ECON130 Week 8: Macroeconomics
Hi all,
As you know this is a course on microeconomics … so it is a bit random to teach macroeconomics. However, as this is the only economics course many students do we think it is a good idea to introduce some of the jargon you will see a lot in your work life!
Usually this is a week of lectures, but given the semester is a week shorter we teach this in a single lecture – and it will be assessed as such.
So what is macroeconomic, why do we care, and what are we measuring?
What is macroeconomics
So far we’ve done microeconomics – we have looked at the behaviour or choices of individuals when faced with a trade-off due to scarcity. We have recognised that prices provide incentives – be they explicit prices or shadow prices – and that the key point to keep in mind was the opportunity cost of a choice.
This is cool. Macroeconomics wants to do the same – but the questions in macroeconomics are LARGE. Instead of asking about a few individuals, or a single market, macroeconomics asks about activity in many markets across a large area (eg an entire country).
The data we use for macroeconomics (to make testable hypotheses) are aggregates of individuals – this could be the total sum, the spread between individuals (the variance), and related changes or growth rates in these amounts.
We would like to use microeconomic intuitions – and the importance of scarcity and opportunity cost – when analysing these problems. However, these are emergent phenomenon where some of the smaller market distortions can multiple to be very large over a whole economy. So the method we often take is to start with the aggregates, decompose them, and then try to understand the behaviour of these aggregated amounts.
This is not a perfect process, and if we tried to implement policy on this basis it could be problematic (as if we haven’t described the behaviour, we don’t know how the relationships will change if we change the policy!). But it is a start – if you would like to do more, come along to ECON141 next semester 😉
Why do we care
I’ll keep this short – a lot of you have explicitly told me you are doing economics because you are interested in where the economy as a whole is going, you are concerned about poverty or unemployment, and that you want to work in policy.
Microeconomics is essential for this – but at the same time so is macroeconomics. Microeconomics gives you the raw tools to “think systematically” in the way economists do – macroeconomics gives you specific understanding of many of the big questions that motivate a lot of economics students.
When I came in economics I was motivated by macro – even though I ended up preferring micro – and I have appreciated the importance of both since.
What do we measure
This was the main focus on our class – we measured certain aggregates: GDP, unemployment, inflation, business cycles and trends, and labour productivity. We understand, in a rough sense, what each of those things mean.
GDP = Production within a certain region (eg New Zealand)
Unemployment = Those willing to work at the current wage who can’t [Note: We also mentioned reporting bias and discouraged workers]
Inflation = Growth in the price level [Note: We also talked about our interest in a measure where this growth is in an “average basket” and how we want to take out changes in prices relative to each other – our changes in scarcity in a micro sense – to think about this idea]
Business cycles = The movement in GDP around a “trend” level due to coordination issues [Note: We stated this was the big focus of the ECON141 course]
Labour productivity = Output produced per hour of work [Note: We discussed how this has risen significantly through the last 150 years, and that this growth is another core issue of interest in macro]
That is a lot of ground to cover in one lecture! But we did it – and after seeing this idea of a “coordination issue” we are now going to do a lecture on game theory which has coordination games. Buckle in.