Introduction to Macroeconomics

00:01 Hello and welcome to your online presentation of macroeconomics.

00:06 My name is James DeNicco and I will be your instructor or your guide through these presentations. This is your introduction.

00:13 So we're going to start talking about what economics is a little bit the difference between microeconomics and macroeconomics.

00:20 We're going to cover some terms that I think are important for you to know throughout the presentation series.

00:26 And then we're briefly going to talk about the different topics we'll go through in the presentation series.

00:31 So first, what is economics? Whenever I ask this question in class, I always have somebody say It's about money or it's about business. Yes, it is about money.

00:40 It is about business.

00:41 That's part of economics.

00:43 But economics is much broader.

00:45 Economics is social science that tries to answer a question.

00:49 It's a question of scarcity.

00:51 It's the study of choice.

00:53 In a world of scarcity, we have these unlimited wants and desires and needs, but we have limited resources.

01:01 We don't have enough resources to meet the wants and the needs and the desires of everybody. So that causes a problem and brings up some questions we have to ask. Those questions are what do we produce? How do we produce, and for whom do we produce it? Those are our broad economic questions.

01:19 So there's three basic different ways you can do that.

01:23 You can have a centrally planned economy, you can have a completely free enterprise economy, or you can have a mixed bag.

01:30 So there's three broad ways, but there's infinite mixed bag possibilities. So there's very few examples of completely centrally planned economies. You might think the former Soviet Union is about as close as that came.

01:44 Centrally planned economies are tough.

01:46 It usually doesn't work out too well.

01:49 As far as the completely free enterprise system, it's hard to think of an example of that. A lot of people might think the United States, but no, that's more of a mixed bag as well. Maybe the Wild West in the United States, back in back in the heyday in history, that was maybe a free enterprise system, but it's a long way from that.

02:06 Now, most of the countries throughout the world, they're right around that middle.

02:10 They're a little bit to the right or they're a little bit to the left of that mixed bag.

02:14 So that's what economics is.

02:16 It's this broad study trying to answer this question of scarcity, trying to solve this problem of scarcity.

02:23 Here we're going to be talking about macroeconomics.

02:26 So what's the difference between microeconomics and macroeconomics? Well, microeconomics concentrates more on the individual choices of firms and households, a household being an individual or a whole house full of people, whatever you like. It's the household side, we call it, and the individual firm firms being businesses, sole proprietorships, partnerships, corporations, whatever you like, they're the businesses.

02:50 So on the household side, let's take me for an example and an ice cream shop.

02:55 I need to decide how many cones of ice cream a week I want to buy.

02:59 I'm a big ice cream fan, so I have to find the point where one more ice cream cone cost me more than it benefits me where those calories cost me more than there's an increase in my happiness factor from having another ice cream cone.

03:13 The firm, on the other hand, they need to make decisions about labor and capital.

03:17 They see this James DeNicco guy coming in there with an inordinate demand for ice cream. He just can't be satisfied.

03:23 So they need to find the proper amount of workers and the proper amount of ice cream machines they need to satisfy my demand.

03:31 That's on the micro side.

03:33 On the macro side, it's really an aggregation of all those individual choices. So it's the study of the performance of national economies and the policies that governments use to try to improve that performance.

03:48 Really, though, it's just an aggregation of all those individual choices and you look how those individual choices are affecting the welfare of an economy.

03:57 So macroeconomics is the 30,000 foot view.

04:01 It's unemployment rates, it's growth, it's the inflation rate.

04:05 It's all those different things monetary policy, fiscal policy.

04:09 It's the broader issues that you'll see on the news a lot.

04:12 So sometimes you'll see microeconomics talked about on the news.

04:16 Most of the time the national headlines are the unemployment rate or the GDP growth. Politicians have arguments.

04:23 It's usually about the macroeconomics.

04:26 So that's what we're going to talk about here.

04:28 I think macro is more fun than micro, but some people might disagree with me.

04:32 All right. So we need to understand a few terms before we go any further.

04:37 First is opportunity cost.

