Transcript Economics 157b Economic History, Policy, and Theory Short

Economics 122a
Fall 2009
Overview
Plan for today's lecture:
1. Give overview of course
2. Why are you in this course?
3. Introductory discussion
Course web page is
http://www.econ.yale.edu/~nordhaus/homepage/Econ122.htm
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Introduction and setup
1. What is this course?
2. Go over course setup
3. Go over readings
4. Lecture and sections
5. Problems and exams
6. Paper
Exodus
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Limited enrollment
Limit to 120 students. The following are GUARANTEED
enrollment: all those who got bumped last year; all
seniors and juniors who are shoppers as of 7 pm
Monday; all sophomores who are declared economic
majors as of 7 pm Monday.
The balance of shoppers will be selected by lottery. My
guess is that the odds are about 1 in 3 of selection.
Freshmen are not eligible. Special cases will be
considered on an individual basis.
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Course Syllabus
DESCRIPTION AND PREREQUISITES
• The course covers business cycles, economic growth, major macro
topics, and their application to fiscal and monetary policy and
history.
• Highlights:
– the major tools of macroeconomic analysis, particularly
understanding business cycles and economic growth and
– Some major historical and policy issues.
• This course is to be taken after completing both terms of
Introductory Economics. Exceptions will be rare. Calculus will be
used.
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Readings
The textbook for the course is the following. For textbook options, see
web page.
N. Gregory Mankiw, Macroeconomics, 7th edition, Worth, 2010.
The book is not in yet, but you can download the first chapters from
the course web site.
Note the options:
• Mankiw, 7th edition from Yale bookstore for circa $170 (should be
in soon)
• Mankiw, 7th edition, in the electronic version, from CourseSmart for
$62 for a 180 day subscription.
• Mankiw, sixth edition, available various from $10 on up. This is for
impecunious risk-lovers.
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Electronic readings
Most of the non-text articles are available in electronic form
on the course web site under the heading “Online
Readings.” These articles are marked (E) on the reading
list and available from the course web site or online.
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Posting of lecture notes
Lectures will be posted after the class.
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Tests and Grading
There will be one mid-term examination, which will take
place in class on Wednesday, October 21.
The final examination will be three hours and is Dec 17.
There will be four graded problem sets, four ungraded but
required problem sets, and a short paper on a historical
or policy macroeconomic issue due at the end of the
semester.
The grade is approximately based 45 percent on the final
exam, 25 percent on the hour tests, and 30 percent on the
problems and paper.
Grade distribution.
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Sections
There will be sections led by teaching fellows from
Department of Economics. Each student will be assigned
to a section.
Sections will go over the analytical material from the
course, cover questions raised by students, and review
problems and exams.
Tentative section times are:
Wednesday 4:00-4:50 and 5:00-5:50
Thursday 4:00-4:50 and 5:00-5:50
Wednesday 7:00-7:50 and 8:00-8:50
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How to master macroeconomics
Experience and modern neuroscience show that better
performance and more persistent understanding comes from
keeping up with the reading, consistent attendance in the
course and sections, along with careful work on the problem
sets.
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Alternatives
Alternative macroeconomics courses:
Econ 122 (Bruegemann). Roughly the same with emphasis
on labor economics.
Econ 126 (Moscarini). Intensive version. More analytical
and mathematical.
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For those who
have had enough
macroeconomics
for today...
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Why are you here?
Before we go on, reflect a moment and then write the
answer to the following on a piece of paper:
“Why am I here? What do I hope to get out of this course?”
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What is macroeconomics?
• Macroeconomics is the study of the overall behavior of
economies (output, inflation, unemployment, trade
balance, financial markets, …)
• Economies are not just the sum of the parts. The
behavior of aggregates is different from the sum of
individuals. Non-linear system.
– This point is found in many areas. Crowds behave
differently from individuals.
– riots, traffic jams, panics, sports, …
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Major themes
There are two major recurrent themes running through
macro:
i) Business cycles
ii) Economic growth
Virtually every macroeconomic issue revolves around
these issues, or a confusion concerning them.
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Business cycles
One major set of issues involves the business cycle. What
are business cycles? What are some examples?
The housing/subprime recession of 2007-09.
– Housing prices peaked in mid 2006 and have fallen about
20 percent.
– In August 2007, investors suddenly discovered that
subprime mortgages were much riskier than had been
supposed.
– This led to financial problems, especially for highly
leveraged financial intermediaries (banks, hedge funds,
etc.), bankruptcies, and other crises
– Risk premiums increased, credit was tightened.
– The Fed responded forcefully right away on a broad front.
– But we seem to be headed for the most severe recession
since World War II.
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Output and employment over the cycle
1.06
Employment/trend
Output/potential
Deviation from trend
1.04
1.02
1.00
0.98
0.96
0.94
0.92
60
65
70
75
80
85
90
95
00
05
10
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The central question of macroeconomics
“The resources of nature and man’s devices are just as fertile and
productive as they were.
The rate of our progress towards solving the material problems
of life is not less rapid. We are as capable as before of
affording for everyone a high standard of life and will soon
learn to afford a standard higher still.
But today we have involved ourselves in a colossal muddle,
having blundered in the control of a delicate machine, the
working of which we do not understand.”
[J.M. Keynes, The Great Slump of 1930
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Debt-GDP ratio under two CBO scenarios
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Economic growth
Economic growth concerns the trend in output over the
long run.
In macroeconomics, we use the neoclassical growth model
to understand economic growth.
GDP (2007 international prices, billions of $)
GDP trends in 3 big regions
10,000
1,000
China
US
SubSaharanAfrica
100
1960
1970
1980
1990
2000
2007
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GDP per capita (2007 international US dollars)
Per capita growth trends in 3 big regions
20,000
China
US
SubSaharanAfrica
2,000
200
1980
1985
1990
1995
2000
2007
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International macro
A final slant on these issues that is important is
international macroeconomics -- a new and fascinating
branch of economics.
Role of exchange rates, international trade, currencies.
Biggest issues now are the huge current account deficit of
the US and the big surplus of China. How will these
resolve? In a gradual unwinding? Or in a financial
meltdown?
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U.S. Trade Deficit: Net exports/GDP (%)
.02
.01
Net exports/GDP
.00
-.01
-.02
-.03
-.04
-What does this mean? That US is
consuming more than it is producing.
- Major questions: how long can this go
on, and how will it end (gradual
adjustment or hard crash)?
-.05
-.06
-.07
60
65
70
75
80
85
90
95
00
05
10
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