Like my fellow classmates, I have been hitting the books hard over the last few days. We just had our last class of our first year on Thursday night. Now finals are looming over us, starting with Macro on Wednesday night.A student recently e-mailed Greg Mankiw (an economics professor at Harvard) with this comment:
At least I'm not the only one! Sometimes, I feel like I'm a little behind everyone else, not having studied economics formally prior to starting on my PhD here at GMU (other than a couple basic courses in my MBA program). Mankiw's repsonse made me feel much better (emphasis mine):
I really enjoyed microeconomics, but have not enjoyed macroeconomics nearly as much. I feel like it's all thrown together haphazardly, with random connections being made without much justification being given for them.
Is this even possible???
When I first studied economics as a freshman, I had a similar reaction. I liked micro a lot more than macro. Given this initial reaction, it may seem odd that I ended up a macroeconomist. Two things happened.
First, macro started to make more sense to me over time.
With this, I definitely have to agree. I am particularly interested in economic development in the third world. It is important to understand both the micro and macroeconomics of these environments to try to understand how to best tackle issues of growth in other nations.
Second, even if the models of micro were more appealing to me, I became attracted to the questions of macro. When you read the newspaper, most of the big economic issues are macro issues, not micro issues. I know some microeconomists will take offense at this claim, but I think it is true. Consider: Economic growth, the business cycle, inflation, unemployment, fiscal policy, monetary policy, trade imbalances--these are things that laymen think economists should have insight into. And they are right: We should. I think this is what draws a lot of macroeconomists into the field.
Mankiw then follows up in another post to give additional clarification about macro and how it all ties together:
Read the rest of his post to see how he addresses these six special cases. For me, it is useful to me to see how many of these models tie together. While it may not help me on my final, it does help me conceptualize what we've been studying into a more consistent whole.
In the previous post, a student in ec 10 expressed puzzlement about how to fit the pieces of macroeconomics together. One way to try to fit the pieces together is to look at the big, complicated macro picture all at once. What follows is an excerpt from my intermediate macro book that tries to do this.
Warning: This material is more mathematical than other things I post on this blog. Proceed at your own risk!
Appendix to Chapter 13: A Big, Comprehensive Model
In the previous chapters, we have seen many models of how the economy works. When learning these models, it can be hard to see how they are related. Now that we have finished developing the model of aggregate demand and aggregate supply, this is a good time to look back at what we have learned. This appendix sketches a large model that incorporates much of the theory we have already seen, including the classical theory presented in Part Two and the business cycle theory presented in Part Four. The notation and equations should be familiar from previous chapters.
The model has seven equations:
Y = C(Y-T) +I(r) + G + NX(e), Goods Market Equilibrium
M/P = L(i, Y), Money Market Equilibrium
NX(e) = CF(r-r*), Foreign Exchange Market Equilibrium
i= r+pe, Relationship between Real and Nominal Interest Rates
e=eP/P*, Relationship between Real and Nominal Exchange Rates
Y = Yn + a(P - Pe), Aggregate Supply
Yn = F(K, L), Natural Level of Output
These seven equations determine the equilibrium values of seven endogenous variables: output Y, the natural level of output Yn, the real interest rate r, the nominal interest rate i, the real exchange rate e, the nominal exchange rate e, and the price level P.
There are many exogenous variables that influence these endogenous variables. They include the money supply M, government purchases G, taxes T, the capital stock K, the labor force L, the world price level P*, and the world real interest rate r*. In addition, there are two expectation variables: the expectation of future inflation pe and the expectation of the current price level formed in the past Pe. As written, the model takes these expectations as exogenous, although additional equations could be added to make them endogenous.
Although mathematical techniques are available to analyze this seven-equation model, they are beyond the scope of this book. But this large model is still useful, because we can use it to see how the smaller models we have examined are related to one another. In particular, many of the models we have been studying are special cases of this large model. Let's consider six special cases.
For related issues, see this article in which economists debate the relevance of their profession and this article by John Taylor discussing the five things we know for sure about economic growth.
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