04:39 All right? Opportunity cost is whatever must be given up to get something or to obtain something, we're going to use that opportunity cost a lot throughout the lecture series.

04:50 So what are the opportunity costs of going to school? Let's do an example here.

04:55 Opportunity costs are both direct cost and indirect cost.

04:59 So when you go to school, you have to pay t uition.

05:02 That's a direct cost.

05:03 Sometimes it's a very high, direct cost.

05:05 You have to buy your books.

05:07 You have to pay for your food.

05:08 You have to pay for your housing.

05:09 Those are all direct costs of going to school.

05:12 Those are opportunity costs.

05:15 There's also your indirect costs, your lost wages.

05:18 Most of you out there are probably smart people.

05:20 You could be out there earning a nice wage if you don't go to school, but you are going to school, so you miss out on those wages.

05:27 That's an indirect opportunity.

05:29 Cost also often forgot about leisure time.

05:34 Leisure time is very important to us, right? It's our time to get our minds back together.

05:38 So if you have kids like me, it's your time to play with your kids.

05:41 For some of you, it's your time to play your video games or go to the movies or just go out with your friends.

05:46 That's very important.

05:48 So when you go to school, you're also missing out on some of that leisure time, right? When you go to work, you miss out on that leisure time.

05:56 If you enjoy leisure, however, you're also going to miss out on wages, right? So this opportunity cost, it's whatever you must give up in order to obtain something. We'll use that term a lot throughout the series.

06:08 The next thing you need to understand is the marginal change.

06:12 What is marginal change? Well, rational people.

06:15 There are people who think systematically and purposely do the best they can to achieve their objectives.

06:21 Rational people think at the margins.

06:24 I think most of us are rational people.

06:26 Most of us want the best for us.

06:28 So what does that mean? What is a marginal change? It's a small incremental adjustment to a plan of action.

06:35 So let's take the firm when they're thinking about how many people they want to hire.

06:39 Well, the first guy they hire, he benefits them more than he cost them.

06:43 They want that guy.

06:44 They take a look at the second person.

06:46 They say he benefits us more than he costs us.

06:49 We want that guy or girl, that person, the third person.

06:53 He costs us more than he makes us.

06:57 We don't want that person.

06:58 We think incrementally, we look at the decisions that need to be made going forward. We look at what the consequences are going forward.

07:06 If the benefit is greater than the cost, we do it right.

07:10 We take that step.

07:11 If the cost are greater than the benefits, we say, Whoa, I'm not going there.

07:15 So firms and people the rational.

07:18 So they think at the margins.

07:20 So this rational thinking, this thinking at the margins can explain some puzzles for us. It can explain why diamonds are so much more expensive than water, even though water is so much more important.

07:33 We need water to live.

07:34 But a person's willingness to pay for a good is based on the marginal benefit, the extra benefit that you get.

07:42 And that benefit it depends on how many units of that good you already have. We already have a lot of water, right? So I'm not going to pay a lot for a little bit more water.

07:52 I can go down to the water fountain and get a drink of water for free.

07:56 A diamond, on the other hand, is very expensive.

07:59 All you guys out there that need to buy your fiancee a diamond is an engagement present.

08:03 You know this actually, I wish it was a little bit reversed and they bought us nice watches as engagement present, but that's not the way it is.

08:10 It doesn't work that way.

08:12 But anybody who has to buy a diamond knows is expensive because most people, they don't have a lot of diamonds because they're scarce.

08:19 Diamonds are very expensive.

08:21 So this rational thinking, this thinking at the margins, it can explain some puzzles for us why something so important is water is a lot less expensive as really something so important as diamond, unimportant as diamonds.

08:35 So now that we know a lot of the terms we're going to need throughout the presentation series, we're going to go over the topics that we'll be discussing throughout the presentation series.

08:44 We're going to be talking about economic growth and standards of living.

08:48 That's a very important one in macroeconomics because it's about reducing poverty. It's about evolving standards of living.

08:56 If you take a look at the pictures I have here, the picture on the left is very sad.

09:00 You don't want children to have to drink dirty water.

