Transcript Mankiw8e_Student_PPTs_Chapter 1 - E-SGH

CHAPTER 1
The Science of Macroeconomics
A PowerPointTutorial
To Accompany
MACROECONOMICS, 8th Edition
N. Gregory Mankiw
Tutorial written by:
Mannig J. Simidian
B.A. in Economics with Distinction, Duke University
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Chapter One
M.P.A., Harvard University Kennedy School of Government
M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management
®
In Memoriam
Mankiw’s Macroeconomics Modules for Macroeconomics 7th ed. are
dedicated to the loving memory of my cherished father, best friend and
mentor. Daddy– you are still my inspiration for making sure
these tutorials are the best they can be for students worldwide!
Ara Vahan Simidian
(June 24, 1928 - December 19, 2008)
May he continue to enjoy learning and loving
economics from heaven above.
Chapter One
Ara Vahan Simidian
2
with Mankiw’s Macroeconomics Modules author, Mannig J. Simidian, 2007.
Acknowledgements
For over a decade, I have had the honor of participating in the educational
supplements for Professor Mankiw’s Macroeconomics (eds. 5th- 8th). Each iteration of his
text becomes clearer, and more insightful! Professor Mankiw effortlessly finds a way to
improve what is already perfect. He profoundly elucidates changes and illuminates the
dynamics of the ever-changing ubiquitous collection of buyers and sellers which comprises
the macroeconomy. In the most organized and articulate fashion, he demystifies the
financial good and evil that all humans face on a daily and long-term basis. To me, there is
no other greater societal contribution to a globalizing marketplace in desperate need of
education, answers, reformation and inspiration. Thank you Professor Mankiw for filling
the world with hope through analytical awareness!
Mankiw’s Macroecoeconomics Modules act as a complimentary tool to Professor
Mankiw’s text, and have been a benefit to students and teachers worldwide who have
wanted yet another way to experience the power and knowledge found in Macroeconomics
8th ed. My participation is an honor for which I am eternally grateful.
I have had a profound support system throughout the years most notably my
Father, Ara Simidian, who rests in heaven, my Mother, Jane Simidian, Dr. Lawrence
Brockman, Dr. Russell & Dara Meetze, Professors Mike McElroy, Adrian Austin, David
Denslow, Mark Rush, Ed Tower, Jeff Frankel, David Gergen, and friends Mark Hassan,
Stephanie Taylor and artistlaureate Peter Max, among many others.
The 8th edition of Mankiw’s Macroeconomics Modules is dedicated to my eight
year old daughter Elle, who is now old enough to understand the importance of the
economy.
I owe
Chapter
One it to her to disseminate macroeconomics education that will not leave3 her
generation in economic turmoil.
Mannig J. Simidian
Welcome to Macroeconomics!
Everyone has reason to think critically about macroeconomic
issues. It is imperative that we seek to understand why some
countries are growing faster or slower than others or
why some have greater fluctuations in inflation or
unemployment. The study of macroeconomics focuses on the forces
that affect the economy as a whole! And, it affects everyone in so
many ways. It plays a significant role in politics, while also affecting
public policy and societal well-being, at national and global levels.
Macroeconomists use variables to measure the performance
of the economy such as real GDP, the inflation rate, and the
unemployment rate many among others. They are also concerned
with matters such as monetary and fiscal policy—both of which, will
be discussed at length in MACROECONOMICS, 8th ed.,
Mankiw’s Macroeconomics Modules, and in your macroeconomics
course. Good luck and have fun using these tutorials to guide you 4
Chapter One
when macroeconomics might be challenging you! Enjoy!!!
President Barack Obama
and the State of the Economy
When President Obama moved into the White House in 2009,
the economy was in a state of turmoil. Mortgage defaults
and a drop in housing prices were the major culprits,
exacerbated by the bankruptcy or near bankruptcy of many
financial institutions. In 2008 and 2009 the Treasury and the
Federal Reserve acted vigorously so as to avoid the
circumstances that characterized the Great Depression which
occurred in the 1930’s. The recovery was slow and painful;
they eventually succeeded to some extent in that
unemployment was at 10.1% but enacted policies that left
behind tremendous government debt.
Chapter One
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Economists use models to understand what goes on in the economy.
Here are two important points about models: endogenous variables
and exogenous variables. Endogenous variables are those which the
model tries to explain. Exogenous variables are those variables that a
model takes as given. In short, endogenous are variables within a
model, and exogenous are the variables outside the model.
Price
Supply
P*
Demand
Chapter One
Q * Quantity
This is the most famous
economic model. It describes
the ubiquitous relationship
between buyers and sellers in
the market. The point of
intersection is called an
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equilibrium.
Market clearing is an alignment process whereby decisions between
suppliers and demanders reach an equilibrium. Here’s how it works.
Let’s say you begin with a demand and supply curve for CDs.
Remember that the demand curve slopes downward meaning that
as you increase the price (by moving along the demand curve), the
quantity demanded decreases. Conversely, the supply curve slopes
upward implying that as the price increases (by moving along the
supply curve), the amount supplied will increase.
The center point A is where market
D
D´
S
P
decisions reach an equilibrium.
B
Now, suppose that there is a sudden
P´
A
increase in the demand for CDs.
P*
Demand will shift from D to D´.
The increase in demand places upward
pressure on the price to point B since the
original price, P* no longer clears 7the
Chapter One
Q´
Q*
Q market. Notice the “shortage.”
S SHIFTS IN DEMAND: Suppose your income
P
rises? Your demand for a given product, for
example, pizza, will also increase.
This translates into a rightward shift in the
demand curve from D to D'. Result:
D' both price and quantity are higher.
D
Q
P
SHIFTS IN SUPPLY: A fall in the price
of materials increases the supply of pizza; at
any given price, pizzerias find that the sale
of pizza is more profitable, and thus the
supply of pizza rises.
This translates into a rightward shift in supply
from S to S'. Result: price falls, quantity rises.
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S S'
D
Q
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Economists typically assume that the market will go into an
equilibrium of supply and demand, which is called the
market clearing process. This assumption is central to the
pizza example on the previous slide. But, assuming that
markets clear continuously, is unrealistic. For markets to
clear continuously, prices would have to adjust instantly to
changes in supply and demand. But, evidence suggests that
prices and wages often adjust slowly.
So, remember that although market clearing models assume
that wages and prices are flexible, in actuality, some wages
and prices are sticky. Market clearing models may not
describe every instant in an economy, but they do depict the
equilibrium toward which the economy gravitates.
Chapter One
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Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
broader marketplace. In microeconomics, an individual chooses to
maximize his or her utility subject to his or her budget constraint.
Macroeconomic events arise from the interaction of many
individuals trying to maximize their own welfare. Because
aggregate variables are the sum of the variables describing
individuals’ decisions, the study of macroeconomics
is based on microeconomic foundations.
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®
The modules mirror the sequencing of the text, Macroeconomics, 8th ed.
There are six parts and a total of nineteen chapters with a module
written for each chapter. Enjoy!
Introduction
Classical Theory, The Economy in the Long Run
Growth Theory, The Economy in the Very Long Run
Business Cycle Theory: The Economy in the Short Run
Topics in Macroeconomic Theory
Topics in Macroeconomic Policy
Chapter One
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Macroeconomics
Real GDP
Inflation and deflation
Unemployment
Recession
Depression
Models
Endogenous variables
Exogenous variables
Market clearing
Flexible and sticky prices
Microeconomics
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