welcome everybody to the first lecture in the course international economics it seems to be the case and also the next semester will be a corona semester where at least the lectures will take place online so let's have a look uh we use the menq textbook on macroeconomics and the first chapter is an introductory chapter my name is georg statman a professor at the european university viadrina in germany but i'm living in denmark because of the fact that at one point in time in 2008 i became an associate professor at the university of southern denmark and i'm still living in denmark so pretty close to owenza and therefore i'm available to teach this course for you the structure of this lecture is as follows that in a first step we want to talk about what macroeconomists study what is the subject and then we want to talk about how do economists think how do they structure the item under consideration the textbook starts with some questions for example we want to know why industrialized countries are growing over time so when we have a long-run perspective when we look at the last 100 years it is a case that the gdp of industrialized countries grows over time what are the reasons for that sometimes it is the case that the economies are not growing the economies are in recessions so in case that the gdp growth rate is negative in two consecutive quarters we talk about recession and there can be several reasons why we are in a recession for example there was one recession recession in the beginning of the 70s and this was due to the fact that the oil price exploded at this point in time so the oil price increased tremendously oil price is used as an intermediate good or input factor in a lot of production processes and therefore production increase production costs increased tremendously but it could also be the case that for example consumer confidence decreases consumers believe that in the future there will be some negative events popping up for example consumers believe that they become unemployed and therefore they are reducing consumption expenditure and then this reduction in consumer expenditure could lead to a recession so when we look at these two lines of argumentations we already get two different reasons why an economy can end up in a recession one line of argumentation was supply sided so we talked about oil price shocks oil price increased and oil price is a important intermediate good for a lot of industries so this shock occurred at the supply side of the economy but a recession can also be caused by a reduction in consumer confidence and then the demand side of the economy is addressed so we should also always look at two sides of a market two sides of the economy the demand side and the supply side we could also ask questions such as why is the inflation rate so high in venezuela but so low in denmark what are the differences between these two countries and why do does the one country experience a phase of hyperinflation while in denmark prices are pretty stable we could also ask the question why denmark is fixing its currency against the euro while sweden is not what are the pros what are the cons against fixing the currency against the euro one of the advantages what are the disadvantages and in what kind of time periods is it better to have a fixed exchange rate and in what kind of time periods is it better to have a floating exchange rate system in place what about the recent financial crisis 2009 2009 and the subsequent crisis in the real economy was it better for denmark to have a fixed exchange rate in place or was it good that sweden had a floating exchange rate in place these are some questions which can be answered in the field of macroeconomics so macroeconomics macroeconomists they observe that economies differ across countries and it might also be the case that countries change over time so we talked about the differences between denmark and venezuela denmark and sweden so economies differ across countries but economies also change over time because sometimes there is a recession and sometimes there is a boom why are these questions important like when you are a business student and you want to work as a manager of course it is very important to know how the business cycle will look like in the future so one important question is how can we forecast how the gdp develops in the future this is pretty important because as a manager you have to adjust and you have to adjust your your company and you have to come up with several decisions within your company in order to prepare your business for the future it is also very important for politics for example the historical growth rate as the textbook said was 3.6 but the growth rate in 2006 2016 was only 1.3 percent what is the textbook talking about the textbook is talking about the development in the us this is what we should keep in mind when we read this textbook it is written for u.s students so the textbook always takes the u.s perspective this is pretty important when we read this textbook so the textbook talks about the growth rate of real gdp in the us and it seems to be the case that it was lower between 2006 and 2016. and this led to the slogan like let's make america great again so economic developments can also result in political developments and therefore i think that econom macroeconomics is so important for example the tech book textbook says the popularity of an incumbent president rises when the economy is doing well how is the u.s economy doing right now when we think about the corona crisis maybe our own perspective is that the u.s economy is not doing very well because of the fact that for example the unemployment rate is pretty high right now we'll have a look at the unemployment rates later on in this lecture but president trump he looks at it a little bit differently when you look at and listen to his current interviews he says that the u.s is doing pretty well because the u.s is digesting the shock and the unemployment rate is decreasing so he is not comparing the unemployment rate right now with the unemployment rate before corona crisis but he's just looking and pronouncing and focusing on the ma on the recent development of the labor market and there it is indeed the case that the unemployment rate in the u.s is decreasing so we have clarified some questions what kind of questions we want to answer in our macroeconomics class and we have also talked about why is it important so it's time for some definitions macroeconomics is the study of the economic activity at the aggregate level which analyzes the entire economy and not just individual households companies or markets so in macroeconomics we do not