Transcript MACROECONOMICS

MACROECONOMICS
Chapter 1
The Science of
Macroeconomics
http://www.dallasfed.org/research/swe/2005/swe0502.pdf
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http://oregonstate.edu/Dept/pol_sci/fac/sahr/pc166514.htm
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http://oregonstate.edu/Dept/pol_sci/fac/sahr/pc1915ff.htm
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http://oregonstate.edu/Dept/pol_sci/fac/sahr/pl1665.htm
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Real Gross Domestic Product, Chained Dollars
[Billions of chained (2000) dollars]
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES
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&Freq=Year&FirstYear=1929&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=yes#Mid
The Science of Economics
The science of economics creates
knowledge by first spelling out a
hypothesis, then checking its reliability
with the data at hand.
 The hypothesis is in the form of a
mathematical model.

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Example of A Model
Suppose we want to analyze the price of
oil.
 We might start with a basic supplydemand model.
 Quantity demanded depends on the price
of oil and income of the buyers.
 Quantity supplied depends on the prices of
inputs and price of oil.
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Price of
oil
Increase in the incomes
of the buyers
Price
Quantity of oil
Qd=Qs
Increase in the prices of inputs to the producers
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Use of Different Models
Sometimes an ignored variable becomes
important; new models have to be devised
to explain the “world.”
 If we look at the economy in large chunks
of time, say 30, 50, 100 years, what we
see is different than when we look at
periods of 1 to 3 years.
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Use of Different Models
Long Run perspective uses flexible price
approach. Flexible price approach is the
basic S-D approach: prices adjust to clear
the market.
 Short Run perspective uses sticky price
approach. Markets don’t clear when
prices are sticky creating unemployment,
excess supply, excess demand.
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