1. INTRODUCTION ECON 702 ECON 702, Introduction 1

2. Fields of Economics Economics Microeconomics (study of individual consumers and markets) Industrial organization, labor economics, health economics, urban economics, environmental economics, game theory, family economics,… Macroeconomics (study of aggregate economy) Growth Business Cycles Real Business Cycles, Monetary economics, International finance ECON 702, Introduction 2

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4. 4 Growth trend Business cycles

5. Course outline We start with basic growth theory Solow model Neoclassical Growth Model (NGM) Next, we introduce some random components into the NGM, to study business cycles. Stochastic NGM Other topics (money, exchange rates, labor markets, lifecycle choices) will be discussed if time permits. ECON 702, Introduction 5

6. Growth Facts 1. Per capita output grows over time, and its growth does not tend to diminish in developed countries. 2. Physical capital per worker grows over time. Capital/output ratio is approximately constant. 3. The rate of return to capital is nearly constant over time. 4. The shares of labor and physical capital in national income are nearly constant over time. 5. The standard of living differ substantially across countries (see the next figure). 6. The growth rate of output per worker differs substantially across countries (see the next figure). 7. There is no systematic relationship between standards of living and growth rates across countries (poor countries do not tend to grow faster and catch up). In other words, there is no absolute convergence. ECON 702, Introduction 6

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8. Questions 1. What factors determine which countries prospered? 2. Can we point to specific economic policies? 3. Are there specific country characteristics that determine economic fate? 4. Is prosperity just a result of luck? ECON 702, Introduction 8

9. Robert Lucas (1988) "Once one starts to think about [these questions], it is hard to think about anything else". ECON 702, Introduction 9

10. Our approach 1. Micro foundations. The modern approach to macroeconomics requires a strong theoretical foundation. The economy consists of individuals and firms, who pursue certain objectives - micro. 2. Computational Experiment. A theory is a “lab” (a mathematical model) for performing controlled experiments. Macroeconomic models often do not have analytical solution. In such cases, we resort to numerical computation. ECON 702, Introduction 10

11. How to do well in ECON 702 1. Do the math. You must practice deriving and proving the results in the notes. Reading the notes is not enough. 2. Attendance. Attending all the classes on time is crucial. 3. Read the notes in advance. 4. Review previous material before every class. 5. Homework. You must solve all the homework. 6. Ask me. Highlight parts of the notes that you did not understand, and visit me during office hours. 7. Understand, not Memorize. ECON 702, Introduction 11