Introduction to macroeconomic

theory and policy

1. 2013-2014

de DiosAbesamisArellanoLibre
Textbook and sources
1. Mankiw, N. G. [2010] Macroeconomics. 7. ed. New
York: Worth Publishers.
2. Sicat, G. [2004] Economics. Quezon City: Anvil
Publishing.
3. Helpman, E. [2004 ] The mystery of growth.
Cambridge MA: MIT Press.
4. Lecture notes and other material (available at the
SE Library reserve section and in yahoogroup).
Textbook and sources

yahoogroup name : econ_imgrossen

http://groups.yahoo.com/group/
econ_imgrossen
popular articles in per se pagehttp:/
/www.econ.upd.edu.ph/perse
House rules
Four examinations (50 pts. each) to be held
on weekends.
Quizzes and HW count for extra points.
120 pts = 3.0
Two unexcused missed examinations = 5.0
Intellectual dishonesty = 0 points for the
exam; repeat offence = 5.0 and SDT
1. Introduction
1.1 The nature and subject-matter of
economics
1.2 Efficiency, growth, equity, and
development
1.3 Macroeconomics
 The word itself
oikonomia (a Greek word)
oikos (= house)+ nomos (= system or management)
rough literal translation: stewardship, or household
management

political economy (an older English term)

stewardship applied to an entire state (polis)
the viewpoint of the sovereign: the whole country regarded
as a household
tax collection and fiscal spending: later matters relating to
population, production, consumption, and trade
Various definitions of economics
the study of people in the ordinary business of life
(Marshall)
study of the allocation of scarce resources among
alternative uses (Robbins)
study of how societies choose to use scarce
productive resources that have alternative uses, to
produce commodities of various kinds, and to
distribute them among different groups
(Samuelson and Nordhaus)
the study of interactions among people as they
seek purposefully to fulfill their wants amidst
scarcity (Tullock and McKenzie)
economics is what economists do
Three problems of economic
organisation

How people interact and organise themselves in

the process of determining:
What goods are produced and in what quantities
How goods are produced
For whom goods are produced
Big questions in economics
When people are allowed to pursue their own interest
freely, is the result chaos or an unintended order?
In what situations are detailed rules and authority
important for society? When are they harmful and
counterproductive?
When should social affairs be left to individual
decisions, and when should the government
intervene (markets versus the state)?
What is the best way to improve the human condition?
In particular, how are various forms of wealth and
income best created and enlarged?
Some big words

Production efficiency: a condition where it is

impossible to increase the availability of all
goods.
Economic growth: an increase in the potential to
produce goods and services
Equity/justice: distribution of goods and services
according to socially accepted rules.
Development: an expansion of choices available
to the greater majority of the people
Production-possibilities curve

depicts various combinations of goods that

can be produced with the given
technology and resources (possible
choices)
typically shows that more of one good can
be had only if some of the others is given
up, i.e., a tradeoff exists (one cannot
have something for nothing)
Production-possibilities curve
Chicken

Not attainable

Attainable
Rice
Technology and resources

Technology
1 day of labour can produce either
5 kg of chicken, or
25 kg of rice, or
a combination of the two

Resources
20 days of labour
Technology and resources

chicken produced = 5 kg/day labour-days

devoted to chicken
QC = 5LC

rice produced = 25 kg/day labour-days devoted

to rice
QR = 25LR

a total of 20 days are available

LC + LR = 20
 Production-possibilities curve

QC = 5LC LC = (1/5)QC

QR = 25LR LR = (1/25)QR

25 [ LC + LR = 20 ]

5QC + QR = 500
Production-possibilities curve
Chicken

5QC + QR = 500
5(0) + 500 = 500

5(100) + 0 = 500

100

Rice
500
Efficiency

A situation is efficient if it is not possible to

reallocate resources so as to increase
the amounts available of all goods.
Alternatively, a production situation is
inefficient if it is possible to obtain more
of some goods without reducing the
amounts available of all others.
Efficiency
Chicken

