Macroeconomics: Chapter 1: Introduction & Macroeconomic Concepts

Macroeconomics
Chapter 1: Introduction & Macroeconomic

Concepts
Prof. Habermacher
EHL
Chapter objectifs
• Get a general idea of the course
• Understand what macroeconomics is
• Understand some crucial macroeconomic concepts, in particular

national accounting and GDP, including its importance/limitations
© EHL Prof. Habermacher 2

Chapter highlights
• Course overview
• Various macroeconomic concepts
• National accounting: track all economic activity
• Is GDP a good measure of prosperity?
• Does GDP increase if you throw a stone through the baker’s glass
window?

Some abbreviations
• AD Aggregate demand (curve)
• Agg. Aggregate
• AS (SRAS; LRAS) Aggregate supply (curve) (short-run; long-run)
• Bank Commercial bank (as opposed to central bank)
• CB Central bank
• C’try/C’tries Country/Countries
• GDP Gross domestic product
• Gvmt Government
• hh Household(s)
• PPP Purchasing-power parity
• SNB Swiss national bank
• VA Value added
• X-rate Exchange rate

Content
1. What is macroeconomics?
2. Course overview
3. Course organisation
4. Macroeconomics concepts
In the Annex, often useful/interesting information!

Today, among others, links to entertaining economics
podcasts!

What is Macroeconomics ?
Macroeconomics studies the
state & development of the
economy at an aggregate
level
… …
EHL Prof. Habermacher 6
Questions illustrating what
macroeconomics is

Example question: Protectionism
Conventional wisdom:
“Buying from foreign country B,

you’re supporting B’s economy & workers,
to the detriment of
your domestic economy!”
Accurate or rather misguided?

Example question: Growth
Productivity differs across time & regions Why do countries grow?
GDP/Capita (in 2011 USD) Why, then, did they not grow a few
70 000 hundred years ago?!
60 000
50 000 Why are many poor countries still not
40 000 growing?
30 000
20 000
10 000 Is democracy key? Education? Or mainly
0 geography? Or…
Switzerland Italy United Poland
Kingdom
1997 2017
Source: Penn World Table, version 9.1

Example question: Machines vs. Jobs?
Since the beginning of industrialization, people thought, machines kill
employment
The past two centuries or so seem to have proven this theory wrong
But:
• Were we (all?) just lucky until now?
• While machines may still kill all jobs in future?
• Will generalized AI be decisive for this?

Example question: Resource depletion
• Will we run out of energy,
and if so, when and how?
• Depending on the point of
view you may call this micro
or macro

Example question: Invest during crisis?
• The crisis has led to a decline in the general price level in the country.
• The government has just announced measures to remedy the crisis.
• Time to invest quickly before prices (e.g., shares) rise again if the
economy recovers?

Example question: Equality vs. Growth?
• Positive macroeconomic question:
“Is there a trade-off between more redistribution towards
the poor and faster growth, or can both go hand-in-hand?”
• Normative macroeconomic (?) question:

“Should we do more to increase growth, or
more to redistribute money towards the poor?”
• Positive affirmation* ≡ How the world is

• Normative affirmation* ≡ What is desirable
*See section 4.

Example question: Austerity vs. Stimulus
Overcoming the recession after the financial & debt crisis through
• … higher government spending?
Stimulating demand and therefore growth?
or
• … austere fiscal policy?
Concentrating on sustainable government finances, even if it means growth will remain a
bit lower in the short run?
⇨ Analyse: What are the effects of printing more money? Of taking on more debt? Of
increasing government spending?
How much debt is sustainable anyway?

