Friday, August 1, 2008


Now let's talk about macroeconomics. Actually, this is the way I study it by summarizing the well known Macroeconomics books, one of them is written by Rudiger Dornbursh and Stanley Fischer, fifth edition, McGraw-Hill Publishing Company. The first author is from Department of Economics, Massachusetts Institute of Technology and the second one is from the World Bank and the same department with Dornbursch. So....let's start by seeing what are its contents....

A. Part I
  1. Introduction
  2. National Income Accounting
  3. Income and Spending
  4. Money, Interest, and Income
  5. Fiscal Policy, Crowding Out, and the Policy Mix
  6. International Linkages
  7. Aggregate Supply and Demand: An Introduction

B. Part II

  1. Consumption and Saving
  2. Investment Spending
  3. The Demand for Money
  4. The Fed, Money and Credit
  5. Stabilization Policy: Prospects and Problems

C. Part III

  1. Aggregate Supply: Wages, Prices, and Employment
  2. Inflation and Unemployment
  3. The Ttradeoff between Inflation and Unemployment
  4. Budget Deficits and the Public Debt
  5. Money, Deficits, and Inflation
  6. The MAcroeconomics: The Interaction of Events and Ideas
  7. Long - Term Growth and Productivity
  8. International Adjustment and Interdependence

Next... here its contents....

A. Part I

1. Introduction

There have long been two main intellectual traditions in macroeconimics, which caused a debate between monetarists (led by Milton Friedman) on one side and Keynesians (led by Franco Modigliani and James Tobin) on the other side, in the 1960s -about the statement that markets work best if left to themselves or the statement that government intervention can significantly improve the operation of the economy. In the 1970s, the debate on much the same issues brought to the fore a new shool of thought, i.e. the new classical macroeconomists. This group - which is developed in the 1970s and remained influential in the 1980s - led by Robert Lucas, Thomas Sargent, Robert Barro, Edward Prescott and Neil Wallace ( the university of Minnesota) and shared many policy views with Friedman. The group sees the world as one in which individuals act rationally in their self-interest in markets that adjust rapidly to changing conditions and the government intervention only make things worse. There are three central working assumption of this school of thought:

  • economic agents maximize, where households and firms make optimal decisions, which means that all available information is utilissed in reaching the best possible decisions in the circumtances in which agents find themselves.
  • decisions are rational and are made by using all the relevant information. Expectations are rational when they are statistically the best predictions of the future that can be made using the available information. That is why this group is sometimes called as the rational expectations school of thought, though rational expectations is only a part of the theoretical approach of the new classical group.
  • markets clear, accordingly prices and wages adjust in order to equate supply and demand.

While... the New Keynesians....

which includes George Akerlof and Janet Yellen (the university of California - Berkeley), Olivier Blanchard (MIT), Greg Mankiw ans Larry Summers (Harvard University) and Ben Bernanke (Princeton University) - argue that sometimes, markets don't clear even when individuals are lookingg out for their own interests. Both informationa problems and costs of changing prices lead to some price rigidities and, as a result, create a possibility for macroeconomic fluatuationd in output and employment.

What about GNP?... what does it mean?... we'll discuss further in the next section...

The growth rate of the economy is the rate at which real GNP is increasing.

Let's first see reasons for the growth of real GNP, as follows:

  • changes in the available amount of resources (capital and labor) in the economy. These two resources are used in the process of production of goods and services . Increases in the availability of these production factors - thus account for the increase of real GNP.
  • changes in the efficiency with wwhich production factors work.

how about empolyment and unemployment...?

The unemployment rate is the fraction of the labor force that can't find jobs.

inflation rate, the growth rate, and the rate of unemployment are the three measurement of macroeconomic performance .

When inflation occurs, the prices of goods increase and also when inflation happens - it is sometimes associated with the disturbances to the economy - make it unpopular.

When the rate of growth is high, there is an increase in production of goods and services, leads an increase of standard of living, to lower unemployment rate and economy provides more jobs available for society.


when the unemployment rate is high, jobs will difficult to find. the unemployed suffer a loss in their standard of living, personal distress, and sometime a lifetime deterioration in their career opportunities.

now...let's talk about the business cycles and the output gap...

Those three measurement mentioned above are closely related through to business cycle.

What is the business cycle anyway....?

The business cycle is the more or less regular pattern of expanssion (recovery) and contraction (recession - mild impact and depression - if severe ones) in economic activity around the path of trend growth; at a cyclical peak, economic activity is high relative to trend , and at a cyclical trough, the low point in economic activity is reached.

The trend path of GNP is the path GNP would take if factors of production were fully employed.

Then ... the output gap....

it measures the gap between actual output and the output that economy could produce at full employment given existing resources.

Full-employment is also known as potential output. So ...

output gap = potential output - actual output

It also measures of size of the cyclical output deviates from potential or trend output

So far... we've learnt some terms of macroeconomics...

Let's stop here for you (and ofcourse especially me...) to have a chance digesting them....

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