1. Macroeconomics
Basics

2. What is macroeconomics?
Seeks to understand changes in
The rate of economic growth
The rate of inflation
Unemployment
Trade with other countries

3. Measuring Economic Growth
Gross Domestic Product (GDP)
The monetary value of all goods and services produced within a country in a given time period
Real GDP
The volume of goods and services produced within a country (i.e. GDP adjusted for price fluctuations)
Economic Growth:
Percentage rate of increase of real GDP

4. Measuring Inflation
Annual percentage rate of change in the consumer price index
In the Eurozone: Harmonized Index of Consumer Prices (HICP)

5. Measuring Unemployment
People out of work and looking for work
Labor force = employed + unemployed

6. Measuring trade with other countries

7. Government Policies
Affect aggregate supply and demand, economic output and price level
Short-term effects
Long-term effects

8. Aggregate Demand/ Aggregate Supply
Includes consumption, investment, government spending, exports
Affects output, prices, employment
Aggregate Supply includes
Includes total supply of goods and services produced by a national economy during a particular time period
Reflects productive capacity

9. Approaches to government intervention
Keynesian economics
Demand-focused
Calls for active government (both on monetary and fiscal policy)
Neo-classical economics
Supply-focused
Focuses mostly on interest rates and money supply
Monetarism (Milton Friedman)
Inflation is a monetary phenomenon (not linked to production)
Rejects fiscal policy bc/ of “crowding out” of the private sector
Objective is to keep rate of growth and money supply constant

10. Types of Government Policies
Monetary
Fiscal

11. Monetary Policy
Manipulates money supply and demand through interest rates
Independent Central Banks
Historically recent (Fed since 1913)
Political independence
Sarkozy’s motivations?

12. Eurosystem (ESCB) Comprises European Central Bank
National Central Banks (will continue until all EU members have adopted Euro)

13. Tasks of the ECB Sets interest rates
Manages foreign exchange operations
Holds and manages some official reserves of euro area countries
Promotes smooth operation of payment systems
NCBs
Lend to national financial institutions
Ensure settlement of cashless domestic and trans-border payments
Collect national statistics

14. Decision-making in ECB
Governing Council
Includes Executive Board and heads of NCBs
Executive Board
President, Vice-President, and four more members (appointed jointly by heads of states)
General Council
Includes all heads of NCBs of ALL EU member states
No decision-making power; but oversees progress of member states towards adopting Euro

15. Eurosystem Strategy Primary objective: price stability
Definition of price stability: “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”

17. Other Public Policies
Affect aggregate supply and demand, economy’s output and price level through
Budget deficits
Fiscal Policy
“crowding out”
Investing in productivity (technology policy)
Improving human capital (education)
Improving physical capital (infrastructure)
External relations (e.g. war expenditures in Iraq)
In the EU, these public policies mostly not integrated

18. Fiscal Policy Goals Stability and Growth Pact
National government deficit no larger than 3% of GDP
Reduces inflationary pressures (and free-riding)
Main purpose of fiscal policy should be stabilization
But fiscal policy is main tool left to governments where monetary policy is constrained
Evidence that most fiscal policy is pro-cyclical
automatic stabilizer

19. Source:
Financial Times, November 4, 2008

20. The Eurosystem’s future
Deepening of integration?
Call for more regulatory power of ECB (now banking regulation national)
Call for a political voice for the Eurogroup
Attractiveness of the Euro – has served as buffer in crisis
Denmark
Iceland
Hungary

21. EU vs. Euro Area
Euro area: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain.
EU Member States obliged to adopt the euro eventually: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia (Jan. 1, 2009), Sweden.
EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.