Example question: Currency manipulation?
What is a “Currency
manipulator”?
Is Switzerland really one,

as the article suggests?
The Wall Street Journal, 16 December 2020

… and the answers?
We will not be able to answer all these questions, in this course
• Some yes
• For others: Hopefully what we treat is a useful starting point for
further reflection
• Macroeconomics is an evolving science

• Macroeconomists almost unanimously agree on some views …
• E.g., trade is often a win-win rather than a zero-sum “one-wins-against-the-other”
• … Many other grand questions remain debated
• E.g.: Unemployment’s causes & solutions? How much debt is desirable? How to
organize the financial system? …
The difficulty of macroeconomics

Good statistics requires large number of (independent) observations
Microeconomics: Sometimes possible
Macroeconomics: Very often impossible
Why?
The difficulty of macroeconomics
In macroeconomics, many things happen/change simultaneously:
• Technology • Mobility structures

• Geopolitical & trade • Importance of • Religiosity
relations economic sectors • Law/Policies
• Cultural norms • Communication • Political parties
• Family structure systems/habits
• Environment
• Demography • Firm structures
• …
• Employment
➔Often difficult to identify what exactly influenced what

➔Often easy to find a combination of data to support ‘any’ claim (?)

Next
2. Course overview

TO BE
Course chapters (current plan) CONFIRMED:
INEQUALITY
1. Macroeconomic concepts
2. Goods Market - Economic Cycle, Keynesian Cross and IS Curve
3. Money and LM Curve
Short
Run
4. The IS‐LM Model and Economic Policy
Long Medium
5. Inflation & Exchange Rates
Run
6. The AS‐AD model
Run
7. Growth and inequality

Course material
• Lessons (including tutorials): Deliver the course material in a lively way;
explain it and maybe add extensions/new developments. Connection to
reality; discussions
• Slides for course and tutorials: Main material supporting the lessons
• LMS: Additional material complementing slides (can be articles, quizzes, …)
• Course textbook: "Macroeconomics, a European Perspective", Blanchard et

al. (Pearson, 2nd ed. or later)
• Not necessary to read the book; some elements may differ; feel free to ask if questions arise

Next
2. Course overview

Lessons
• Slides available on LMS before the lesson
• No need to read the slides before the lesson
• Constructive comments highly welcome

⇨ Answers live or after the lesson
• Pay attention! The material is dense; you will regret later if you
missed the explanations given during the course
Ecole hôtelière de Lausanne Prof. Habermacher 23

Tutorials
• Objective: to solve tutorial problems related to each chapter of the course
(tutorial will be held approximately every two weeks)
• Not graded
• During the tutorial: detailed solution development, and Q&A
• Recommendations:
1. Work on the problem before the tutorial
2. Review solutions after access is given
3. Prepare potential questions
While tutorials are not mandatory, attendance is highly recommended to
maximize your learning for the Macroeconomics course; explanations will be
more detailed than the answers provided on LMS.
• Academic assistant in charge of the tutorials: Min Ji SEO (Minji.seo2@ehl.ch)
Exams
• Mid-term exam: 30% of final grade, 45 minutes, open book
• Final exam: 70% of final grade, 90 minutes, open book

Course rules
• Arrive on time
• Attendance is not mandatory but highly recommended
• Make it a pleasant environment for learning
• Disruptive behavior will result in sanctions (as per EHL rules)
• No smartphones in the classroom
• No laptops in the classroom
• Tablets allowed, only flat on the table
• Our experience shows that in the short term, students would like to have the laptops, but in
the end, they are too distracted and distracting. In economics: we work with graphs &
equations
Tip = Printed slides (4 per page) + Marker + Pencil + Paper

Encounter critical fellow Léon
Often passages in dark blue text
He ensures that we are not hypnotized by abstract theory:
• Background/commentary
• Supports your critical interpretation of the economic analyses

introduced in the course
• Better understand and interpret the economic world around us

