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Macroeconomics Notes

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Macroeconomics Hilary Term 2009 Introduction to Macroeconomics - Models/History/Statistics:

• The historical performance of the UK economy:
◦ Real GDP per person in the UK is 5 times higher today than in 1900
◦ Inflation:
▪ +ve and -ve till 1940
▪ then averaged 25%
▪ since early 1990s = 2/3%

• Changes in wages can be flexible (continuous market clearing) or sticky (wages take time to adjust to market clearing price)

• Two macroeconomic disasters of the 20th century:
◦ The Great Depression of the 1930s:
▪ Keynes and Keynesianism
◦ The Great Inflation of the 1970s:
▪ Friedman and Monetarism

• see UK real GDP per capita graph in M&T

• see UK real GDP growth in M&T

• UK inflation rate:

see UK unemployment graph M&T UK interest rate:

Keynes on economists and models:

◦ An economist 'must be a mathematician, historian, statesman, philosopher - in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future.'
◦ 'Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world' Models:
◦ Economists use models to:
▪ simplify away factors less relevant to the question at hand
▪ highlight and measure relationships between key economic variables
▪ devise policies based on these relationships
◦ Key features of models:
▪ exogenous variables - taken as given
▪ endogenous variables - explained by the model
▪ assumptions about economic relationships Three key economic variables:
◦ Gross Domestic Product (GDP): the total output of the economy valued at market prices
◦ Output = income = expenditure
◦ Real v nominal GDP
◦ The rate of inflation of the consumer price index (CPI)

◦ The unemployment rate - percentage of those wanting to work who are unemployed The simple circular flow: closed economy (and no government or financial sector)

The circular flow: closed economy:

'Macroeconomic priorities' by Lucas:

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