Read Chapter 0: Introduction - Econ206 - Francesc Ortega text version



Chapter 0: Introduction

Econ206 - Francesc Ortega

August 31, 2011




· We will start by reviewing the key concepts of

Macroeconomics: GDP, inflation, and so on.

· You will learn how to obtain the data from the official

sources, and how to manipulate it to make it useful. This is a skill that is important in most jobs in economics and business.

· Become familiar with spreadsheets (e.g. Excel). You will

need it everywhere you go. Practice makes perfect.




1. The basic model. Classical theory. 2. Add time: economic growth. 3. Add rest of the world: the open economy. 4. Add price rigidities: persistent recessions and booms. 5. Current policy issues

· We will read relevant newspaper articles (problem sets). · Use our theoretical models to provide analysis.



The key assumption: flexible versus rigid prices

· In ideal neoclassical world, prices are the invisible hand

that ensures that markets clear (supply equal demand).

· True in many markets. Financial markets clear by the

minute or even second.

· Not true in other markets in the short run. Prices in those

markets are rigid (sticky) for one reason or another. Example: wages in the labor market.

· As we shall see, crucial implications for economic policy.

Keynesian recipes to fight a recession.



Long and short-run fluctuations

U.S. Real GDP per capita

(2000 dollars)

First oil price shock

Great Depression World War II

Second oil price shock



Multiple models

· To keep analysis simple we will use different versions of

essentially the same model, as opposed to one humongous model.

· Each version simplifies the parts that are not relevant for

the problem at hand.

· Crucial to know which model is most appropriate for each


· Examples: For economic growth: Solow. To understand

Krugman's recipes to fight the recession: ISLM with price rigidities.




· Key principle of microeconomics: economic agents make

optimal choices given their constraints.

· Modern macroeconomics is fully consistent with optimizing

agents. But requires advanced calculus.

· Here we will respect the principle but optimization will be

hidden in the background to keep analysis simple. E.g. our consumption function.

· More on this in future courses. See also latter part of

Mankiw's book.



Math and graphs

· Math will be kept to a minimum. Emphasis on ideas and

graphical analysis.

· But some Math will be necessary to convey some

important ideas. We'll go over that slowly. Be patient and ask questions!

· Some graphs will be deceptively simple. A lot of ideas

hidden behind a simple curve. Be alert. Crucial to learn how to use them.


Chapter 0: Introduction - Econ206 - Francesc Ortega

8 pages

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