Some key course objectives
• That you learn the basics of macroeconomics
• Overview of some key areas of macroeconomics
• Broad understanding of main macroeconomic variables (GDP, interest rate, …)
• Ability to use macroeconomic models to determine the consequences of a
macroeconomic shock, on firms, workers, hhs
⇨ For this, we aim to develop a framework/language to

systematically analyze relationships between various macroeconomic
elements
GDP (growth), taxes, monetary policy (interest rates, inflation),
unemployment, trade, technological progress, some government
policies…
What you hopefully also get from the course
• A basis supporting you in your personal evaluation of economic
developments in the world
• Ability to relate key points from the lessons to corresponding – or divergent
– observations in your real life!
Suggestion:
➔Never take what we learn in the course as an abstract and complete
theory. But as a base model - simplified - for thinking about the real world
➔Ask yourself, how the world differs (or corresponds) from the concepts
discussed!
➔Ask questions to Prof./TA!

➔Even if they go to some extent beyond the main points taught!
• Chances are, your question will also help your colleagues
How to learn macroeconomics
1. Learn to thoroughly understand the theory; think why we say what
we say in macroeconomics
2. Quizzes & exercises help to verify whether you’ve learned the

course material well. They’re not the main basis for your learning.

Next
2. Course overview

4.1. Actors
4.2. The circular-flow diagram
4.3. National Accounting, GDP
4.4. Beyond GDP
4.5. Fiscal Policy & Monetary Policy
4.6. Varia

Actors
Firms Households
Production
__________ __________
Consumption
(+Investment) Key __________
Work
(+Saving)
Economic Actors
Government & Roles Rest of the
world
Allocation1 Financial Trade (Im & Ex)
institutions __________
Redistribution
Stabilization2 Intermediary
(+Market rules)
1 Gvmt chooses which public goods to support, and how to influence who has how much net income. 2 Stabilize economy e.g., in recessions
4.1. Actors
4.4. Beyond GDP
4.6. Varia

The circular-flow diagram
Firms Households
Key
Economic Actors
Government & Roles Rest of the
world
Financial
institutions
For a start, let’s ignore G (taxes, spending, …) and RoW (imports, exports)
The circular-flow diagram
ΣVA
1000 Products and
services market
Inv. 300 Cons. 700
Salary 800
Firms Labor market Households
Interests 200
Securities
Financial market
Saving 300

4.1. Actors
4.4. Beyond GDP
4.6. Varia

Economic performance
• How can we judge the performance of an economy?
• Is it what people can afford? And if so:

- Rather what they earn?
- Rather what they can buy?
• Is it all what is produced?
• Subject to important nuances, all of these three are equal. The name
we use: Gross Domestic Product, GDP!
• Pitfalls: Savings & investments, intermediate inputs, depreciation, imports/exports
(see later)

• GDP ≡ economic activity of a
country: total domestic
value added of production
on the market (annual)
• GDP ignores non-market

production
• Vegetables grown as hobby in
the own garden do not count
• Youtube if it’s free

• Per-capita GDP is an indicator for
how much a person, on average,
may earn. Correlates strongly with
indicators of human flourishing
(education, health, longevity, …)
𝐺𝐷𝑃
𝐺𝐷𝑃𝑝.−𝑐. ≡
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛𝑠
• Mind the regional price level!

More on this later. Source: Wikipedia

• Growth of (per-capita) GDP
is often the focus of
discussions, as a measure of
improvements (or setbacks)
in economic development
• Switzerland is rich. It grows Annual p.c.

growth
in absolute GDP, but barely rate

0.7%
in per-capita GDP
0.3%
7.7%
1.2%
• China: Less rich, but

-2.6%
5.7%
0.6%
growing extremely rapidly 0.9%

0.3%
0.4%
1.1%
Source: OmniCalculator

What do you think? (we can
discuss it later!):
A stone is thrown through the

baker’s glass window. What's
the effect on GDP?
A. GDP decreases
B. No impact on GDP
C. GDP increases
www.wooclap.com/HABMACEN
Time to become more specific about how we
measure economic performance

