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Macroeconomics ECO 403

LESSON 03

IMPORTANCE OF MACROECONOMICS

Why learn macroeconomics?

1. The macroeconomy affects society's well-being.

example:

Unemployment and social problems

Each one-point increase in the unemployment rate is associated with:

920 more suicides

650 more homicides

4000 more people admitted to state mental institutions

3300 more people sent to state prisons

37,000 more deaths

increases in domestic violence and homelessness

The macroeconomy affects your well-being.

example 1:

Unemployment and earnings growth

example 2:

Interest rates and mortgage payments

Unemployment Rate of Pakistan

Years

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Macroeconomics ECO 403

Unemployment and Earnings Growth

-1

-2

-3

Inflation Growth rate

-4

-5

1965

1975

1985

1995

growth rate of inflation-adjusted hourly earnings

change in Unemployment rate

Interest rates and rental payments

For a Rs.320,000; 3-year mortgage

Date

actual rate on 3-

monthly payment

annual payment

year financing

May 2003

8.50%

Rs. 10,021

Rs. 120,252

May 2004

7.25%

Rs. 9,839

Rs. 118,068

Why learn macroeconomics?

3. The macroeconomy affects politics & current events.

· example:

Inflation and unemployment in election years

Inflation and Unemployment in Election Years

Year

U rate

inflation rate

1976

7.7%

5.8%

1980

7.1%

13.5%

1984

7.5%

4.3%

1988

5.5%

4.1%

1992

7.5%

3.0%

1996

5.4%

3.3%

2000

4.0%

3.4%

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

The supply & demand for new cars

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Macroeconomics ECO 403

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)

The demand for cars

Demand Equation

Qd = D(P,Y)

shows that the quantity of cars consumers demand is related to the price of cars and

aggregate income.

· General functional notation shows only that the variables are related:

Qd = D(P,Y)