Efficient

Inefficient
Rice
Growth

An increase in the capacity to produce

goods. This can occur either through
(a) more resources being available or
(b) an improvement in technology.
Either one causes the production-possibility
curve to shift outward.
Growth from increasing resources
Chicken
(1/5)QC + (1/25)QR = 20
5QC + QR = 500

(1/5)QC + (1/25)QR = 25
125 5QC + QR = 625

100

Rice
500 625
Growth from better technology
Chicken
(1/5)QC + (1/25)QR = 20

200 (1/10)QC + (1/25)QR = 20

100

Rice
500
Equity

Equity is the achievement of a distribution of resources that

corresponds to a societys notion of justice.
Greater equality but in what?
equality in opportunities: may not always mean outcomes
are equal, since people have different abilities.
equality in outcomes: may result in disincentives to work
and innovation.
equal access to a minimum bundle of basic goods and
services (notion of a poverty threshold): consistent with
inequality of outcomes beyond a certain point
Equity for whom?
Environment
Lumad

Lowlanders

Income
Development
Wider opportunities for all in society can be attained either
by growth, greater efficiency, greater equity, or all
these.
Opportunities mean not only command over material goods
but also conditions essential to human existence (e.g.,
knowledge, health, natural environment, and freedom).
Hence not all economic growth promotes development,
and not all development requires growth.
A major is question is whether and how the two go hand in
hand.
Human development
introduced by the UNDP in 1990 as an
alternative measure of development to just
income (work by A.K. Sen and M. ul-Haq)
meant to measure a persons capabilities to
accomplish more physically, intellectually,
materially.
income just a means to an end (outcomes
matter, not incomes)
healthy, wealthy, and wise
Human development index
Capability Measure
concept
Health life expectancy
1. Mean years of schooling
Knowledge
2. Expected years of
schooling
Decent living standard Gross national income per
capita

Source: Human Development Report 2012

 HDI for selected countries
(2012)
HDI Life Mean Expected Income per
expectancy schooling schooling capita

Norway 0.955 81.3 12.6 17.5 46,688

US 0.937 78.7 13.3 16.8 43,480
Uruguay 0.792 77.2 8.5 15.5 13,333
China 0.699 73.7 7.5 11.7 7,945
Thailand 0.690 74.3 6.6 12.3 7,772
Philippines 0.654 69.0 8.9 11.7 3,752
S. Africa 0.629 53.4 8.5 13.1 9,594
India 0.554 65.8 4.4 10.7 3,285
Niger 0.304 55.1 1.4 4.9 701
Source: Human Development Report 2012
Big questions in macroeconomics
Why are some societies richer or more developed than others?
Why is the rate of growth of some economies faster than that of
others?
What are the reasons for fluctuations in economic activity (booms
and recessions)?
Is there a role for government in stabilising prices and promoting
employment?
How much should government tax, spend, and borrow to attain
its ends and not disrupt the level and growth of economic
activity?
Micro- and macroeconomics
Microeconomics: study of the behaviour and
interaction of individual households and
firms, and the behaviour of individual
markets
Macroeconomics: study of the behaviour of
the economy as a whole; its four main
concerns: (a) level and growth of output; (b)
inflation; (c) employment of labour; and
(d) the national debt
Economic fluctuations and growth
Good 2
Promoting growth
is about shifting the
frontier outward.

Stabilisation is
about keeping the
economy at full
employment.

Good 1
But observed growth is a combination of employing resources
more fully and an expansion of resources.
 Real GDP growth 1982-2012
(in percent)
Marcos C Aquino Ramos Estrada Arroyo B Aquino

10

0
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 07 08 09 10 11 12
-2

-4

-6

-8

-10
Questions
What is average growth for the whole period?
What were average GDP growth rates for
each of the presidents?
What can explain the noticeably lower growth
rates in 1984-1985; 1991-1992; 1998; and
2009?
What is the governments idea of inclusive
growth? (See Phil. Devt. Plan)