National Accounting
• Measures the economic activity of a country
• Inputs, outputs, labour, investments of the various sectors in the

economy are considered
• Most important macroeconomic indicator produced: GDP

National Accounting
Three ways (methods) to calculate GDP
1. Value added = Sum of value the firms add

Intermediate inputs! ⇨ SumVA < SumProduction (Sales)
E.g. Painter who buys colour for $5, and sells pic for $50: VA = $__
E.g. Baker, buys flour for $30, and sells bread for $50: VA = $___
2. Income = Sum of incomes from domestic production
3. Expenditure = What is spent domestically, adjusted for trade1

1 Details later

Simple economy: autarkic & in equilibrium
Farmer Miller Baker

Produces: Wheat Flour Bread
Buys inputs from: Baker (feed oxen) Farmer (for wheat) Miller (for flour)
Sells products to: Miller Baker Farmer, Consumers
Let’s simplify: Ignore capital ⇨ No need to build mill, bakery, etc.
What does “autarkic” mean? No trade

__________
What does “in equilibrium” mean? Here: No savings/investments ⇨ None
accumulates wheat/money/etc.; everything is
directly consumed (stable ‘steady state’)
Simple autarkic economy

Farmer Miller Baker
Sells products to: Miller Baker Farmer, Consumers What firms
pay for
1 Intermediate inputs 5 40 72 inputs
3 Value added 35 32 28
VA = Firm’s
2 Production (sales value) 40 72 100 own contri-
bution to
Split of value added output value
Salaries (earned by hh) 10 10 20 How value

Profit (earned by hh 25 22 8 added is
owning the firms) distributed
within firm
Household consumption: 95
Simple autarkic economy
How to calculate GDP in this
economy?
Recall:
1. Value added method

2. Income method
3. Expenditure method

GDPVA: Value added by domestic producers

Farmer Miller Baker
Intermediate inputs 5 40 72
Value added 35 32 28 GDPVA = ∑𝑉𝐴 =
Production (sales value) 40 72 100 95
Split of value added

Salaries (earned by hh) 10 10 20
Profit (earned by hh 25 22 8
owning the firms)
GDPInc: Income from domestic production

Farmer Miller Baker
Value added 35 32 28
Production (sales value) 40 72 100
Split of value added

Salaries (earned by hh) 10 10 20 GDPInc =
Profit (earned by hh 25 22 8 ∑ℎℎ 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 =
owning the firms) 95
GDPExpe: Domestic expenditure

Farmer Miller Baker
Consumption
expenditures of
Split of value added the hhs in the
country
Salaries (earned by hh) 10 10 20
Profit (earned by hh 25 22 8
owning the firms) GDPExpe =
∑ℎℎ 𝑒𝑥𝑝𝑒𝑛𝑑 =
95
Observation?
All three GDP values are the same!
Our economy is simplistic
Theoretically: the three remain equal in real, complex economies
In practice: measurements noise; measuring with precision is difficult
Tricky:
• Savings/investments
• National borders/trade
Expenditure method often particularly convenient → Next
GDPExpe: Domestic expenditure, adj. for trade

• Consider the spending on final products in our simple autarkic economy
“Z” final demand (what our economy must deliver to satisfy what’s demanded)1
CRUCIAL!
“C” domestic consumption (final/household) of products
Output → Z = C  Consumption
+ Trade
“X” Exports Z=C+X–M
“M” Imports
Demand for our products (Z) includes what we export, but not what we import
+ Savings (investments) & Gvmt expenditure: We must also produce these first
“I” Investment
“G” Government spending3
Z≡C+I+G+X-M
• Expenditure-based GDP (Y) is based on this value, Y = Z:
Y=C+I+G+X-M
⇦ General (Expe.) GDP formula
1 excludes economy’s own consumption of intermediate products 3 More on gvmt spending (e.g., public goods) in the annex
GDPExpe: Expenditure method, schematic
Rest of the world
M X It may help to think of

