Lecture Macroeconomics: Lecture 1 - Prof. Dr.Qaisar Abbas

Macroeconomics
Course instructor: Prof. Dr. Qaisar Abbas

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Course objectives

•

Introduction to Macroeconomics

•

Learning the key concepts of Macroeconomics

•

Application of Macroeconomic knowledge in real life situations

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Textbooks

Core Textbook
Macroeconomics by N. Gregory Mankiw- Latest edition

Supplementary reading
Economics by Samuelson Nordhaus- latest edition

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Course Outline
1.

The Science of Macroeconomics

2. The Data of Macroeconomics
3. National Income: Where It Comes From and Where It Goes
4. Economic Growth
5. Unemployment
6. Money and Inflation
7. The Open Economy
8. Introduction to Economic Fluctuations
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Course Outline
10. Aggregate Demand II
11. Aggregate Supply
12. Macroeconomic Policy debate
13. The open economy in the short run
14. The theory of real Business cycles
15. Consumption
16. The debates over government debt
17. Investment
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Grading

•

Quiz 10%

•

Assignments 15%

•

First Sessional 10%

•

Second Sessional 15%

•

Final 50%

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Lecture 1

The Science of Macroeconomics

Instructor: Prof. Dr.Qaisar Abbas

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Lecture Contents

•

The issues macroeconomists study

•

The tools macroeconomists use

•

Some important concepts in macroeconomic analysis

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Macroeconomics

Def
•

•

The field of economics that studies the behavior of the aggregate economy.
Macroeconomics examines economy-wide phenomena such as changes in

unemployment, national income, rate of growth, gross domestic product,
inflation and price levels.

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Important issues in macroeconomics

1.

2.

3.

Why does the cost of living keep rising?
Why are millions of people unemployed, even when the economy is
booming?
Why are there recessions? Can the government do anything to
combat recessions? Should it??

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Important issues in macroeconomics

•

•

•

What is the government budget deficit? How does it affect the
economy?

Why does the U.S. have such a huge trade deficit?

Why are so many countries poor? What policies might help them
grow out of poverty?

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U.S. Gross Domestic Product
in billions of chained 1996 dollars
10,000
9,000
8,000
7,000
6,000
5,000

lon

4,000
3,000
1970

1975

1980

g

pw
u
n
-ru

1985

t
d
r
a

d
n
e
r

1990

…

1995

2000

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U.S. Gross Domestic Product
in billions of chained 1996 dollars
10,000

longest economic
expansion on record

9,000
8,000
7,000

Recessions
6,000
5,000
4,000
3,000
1970

1975

1980

1985

1990

1995

2000

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GDP of Pakistan

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Why learn macroeconomics?

1. The macro economy affects society’s well-being.
§

example:
Unemployment and social problems

2. The macro economy affects your well­being.
§ example 1:  

Unemployment and earnings growth
§ example 2:
Interest rates and mortgage payments

3.

The macro economy affects politics & current events.
example:  
Inflation and unemployment in election years

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Inflation and Unemployment in Election Years, USA
year

U rate

1976
1980
1984
1988
1992
1996
2000

7.7%
7.1%
7.5%
5.5%
7.5%
5.4%
4.0%

inflation rate

5.8%
13.5%
4.3%
4.1%

3.0%
3.3%
3.4%

elec. outcome

Carter (D)
Reagan (R)
Reagan (R)
Bush I (R)
Clinton (D)
Clinton (D)
Bush II (R)

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Inflation and Unemployment in Election Years, Pakistan
year

U rate

1988
1990
1993
1997
2002

3.142%
6.3%

5.283%
5.755%
8.051%
6.195%

2008

inflation rate

8.835%
9.051%
9.825%
11.803%
2.504%
11.998%

elec. outcome

PPP
IJI
PPP
PML
PML (Q)
PPP
Source: IMF

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Economic models

…are simplified versions of a more complex reality
•

irrelevant details are stripped away

Used to
•

show the relationships between economic variables

•

explain the economy’s behavior

•

devise policies to improve economic performance

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Example of a model:
The supply & demand for new cars
•

•

Explains the factors that determine the price of cars and the quantity sold.
Assumes the market is competitive: each buyer and seller is too small to

affect the market price

Variables:
Q d = quantity of cars that buyers demand
•

Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)

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The demand for cars

demand equation:          Q d = D ( P ,Y )
shows that the quantity
of cars consumers demand
is related to the price of cars
and aggregate income.

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Digression: Functional notation
•

General functional notation shows only that the variables are
related:

Q d = D (P ,Y )

A list of the
variables
that affect Q d

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Digression: Functional notation
•

General functional notation shows only that the variables are
related:

Q d = D (P ,Y )
• A specific functional form shows the precise quantitative 
relationship:

Examples:
1)      Q d = D (P ,Y ) = 60 − 10P + 2Y
0.3Y
d
2)      Q = D (P ,Y ) =
P
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The market for cars: demand

demand equation: 
   Q d = D (P ,Y )

The demand curve shows the
relationship between quantity
demanded and price, other
things equal.

P    

Price 
of cars

D
Q 

Quantity 
of cars

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The market for cars: supply

supply equation: 
   Q s = S (P , Ps )
The supply curve shows the
relationship between quantity
supplied and price, other

things equal.

P    

Price 
of cars

S

D
Q 

Quantity 
of cars

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The market for cars: equilibrium

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