09:02 You want them to have access to that good health care, to clean water, to education.

09:07 You want to have you want to afford them the opportunities to achieve their dreams.

09:11 Right, to achieve their goals.

09:13 That may sound a little touchy-feely, but it's very important.

09:16 We want children to look like they look in the picture on the right.

09:19 We want them to be happy.

09:20 We want them to have opportunity.

09:22 We want them to have clean water.

09:24 Right. Something as simple as that.

09:26 So economic growth will be focusing on that.

09:29 How do we evolve standards of living? How do we reduce poverty? How do we take countries that live in poverty and evolve them? So we'll be looking at that topic very closely.

09:41 Part of that is productivity.

09:43 So we'll concentrate on productivity.

09:45 How do we make a country more productive? So I'll come back to technology here, but one of them is human capital.

09:51 First, we want people healthy.

09:54 That's part of human capital.

09:55 So that involves health care.

09:57 You've got to get people health care.

09:58 You got to get people healthy.

09:59 You want everybody to have access to.

10:02 Also its education and skills.

10:04 So the education system, how good are our workers? How knowledgeable are our workers? The more knowledgeable and more healthy our workers are, the more productive they're going to be. Physical capital, the tools, the equipment, the computers, the factories that makes our workers more productive.

10:21 So you have a guy and you tell him you want him to go out and break up a slab of concrete. If he just has his hands, that's a hard task.

10:28 It might take a while.

10:29 You give him a sledge hammer, he's going to be able to break it up a lot quicker, right? You give him the tools he needs and we'll be able to break up that concrete.

10:37 He's more productive.

10:38 Entrepreneurship. We need people to go out there and take those risks.

10:43 Right. Risk for those financial reward.

10:45 Those are our innovators.

10:47 You give people the incentive with those profit rewards.

10:50 They'll go out there, they'll be productive and they'll innovate.

10:52 You also knew the social and legal framework that fosters the environment of productivity. It fosters entrepreneurship, incentivizes people to go out there to be productive and to be innovative.

11:04 When I talk about this, I like to talk about property rights, something as basic as property rights. So if you can't own your production, you can't own what you're doing.

11:13 What's the point in going out there and building up a business if somebody is just going to come steal it away from you? Well, then there's very little incentive to go out there and be productive.

11:22 So property rights, that's under the purview of the social and legal framework. So that's important.

11:28 Now let's go back to technology.

11:30 I put a little star next to technology because that affects all the other areas.

11:34 Right? It can make learning easier.

11:36 It can make being healthy easier.

11:38 The innovations in the medical field over the last 100 years are amazing.

11:42 It can make physical capital better.

11:44 We talked about the guy breaking up the slab of concrete with a sledgehammer.

11:48 Now let's give him a jackhammer.

11:50 Let's increase the technology of that physical capital.

11:52 Now, the job gets a lot easier right out there with that jackhammer or the entrepreneurship. People can start businesses online now with technology, so it's easier to be innovative as an entrepreneur.

12:03 So technology, it affects all those different areas.

12:07 So these are our factors of productivity.

12:10 So we'll concentrate on those in conjunction with with evolving standards of living or economic growth.

12:17 We're also going to talk about business cycles.

12:19 So here in our graph on the vertical axis, we have aggregate economic activity. On the bottom, we have time.

12:26 So first we have what we call our normal growth path.

12:29 This is our long run.

12:31 This is GDP growth.

12:33 All right. So that's growth in the long run.

12:35 But the long run is just made up of a bunch of short runs or our business cycles.

12:40 So the business cycles, they go up and down.

12:43 The long run, the normal growth path is like a regression line, or you can think of it as an average line through the short run, through the business cycles.

12:51 But the business cycles, that's the aggregate economic activity, that's the actual activity going on.

12:57 So let's define some different parts of the business cycle.

13:00 At the bottom you have what's called the trough.

13:02 You've gone through the bad times, you've bottomed out and you're about to grow.

13:06 That's the bottom.

13:08 The top is what we call the peak, the peak that's in the United States when Lehman Brothers crashes right before the financial collapse happens.