It may help to think of
the act of investment I gvmt spending G as:
as: Firms taking some Goods and Taking some
services market produced goods -
produced goods -
steel parts, wires etc. - tubes, books,
and assembling these bitumen, guns, wires
Y C
into machines and etc. - and creating
I G water supply, schools,
factories!
streets, army, etc.
from it
Government Households
Firms
Y=C+I+G+X-M
GDPExpe: Interest?
• If the bakery has an oven, aka capital, and it earns an interest?
• Example: Maybe the bakery has borrowed the capital from a
lender/investor
 Represents a sort of ‘wage’ or ‘income’ that capital earns (just as

with wage for the human labor)
 Counted as part of GDP

GDPExpe: Trade
Exercise: What happens to GDP, if the farmer must buy seeds for a cost of 10 from
foreigners? GDPVA, GDPIncome, GDPExpenditure?
Consider the foreigners use the money to buy your bread!
Farmer Miller Baker

(Domestic) Household consumption: 95

GDP decomposition: Example EU15, 2008
Trillion

The growing economy: Example
• Consider our simple economy again: farmers, millers and bakers
Farmer Miller Baker
• Assume:
1. Population has grown ⇨ 10% more farmers, millers, bakers, consumers, …
2. Farming technology has improved ⇨ The farmers produce 10% more (but don’t
need more oxen; no need to buy 10% more bread)
• Problem (solution in class): what is the GDP growth?

The units of GDP
Year Turkish GDP • What do you think of that data on GDP for
(Billion Liras) Turkey ?
• Did the economy really double ?
1994 5.3
• If not: What is happening ?
1995 10.7
Source: OECD National Accounts
• Answer: Nominal GDP is reported.
= GDP in current prices
= GDP for prices at the time of the purchase
⇨ Captures variations of (i) quantity of goods
and (ii) prices of goods & services
⇨ Inflation impacts nominal GDP: change in

the price of goods
Nominal and real GDP

Year Nominal GDP Nominal GDP = GDP in “current prices”
(Billion Liras) • ≡ Market value of a year‘s production, given that
year‘s prices
1994 5.3
• Here: Liras needed in a 1995, to buy all output of 1995
1995 10.7 = 10.7 bn Liras
Year Real GDP Real GDP = measures of GDP in “constant prices”, for a
given base year) = ...
(Billion Liras1994)
• ≡ Value of year’s production if prices had been the
1994 5.3 base year‘s prices instead
1995 5.7 • Here: Value of 1995 production, if goods had been
sold at prices from 1994 = 5.7 bn Liras1994
Source: OECD National Accounts • Captures changes in ’physical’ quantity1 of production
1 Or quantity of ‘service’ even if not physical.
Nominal and real GDP: Car illustration
2010 2011
Price 1’000 / 1’100 /
Volume 6 9
Real GDP (in 2010 prices) 6'000 9'000
_____ +50%
Nominal GDP (in current prices) 6'000 9'900
_____ +65%

Find the price index based when we know nominal and real GDP?
Nominal GDP = Real GDP  Price index

[…isolate price…]
Therefore: Price index = Nominal GDP / Real GDP
Turkish Lira, base-year 1994 (example from above):

1994: P = 5.3 / 5.3 = 1.00
1995: P = 10.7 / 5.7 = 1.88
Intuitively: Price index = by how much have prices, on average, increased (or
decreased) relative to the base-year
⇨ Graph next slide!

