Macroeconomics PDF - Overview and Key Questions

1 Macroeconomics Macroeconomics (Greek makro = ‘big’) describes and explains economic processes that concern aggregates. An aggregate is a multitude of economic subjects that share some common features. By contrast, microeconomics treats economic processes that concern individuals. Example:...

1 Macroeconomics Macroeconomics (Greek makro = ‘big’) describes and explains economic processes that concern aggregates. An aggregate is a multitude of economic subjects that share some common features. By contrast, microeconomics treats economic processes that concern individuals. Example: The decision of a firm to purchase a new office chair from com- pany X is not a macroeconomic problem. The reaction of Austrian house- holds to an increased rate of capital taxation is a macroeconomic problem. Why macroeconomics and not only microeconomics? The whole is more complex than the sum of independent parts. It is not possible to de- scribe an economy by forming models for all firms and persons and all their cross-effects. Macroeconomics investigates aggregate behavior by imposing simplifying assumptions (“assume there are many identical firms that pro- duce the same good”) but without abstracting from the essential features. These assumptions are used in order to build macroeconomic models. Typi- cally, such models have three aspects: the ‘story’, the mathematical model, and a graphical representation. Macroeconomics is ‘non-experimental’: like, e.g., history, macro- economics cannot conduct controlled scientific experiments (people would complain about such experiments, and with a good reason) and focuses on pure observation. Because historical episodes allow diverse interpretations, many conclusions of macroeconomics are not coercive. Classical motivation of macroeconomics: politicians should be ad- vised how to control the economy, such that specified targets can be met optimally. policy targets: traditionally, the ‘magical pentagon’ of good economic growth, stable prices, full employment, external equilibrium, just distribution 1 of income; according to the EMU criteria, focus on inflation (around 2%), public debt, and a balanced budget; according to Blanchard, focus on low unemployment (around 5%), good economic growth, and inflation (0—3%). In all specifications, aim is meeting several conflicting targets simultaneously. Examples for further typical questions to macroeconomics: what causes business cycles (episodes of stronger and weaker economic growth)? can an increase in the monetary supply by the central bank cause real effects? what is responsible for long-run economic growth? should the exchange rate of a currency be kept at a fixed level? can one decrease unemployment, if one accepts an increase in inflation? A survey of world economics: three large economic blocks (Eu- rope, USA+Canada, Japan+Far East) with different problems, the remain- der mostly developing countries. 1. USA: good growth, low inflation, tolerable unemployment rate, per- sistent external deficit, increasing income inequality. 2. EU: moderate growth, low inflation, in some countries high unem- ployment, inconspicuous external balance (total EU active, in Austria recently turned active), for some countries large public debt, currently important unification process, convergence and heterogeneity of indi- vidual countries. ‘Richest’ EU countries Luxembourg, Denmark, then ‘mid-field’ with Austria, IRL, B, NL, UK, D, F, FIN, I, S; slightly be- low E, GR, SLO, P. Last come most ‘new’ (2004 accession) countries (from Malta down to Latvia). Very ‘rich’ non-EU countries Norway, Iceland, and Switzerland. 3. Japan: recently weak growth, large external surplus, deflationary ten- dencies. 2