EC111LectNG11

EC111LectNG11 - EC111 MACROECONOMICS Spring Term 2012...

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1 EC111 MACROECONOMICS Spring Term 2012 Lecturer: Jonathan Halket: Room 3.202; Tel: 872394; Email: jhalket@essex.ac.uk Term-time Office Hours: Wednesday 2-4 pm. Reminder: Assignment Due Monday, March 5 th ; Test Friday, March 15 th Week 16 Topic 1: Macroeconomics and the National Economy. In macroeconomics we consider the economy as a whole rather than the individual decision-making unit. Instead we consider the behaviour at the aggregate level; firms, households, the government, banks; the world economy. We consider how different groups or sectors interact to generate relationships between key economic variables such as national income, consumption, investment and imports as well as a variety of economy-wide „prices‟: the overall price index, wages, exchange rates, interest rates etc. Macroeconomic analysis is closely linked to policy. The key macroeconomic outcomes that concern us here are also goals for macroeconomic policy: Sustained long-term growth in national income per capita. Keeping the level of economic activity relatively stable from year to year. Keeping the rate of unemployment as low as is feasible. Keeping price inflation low and stable. There may be some trade-offs between these objectives (something we shall look at). Other variables are of interest too, but they are intermediate variables rather than ends in themselves. But Wait: What do you think should be the ultimate end? National income and growth. National income represents the amount of marketed goods and services that is produced in the economy in a year. It is a flow rather than a stock (such as the capital stock or the stock of financial assets). Every time something is bought it must also be produced and sold, so national income and national product are essentially the same thing. Measuring this in real terms, and dividing by population, gives measures like (real) Gross National Product (GNP) per capita, which are the focus of most studies of economic growth. Economic growth is measured over decades rather than months or years. Faster growth makes a huge difference to average living standards in the long run because of compounding. If per capita income grows at 2 percent per year then income doubles in 36 years (not 50); if the growth rate is 4 percent, income doubles in 18 years (rule of thumb: 72/growth rate). In the UK (one of the slower growers) real per capita GNP has increased by a factor of 3.3 since 1950 (two generations and by 7.2 since 1870 (five generations).
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2 In the long-run standards of living are determined by the capacity of the economy to produce. In other words it is determined by the position of the production possibility frontier (PPF), which in per-capita terms depends on the size of the capital stock and on technology. Thus growth in per capita income depends on capital formation and technical progress (and perhaps a few other things). But note:
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EC111LectNG11 - EC111 MACROECONOMICS Spring Term 2012...

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