Introduction: What is macro?

Valerio Pieroni

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Course goals

- Understanding of how to think about the economy overall, i.e. the macroeconomy.

- Enable you to apply the tools developed to think about macroeconomic policy issues.

- (Timely) Topics we will consider:

- What drives inflation?

- How can policies influence economic growth in the long and short run?

- What is the role of the Central bank and how important are it’s targets?

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Course organization (Autumn term)

- A year-long course. I will teach the autumn term portion. The material naturally leads
on throughout the course.

- 10 weekly lectures (week 2 to week 11)

- 10 weekly classes (starting from week 3)

- In these classes you will work through problem sets covering material from the previous
week’s lecture. Found on Moodle.
- Solutions uploaded onto Moodle at the end of the week the problem set is covered.

- Student support hours

- By appointment (15 mins): [email protected]
- First port of call is your AL. They will tell you when their support hours are in the first class

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Course Assessment

1. Coursework:
- One online autumn term Moodle test.

- One online spring term Moodle test.

- Each test will cover material covered in that term up to the test.

2. Final Exam:
- In-person, open book exam in May/June 2023. Open book means you are allowed a set
of note (up to 10 pages), one textbook and a calculator.

- All lecture/class material could come up.

- See past exam papers on Moodle for revision.

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Grading

- Grading depends on your level/year of study.

- Level 5 (second years)

1. If the average coursework mark is ≥ 40%
- You are awarded whichever is greater 50% coursework and 50% final exam mark OR 100%
final exam mark.
2. If the average coursework mark is < 40%
- You are awarded 50% coursework and 50% final exam mark.

- Level 6 (final years)

1. You are awarded 50% coursework and 50% final exam mark.

- See the course outline on Moodle for more information.

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Expectations

- Required reading:
- Lecture Notes (Moodle). Slides follow these closely.

- Mankiw textbook readings. Chapters in the course outline.

- Class problem sets:

- Please attempt the problem sets before class. Come knowing what you find tricky and let
your AL know.

- Interaction is greatly encouraged in lectures and in classes. If anything is unclear,

please let us know.

- We all make mistakes, including me. Please let me know if you notice anything that
looks a bit off so I can correct it for everyone.

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Communication

- Moodle is your friend. All important information and new documents will be uploaded
onto Moodle as we progress with the course.

- Please feel free to email me with any questions or suggestions. Feedback is very
helpful: [email protected]

- On weekdays I aim to respond to all emails within 24 hours. If you don’t hear back
from me, please send me a follow-up nudge email. I may have missed your email by
accident.

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Check you are registered

- Are your online registration title green?

- If not follow the steps on www.essex.ac.uk/welcome/registration

- Collect your registration card

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Any questions?

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Today:

- What is macroeconomics?

- What is an economic model?

- Long-run vs Short-run

- Stock and flows

- Introduction to national accounts

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What is macroeconomics?

The study of the economy as a whole, the behaviour of aggregate

variables.

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What are macroeconomic variables?

Aggregate variables are variables that come from the behaviour of collections of
individuals/firms etc.

Examples:
- GDP

- Inflation rate

- Exchange rate

- Unemployment rate

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Structure of the Aggregate Economy

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Models/Theories

- In this course, we will set out a number of key theories that have been developed
throughout the twentieth century to explain the behavior of aggregate variables.

- But before we get there, what exactly is a theory?

- 3 main ingredients:
1. Description of the variables that we are interested in.
2. Assumptions about how the variables can behave and interact.
Often use simplifying assumptions to make the math manageable.
3. Outcomes/predictions that follow logically from the assumptions. We focus on
establishing the equilibrium of a model.

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How do we evaluate models?

- Take model predictions to the data.

- Are the model predictions consistent with what we observe in the data?

- If align =⇒ ”good” model.

- If inconsistent =⇒ ”bad” model.

- If we find that we have a ”bad” model, the next step is to alter the assumptions and
then see if the new model predictions align with the data.

- Research is the repetition of this process.

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What kind of maths will we use?

Macroeconomic research uses advanced mathematics and a lot of computer programming.

We will keep it simple. You will have to utilize:
- Algebra
- Arithmetic rules (+, −, ×, ÷) but with letters instead of numbers.
(a −b )
- E.g. c .(d + e )

- Calculus
- Derivatives.
df (x )
- E.g. f (x ) = x 2 , dx = 2x

- Graphical analysis
- Draw line graphs.
- Important to think through whether a change in the environment moves us along a curve
or shifts the curve.

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Endogenous vs. Exogenous variables

- Endogenous variables - variables that are explained or determined by the model.

- Exogenous variables - variables not determined by the model. Take as given.

Models make predictions about how the exogenous variables impact endogenous
variables.

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Endogenous vs. Exogenous variables

- Endogenous variables - variables that are explained or determined by the model.

(Dependent variables in econometrics speak.)
- Exogenous variables - variables not determined by the model. Take as given.
(Explanatory/independent variables in econometrics speak.)
Models make predictions about how the exogenous variables impact endogenous
variables.

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Example: Supply and demand

Q: How does consumer income impact market price (inflation)?

Y - Consumer income (exogenous)
P, Q - Market price and quantity (endogenous)

QD = 10 − P + 2Y

QS = −2 + 3P
In equilibrium supply = demand (QS = QD ).

−2 + 3P = 10 − P + 2Y

=⇒ P ∗ = 3 + 12 Y , Q ∗ = −2 + 9 + 23 Y

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Short run vs. Long run

A key aspect of macroeconomics, which makes it distinct from microeconomics, is that is it

necessary to specify the time frame we are considering.
Will be set out in the assumptions of the model.
- Short run: Aggregate prices are fixed/sticky.
- Sticky prices means that prices do not fully adjust after a change to the economy.
- With sticky prices quantities need to adjust after a change to the economy.

- Long run: Aggregate prices are fully flexible.

- Adjustment takes place through both quantities and prices.

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Stock variables vs. Flow variables

- Stock variable:
- A quantity measured at a point in time.

- E.g. Population of a country in 2022, an individual’s wealth in 2020.

- Flow variable:
- A quantity measured per unit of time.

- E.g. Level of immigration in 2022, an individual’s income in 2020.

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