13:16 So the financial crisis happened in the United States.

13:19 Lehman Brothers was an investment firm that went down the tubes and then everything kind of went down the tubes with it.

13:25 And we had the largest recession in the United States that we had since the Great Depression. From the trough to the peak.

13:31 That's what we call an expansion.

13:33 That's when GDP is growing positive GDP growth from the peak to the trough. That's a contraction, not necessarily recession.

13:42 A recession is defined as two consecutive quarters of negative GDP growth in a row.

13:48 A recession is a contraction, but a contraction isn't necessarily a recession. So this is our business cycle.

13:56 You have your normal long run growth path that's made up of your business cycle, all your short run ups and downs.

14:03 At the bottom we call that the trough.

14:05 We expand from the trough to the peak.

14:07 At the peak, that's the beginning of a contraction.

14:10 Things start to go down.

14:11 You can track from the peak to the trough.

14:15 All right. So those are our business cycles.

14:17 We'll be talking about both the long run and the short run.

14:19 We're going to go to the long run first with growth and then we'll get to the short run, which allows us to talk about policy.

14:26 We'll be talking about employment and unemployment.

14:28 One of my favorite. That's what a lot of my research is about.

14:32 So we'll be talking about the different definitions of employment and unemployment and the cost of unemployment to the economy.

14:39 That's what we really care about.

14:40 That's why we concentrate on it.

14:42 We're looking at the health of the economy.

14:44 So the more people that are unemployed, the more cost to the economy.

14:48 So there's direct economic costs.

14:50 When people are out of work, we can't collect tax revenue.

14:53 Also, they miss out on wages so they can't consume, they can't buy things. Also, there's increased social benefits.

15:01 If somebody's out of work, we have to help them.

15:03 We have to help them in their tough times, get back on their feet.

15:05 So there's those direct economic costs.

15:09 We care more than just about money and economics.

15:11 We care about wellbeing as well.

15:13 So we look at the psychological cost.

15:16 When you're out of work, it's hard on you.

15:17 You're down. You can't feed your family, you can't pay for your mortgage or your rent.

15:21 You can't make your car payments.

15:23 That's tough on people.

15:24 So those are costs associated with unemployment as well.

15:27 And there's a lot of social costs.

15:29 You see increased crime.

15:31 You see increased homelessness.

15:32 There's also political costs.

15:34 The higher the unemployment rate, the harder it is for political parties in charge to stay in charge. So there's all those costs associated with unemployment and we'll touch on all those. We'll also talk about prices and inflation.

15:47 When there's too much inflation, there's cost involved in that as well.

15:51 We'll look at how we measure inflation through the CPI, the Consumer Price Index. We also use the GDP deflator.

15:58 We'll do it a different couple of different ways and we'll look how it affects the economy. What are those costs? Something we call shoe leather cost.

16:05 So your purchasing power goes down as there's inflation.

16:08 So I have my little crumpled up $1 bill here right as I walk around with this $1 bill and there's inflation, this dollar is buying less stuff.

16:18 So say you can buy me two ice cream cones now $0.50 a piece.

16:22 If there's inflation in ice cream cones go up to $0.55.

16:26 Now, I can only get one ice cream cone.

16:27 And I'm sad. We don't want people to be sad, right? So we talk about inflation and the cost associated with that as well.

16:34 Finally we'll get to the international economy.

16:37 So the international economy or when we open up the economy, we call it, and we're going to talk about trade exports and imports, which are closely related to exchange rates, which decide whether my goods are more costly or cheaper than your goods. So if my goods are relatively cheaper than your goods, you're going to import my stuff. If your goods are relatively cheaper than my goods, I'm going to import your stuff. So the other side of the goods and services and trade are the assets.

17:04 That's net capital outflows.

17:06 So we'll talk about all that.

17:08 And at the end, we'll also get into some policy which is fun to talk about how policymakers try to affect change in the economy and the different tools that they try to use.

17:18 So that's going to be your presentation.

17:21 This is your introduction.

17:22 I hope you enjoy it.

17:23 Thank you.