study the utility function of households we do not check how much labor how much capital is used in the production process in order to produce this of that output or how the market of pizza looks like this is not what we study in macroeconomics we look at aggregate levels so we look at different macroeconomic variables one important factor is the business cycle and the business cycle can be defined as the development of the economy over time it consists out of booms and recessions it causes changes in the consumption levels and the consumption structure and it influences the investment decisions of companies then in red inc it is written here predicting the business cycle and adjusting to it is crucial for the financial success of a company why is that let's think about an automotive company which is producing cars you are the manager of this automotive company and right now the economy is in a crisis so also our automotive company is not doing very well and the manager of the automotive company is looking out of the window there is a big parking lot in front of the factory and the parking lot is filling up with freshly produced cars like all the new cars are parked on this parking lot but it is the case that not too many cars are leaving the parking lot because the economy is in a recession and the demand for automotive is relatively low so now this manager of course has to prepare his company her business for the future so he has to come up with some decisions and in a first step it might be a good idea to make a call to the production plant and you as like the leader as a ceo of this company like you have to talk about production and you'll give a call to the floor and say hey maybe it is a good idea to reduce production by 50 so we have to lower output because of the fact that the parking lot is filling up but you are not done by making this one call you also have to make other calls for example you have to make a call to the human resource department and you have to inform the human resource department that you decreased production capacity by 50 percent and then it will be the case that the human resource department has to act in a recession the human resource department will make like a body count they will say one two three number three you are out one two three you are out one two three you are also out so the company will lay off some people because of the fact that production capacity reduced furthermore it is the case that we also have to inform the department which is sourcing different tools for the production process so for example one we reduce car production by 50 we need 50 percent less wheels and 50 percent less steering wheels so we have to inform the sourcing department that we need less intermediate goods so this crisis which affects now the automotive industry will also affect other companies which are in a different part of the value chain so other companies which are on a lower level of the pro of the value chain they will also suffer because this automotive company buys less intermediate goods after we have called the human resource department and our sourcing department we also have to call our sales department and we have to give them some advice what to do with the prices and of course when our parking lot is filling up it might be a good idea to reduce prices so the car price is reduced hence we know all our decisions in our automotive company we have to fire some workers we have to buy less intermediate goods and we have to reduce prices in case that not only our automotive company but also other companies are in a recession they will come up with the same decisions and therefore we already know how important macroeconomic variables behave in a crisis in crisis gdp growth will be low or negative the inflation rate will also be relatively low or negative so maybe there is a phase of deflation furthermore we also know what happens to the labor market the unemployment rate will increase so by just looking at common knowledge by just looking at the microeconomic perspective we can infer what's going on on the macro level so microeconomics and macroeconomics are linked to each other because the decisions which are made on the micro level in the end also drive the important macroeconomic variables gdp growth rate inflation rate and unemployment rate have a look at some graphs here you can see a stylized business cycle over time so on the horizontal axis we have the time and then we have here the development of gdp over time it seems to be the case that this business cycle fluctuates around the level of 100 and therefore i don't like this stylized business model too much because as i mentioned over time it is the case that in industrialized countries gdp is increasing so i like much more this figure here where you can see that uh the growth trend of gdp is indeed positive over time so economies are growing over time so what is macroeconomics all about you can see here that the economy is growing over time but it's also a case that we have some ups and downs in the downs like in the recession it is the case that gdp decreases the growth rate of gdp is negative and it might be the case that the unemployment rate increases in a boom it is the case that we are above um that the economy is running like too much um the this could lead to inflation pressures inflation rate could pick up so it might be the case that we have a problem with the inflation rate in a boom so therefore we could for example question whether it is the case that the government could do something to smooth business cycle volatility and this should be demonstrated by looking at this graph so we are looking at one economy which is growing over time along the black growth trend but the economy is not developing along this black growth trend it is actually developing along the red business cycle the economy is going up and then the economy is going down in a recession here then the economy is picking up again and then there follows a second recession so when the gdp fluctuates over time it's also the case that here we have a phase where the inflation rate is pretty high and here we have a phase where the unemployment rate is pretty high so the big question is whether the government can do something to smooth business cycle volatility maybe the objective of the government could be that we reduce business cycle volatility so that the economy is actually growing along the green business cycle this implies that the economy has to do something they have to boost demand in a recession so the government has to increase the demand in a recession by increasing government spending by decreasing taxes and then we will not grow