Currency fixation versus floating exchange rates (Denmark vs. Sweden)

2. Importance of Macroeconomics

   • Understanding the business cycle is crucial for effective management decisions in businesses
   • Historical growth rates impact political climate (e.g., US historical growth rate vs. recent stagnation)

3. Definitions

   • Macroeconomics: Study of economic activities at an aggregate level
   • Business Cycle: Fluctuations in economic activity, consisting of booms and recessions
   • Predicting the business cycle is essential for financial success in companies

Business Cycle and Company Decisions

• Example of an automotive company facing recession:
  • Needs to adjust production, reduce workforce, and lower prices
  • Decisions made at the micro-level influence macroeconomic variables (GDP growth, inflation, unemployment)

Graphical Representations

• Stylized Business Cycle Diagram:
  • Shows GDP growth and recession phases over time
  • Importance of smoothing business cycle volatility

Government's Role in the Economy

• Question of whether government intervention is necessary to manage business cycle volatility
  • Demand-side Policies: Increase demand during recessions (spending, taxes)
  • Supply-side Policies: Enhance long-term growth (investment, innovation, deregulation)

Historical Context

• Long-term GDP growth trends and recession impacts:
  • Great Depression vs. 2008-2009 crisis
  • Economic instability can lead to political instability (e.g., rise of totalitarian regimes)

Key Macroeconomic Variables

• GDP Growth
• Inflation Rate
• Unemployment Rate

Microeconomic Examples in Macroeconomics

• Use of the pizza market to illustrate supply and demand shocks
  • Importance of distinguishing endogenous (market outcomes) and exogenous (external shocks) variables

Conclusion

• Macroeconomics as a diverse field needing various models and approaches
• Flexibility of wages and prices:
  • Impact on economic recovery and stability
  • Importance of understanding demand shocks and price adjustments

Closing Remarks

• Emphasized the interconnectedness of economic decisions at different levels
• Encouraged students to think critically about macroeconomic concepts and their implications.