along the red cycle which is very volatile but maybe along the green cycle which is less volatile in a boom of course the government has to press the break button the brake pedal and the government has to reduce government spending and they have to increase taxes so that the economy can cool down in a boom phase and then when this works it will be the case that the development of the economy it is much more smooth compared to a situation where the government does not intervene we call this kind of policy like a demand-sided policy because the government tries to influence demand so that in the end the business cycle is smooth but there is also something in macroeconomics which is called like supply-sided policies a supply-sided policy questions whether the black growth trend is a natural constant it might be possible to also implement the right policies so that the economy can grow along the green growth trend and then of course we can question whether it's a good idea to [Music] focus on the business cycle volatility at all so when we are able to implement the green growth trend then after a few quarters we are very far away from these old business cycles which have some volatility so it might be better to implement a supply-sided policies so that the economy maximizes the long-run growth trend what are supply cited policy tools so for example more investment so that the capital stock increases the government has to look for conditions so that investment is maximized we need more r d research and development so that some innovations pop up and we also have to deregulate the labor market so that the economy can grow at a faster rate so the supply sided policies looks at investment capital stock innovation research and development while the demand-oriented policy tools they look at government spending taxes and these are the policy tools of a demand-sided policy until now we looked at the business cycle in a stylized diagram let's have a look at the business cycle of a real economy so here we are looking at uh the real gdp per capita since it this picture stems from the menque textbook it is related to the us and we are looking at a very long perspective so we have more than 100 years of data here what we can see in this diagram is that sometimes there is a recession for example here is a recession in the 1930s where the gdp growth rate is indeed negative for some years so a very severe recession this phase is called the great depression of the 1930s why is that so important i think like i'm german and from a german perspective this phase is so important because it once more highlights the linkage between economic instability and political instability so like the same crisis the same depression occurred in the german economy and this led to political instabilities in the end the riot national socialist party came into power hitler came into power and this resulted in the second world war like a few years later in 1939 so this kind of development here this economic development clearly has influenced the political development in germany and hence political development in europe and the world nevertheless we can clearly see the long-term growth trend and we can see for example the crisis 2008-2009 here like the last crisis 2008 2009 also affects the growth rate of real gdp per capita in the us but this recession in 2008 2009 is definitely less severe compared to the crisis in the 1930s so here we can only see a small reduction in gdp while much more pronounced in 1930s so when we when we look at this graph we of course can ask the question uh should we bother with business cycle volatility so so should we really focus on business cycle volatility is it important yes or no like over time it is the case that the economy is growing but remember what i told you like economic instabilities lead to political instabilities and therefore maybe it is a good idea to smooth business cycle volatility to reduce business cycle volatility and maybe it should be the objective of a government to reduce business cycle volatility so this is of course like a big question in macroeconomics should the government do something and can the government do something are the instruments which the government have in order to smooth business cycle volatility are they effective or not this is also an important question so in case that the government is responsible for the business cycle volatility do they have tools in order to influence the business cycle volatility this is another question which we'll address here in our course in this uh graph you can see the inflation over time and um we talked about inflation already in a phase of recession for example here in the great depression the inflation rate will be very low or even negative so here in the 1930s a deflation occurred and this is in line with our intuition which we derived by looking at the automotive manager because when the automotive manager saw that the parking lot is filling up the automotive manager was decreasing the car price and when all managers do that in the different industries then the inflation rate will be negative also here the last crisis 2008 2009 the inflation rate decreased there was not a phase of deflation but the inflation rate is pretty low what about the unemployment rate here i departed a little bit uh from the textbook and i came up with a most recent figures for um the u.s unemployment rate it stems from the us bureau of labor statistics published in august 2020 and they have some numbers in this graph which stem from july 2020. once more there is a line over time so a line diagram the unemployment rate on the vertical axis you can see here this blue area which is bursting of the dot-com bubble in the year 2001 and the attacks 911 occurred in this time period we can see here that the unemployment rate increased then we can see here like a very pronounced increase of the unemployment rate in the crisis of 2008-2009 so before crisis the unemployment rate was on the level of five percent like after crisis the unemployment rate is on a level of 10 so the unemployment rate doubled in the us and being unemployed in the us is not funny it's not as funny as being unemployed in denmark when you are unemployed in the us like after three months you lose your house and you have to live in a car after additional three months of unemployment you lose your car and you live in a tent and after additional three months living in a tent you lose your tent and you live on the street so this very high unemployment rate in the us goes hand in hand with an increasing number of people living on the streets homeless people homeless people increased tremendously in the us in this time period therefore this unemployment rate and this figure tells also some stories about human beings and how this resell recession affected the life of the human beings therefore it's so important over time the unemployment rate decreased again the economy of the us was in a boom in late 2019 unemployment rate was at the level of 3.5 something like like that definitely below 4 and then you can see what happened uh during the corona crisis uh during like a few months it's a case that the unemployment rate increases from the level 3.5 to the level of 15 and this corona shock is much much higher compared to the 2008-2009 shock so in 2008 2009 the unemployment rate rate increased by 5 percentage points but in 2020 the unemployment rate increased by about 12 percentage points so the corona shock is a much deeper shock compared to the financial crisis 2008-2009 but what trump is talking about right now is that he's looking at the most recent development that the unemployment rate goes down from 15 to 10 percent so trump talks about that the unemployment rate decreased by five percentage points it's very important for trump uh that the economy is doing good because he always mentioned that like he's responsible for this boom phase of the us so here we can clearly see like the signs of making america great again like trump might be very successful at least he believes that like this was caused by his action like this boom was caused by his action and he's asking for re-election later on this year great so like when it comes to macroeconomics we talk about three important macroeconomic variables gdp growth inflation rate and the unemployment rate but when you look at the at the textbook suddenly the textbook talks about the pizza market and we can see here a diagram where we have a supply curve a demand curve for pizza and then we have on the vertical axis the pizza price and on the horizontal axis the quantity of pizza so we can use this diagram in order to find the equilibrium price of pizza and the equilibrium quantity and then the textbook also talks about what happens if what happens if when we see a shift in demand what happens if the gdp and the income of the private households increases how does that affect the pizza market it is the case that this affects the demand side so there is a demand sided shock we can see how this shock is digested the pizza price increases and the quantity traded also increases in the next step the textbook looks at the supply shock so starting point is this equilibrium here then it is the case that the price of ingred ingredients increase the material price i don't know the price for for cheese or tomato sauce increases and therefore the supply decreases the supplied curve shifts to the left and this leads to an increase of the price level and a decrease of the quantity traded so first i was a little bit puzzled by this analysis why is the textbook using a microeconomic microeconomic example like we are looking at one market the pizza market in order to talk about macroeconomics so a microeconomic example in order to talk about macroeconomics but the author uses this model in order to highlight how economists and also macroeconomists structure their models in the models it is very important that we distinguish exogenous variables and endogenous variables exogenous variables they enter the model like a shock always occurs with an exogenous variable then some transformation occurs with within the model and then afterwards some endogenous variables change so the pizza market is used in order to explain the difference between endogenous and exogenous variables endogenous variables are those variables that a model explains and exogenous variables are those the model takes as given it is the case that a shock always occurs by a change of an exogenous variable and afterwards we want to know how the exogenous shock is digested by the model so how do the endogenous variables change due to the fact that one exogenous shock occurred let's have a look at the endogenous variables of our pizza market we have three equations the first equation that's the demand relationship thus the demand depends on the goods price and on the income of the household the supply side also depends on the price for pizza but also for the price of the ingredients the price for cheese tomato sauce the price of the materials then we have a third equation that quantity supplied has to be equal to the quantity demanded so this is the market clearing condition and when we have three equations then we can determine three endogenous variables and the endogenous variables are the quantity supplied the quantity demanded and the price for pizza these are the three endogenous variables and it is very very very important that you always know which variables are endogenous which variables are exogenous when you don't know that then you have no clue about the model and you cannot work with this model so this has to be clear in each and every situation in each and every model the textbook also talks about the models used in macroeconomics and tries to characterize them the textbook says models are made of symbols and equations models symbolize the relationships often in mathematical terms and models are not realistic this is indeed the case like we have here some symbols and equation when you don't know what the symbols imply what they stand for it's hard to work with the model so you need to know what is p what is pm we have some mathematical terms which is right we have some equations we have some functions here and the textbooks book also says models are not realistic what is not realistic here so for example it could be the case that you say yes there are some workers in the pizza place and the wage rate doesn't play a role yes this is right ray tray plays a role in reality but in this model it doesn't play a role what about the rant for the place for the pizza place the rent is not modeled here at all what about the individual household what about when the individual household likes other stuff compared to pizza what if for example a doughnut store opens directly next to the pizza store so like in the real world of course a lot of things can happen which cannot happen on our simple model of the pizza market so therefore it is indeed the case that this model is not realistic we are using some very simplifying assumptions nevertheless it's very important to understand how a pizza market works and it's especially very nice in order to clarify the terms endogenous and exogenous variables so we have talked about the endogenous variables let's talk about the exogenous ones um we have one exogenous variable which stems from the demand side this is the income of the household y and then one shock which occurs one exogenous variable on the supply side like the price of the ingredients the materials which are abbreviated by pm so what is very important is that um [Music] we have to distinguish uh supply and demand shocks for example here on slide number 15 where we say income increases the shock arrives in the demand function and therefore it is a demand shock although this shock can be regarded to be positive like income increases the quantity of pizza traded increases the price increases maybe also the profitability of our pizza store increases we call it a demand shock shock is nothing negative a shock can be positive or negative and therefore we can more regard a shock like a change a change can also be positive or negative so don't take a shock as a negative thing it can be negative or positive furthermore what is really important about this pizza model is that we can either look at the equilibrium values so we can use the pizza model to determine the equilibrium or we can use the pizza model in order to find out what happens if what happens if one change occurs then we want to find out how is this shock digested and how does the price change and how does the quantity change compared to the initial equilibrium so in one graph we focus on the equilibrium we can determine the equilibrium and then we focus about changes how do economists think this is the main question of this part of this chapter the field of economics is like a it's like a swiss army knife a set of complementary bus but distinct tools that can be applied in different ways in different circumstances and of course when you want to open a bottle and you are trying to open the bottle with this scissor here it might work but it's very complicated to open a wine bottle like with this scissor when you're trying to use this scissor to open a wine bottle you are not applying the right tool like the right tool for opening a wine bottle is this one so the art of being an economist the art of being a macroeconomist is also to find the right model for the right setting so we have to think about what kind of model can be applied in the one or the other situation therefore it is the case that we need multiple models we need a lot of models because of the fact that the task a macro economist has to major is also so heterogeneous so the field of economics is like a swiss army knife in the last part of the textbook the textbook talks about the important question of the flexibility of wages and prices they ask the question at which speed do wages and prices adjust this could also be an important question in our pizza market where we assume that the one or the other shock arrived and then there is a new equilibrium but we could also ask a question how long does it take until we arrive at this new equilibrium when it comes to wages it is a case that labor contracts often set the wages for a certain time period in the future it might be for a period of up to three years in a market clearing model like a demand and supply diagram like in our pizza model we always assume that the goods prices are fully flexible goods prices adjust immediately i would like to use this diagram in order to highlight why is it important to distinguish cases where prices can adjust compared to a situation where prices cannot adjust let's assume that the supply curve in the right diagram is a vertical line this is our supply curve the initial equilibrium a the prices are on pa and the level of income is equal to y a now i would like to examine what what happens if like a negative demand shock occurs and the demand curve shifts to the left a negative demand shark shifts the demand curve to the left i have to introduce a few points here this is point a prime and this is the new equilibrium b and it seems to be the case that prices can adjust in this model by prices can reduce and so nothing happens with respect to the income level the income level stays the same so what what's going on in this model is that the negative demand shock occurs demand is on the level a prime and supply is on the level a so supply is larger than demand and when supply is larger than demand it might be the case that here prices adjust prices decrease and when prices decrease the quantity demanded once more increases so that in the end nothing happens to the variable which is displayed here on the horizontal axis let's contrast this with the situation where the supply curve is like a horizontal line and this is also equilibrium a uh with p a and y a the demand curve shifts to the left because a negative demand shock occurred and here it is the case that the prices are fixed and prices do not adjust so the price level in a is equal to the price level in b and this also affects the income level uh the income level is reduced and since this new equilibrium like point b is indeed an equilibrium the economy will stay there for a longer time period so like in the right part of the diagram the shock is digested by a decrease in prices so the prices decrease and in the end demand is on the same level as before and so is supply this is different in the left part of the diagram where prices do not adjust here there is a problem because in the end it is the case that the equilibrium quantity is lower than before and when we assume that this is not like a microeconomic market but a macroeconomic market then it is the case that the economy will end up in a recession so unemployment rates will be higher for a longer time period and the economy will stay in a recession for a longer time period with a higher unemployment rate so in the left situation there is the danger that this economic instability will also lead to political instability and therefore maybe the government should do something the government should increase the demand by increasing government spending for example or lowering taxes and it could be the responsibility of the government to shift the demand curve back to the right so that the economy gets out of recession and the government can fight the higher unemployment rate so maybe is it it is the responsible of the government to do something in the left part of the diagram nevertheless this diagram highlights that it's very important to distinguish situations where prices adjust compared to situation where prices do not adjust and therefore this graph is linked to the argumentation in the textbook you will not find this graph within the textbook but i think that it is a nice visualization of the text written in the last part of chapter one thank you very much that you attended this lecture have a nice day bye bye