- Can you read from the graph, the

overall price inflation from 2008 to
2011?
- What is, roughly, the price index

P2008 in 2011?1
1 Price index in year 2011, for base-year 2008

Domestic and national measurements
• GDP is “territorial” in production: what is produced within the
country’s territory
Question: Does the production (income) of a French working in
Switzerland belong to Swiss or French GDP?
• GNP (Gross National Product)1 instead is about residency of the

people
Question: Does the production (income) of a French working in
Switzerland belong to Swiss or French GNP?
• Differences between GDP and GNP are often not very large
1 Aka GNI, Gross National Income
GDP subtleties: Investment
What really is investment?
Purchase of buildings, equipment, machinery etc., to contribute to future
production. We consider it mostly by firms, but it can also be by households
For firms, investment (I) includes both

• Investments for expansion
• Investments for replacements (depreciation) ⇨ Hence Gross Domestic Product
Question: Does this seem ideal? Is “Net Domestic Product” (≡ GDP net of depreciation) a better
measure of what people can consume?
• When households invest, we often categorize this as consumption (C)

• Even if it is a washing machine (long lifetime)
• Exception: Buying a house is considered investment (I)

GDP subtleties: Purchasing-Power Parity (PPP)

Per-capita GDPs 2021, nominal
• CHE 93.5k USD 135% of US
Date Source:
• USA 69.4k USD 100% Based on IMF acc.
to Wikipedia:
• IND 2.2k USD 3% of US nominal & PPP
But: In India things are cheap, and in

Switzerland expensive!
⇨ How much more can the Swiss really
buy than Indians?
⇨ Purchasing-Power Parity Adjustment!
Per-capita GDPs 2021, PPP-adjusted
relative to US How to PPP-adjust? If products are
21% more expensive in CH (in $) than
• CHE 77.1k USD 111% of US
in the US, the CH GDP PPP-adjusted,
• USA 69.4k USD 100% with US as basis, will be 21% lower
• IND 7.4k USD 11% of US than absolute (nominal) CH GDP
GDP reporting: Ideal vs. in media
When comparing GDP differences across time and/or across countries, what
tends to be more informative about how people fare?
- Per-capita or absolute?
- Real or nominal?
- PPP adjusted or not?
Choosing the right form can be crucial for a meaningful comparison
Watch out for GDP comparisons in articles/graphs, especially when the

author has a political aim!
Knowingly or unknowingly, authors regularly bias results by simply reporting,
e.g., absolute nominal values! At times it can distort the picture significantly!

Revisiting the Broken Window
Let’s return to our first question on GDP:
A stone is thrown through the baker’s

glass window. What's the effect on
GDP?
A. GDP decreases
B. No impact on GDP
C. GDP increases
Discuss in groups of 3-4

Revisiting the Broken Window – Hazlitt’s answer

Video: https://www.youtube.com/watch?v=hXC9FI1nAqs (3:05)
On 3 lines: Yes, new glass. But: No new suit! Suit or glass: same stimulus. Net difference: Broken
glass means a lost suit for the consumers! Morale: Be very vigilant when promised a great
economic gain from expensive, laborious projects! Projects’ values lie in what they create, not
in what they cost!
Interpretation
1. Compelling. Debunks flawed arguments pro large industries or projects.
• Always going around vandalizing can just make us poorer in the long run; is like making our
technology a bit less efficient. Recall: With industrialization, having more efficient technology
has simply been good for our GDP, workers, consumers! By destroying glass windows, it is like
going a small step backwards here.
2. What the video omits: In some crisis times, Hazlitt’s explanation is not
detailed enough! Reality then can have room for positive stimulus
effects!
• We’ll get back to this in the next chapter; the stimulus effect is very much core to it!
3. Despite 2., H’s is spot on, most generally: People tend to always think
big spending is equivalent to improving the economy. This is mistaken.
• E.g.: Media celebrates: “PV creates xyz thousand jobs!” – oddly, it hails “PV is cheap!” too!
Final word on GDP: Economists’ names for GDP
When the context is clear, economists may use different names for the
Gross Domestic Product (GDP):
•Y
• Production
• Income
• Output

4.1. Actors
4.4. Beyond GDP
4.6. Varia

Criticisms of GDP
Many criticisms of GDP have been brought forward
Some major ones:
• Inadequate measure of well-being!
• Ignores non-market activities/non-quantifiable/free (digital?) activities
• How much would you pay for search engines, FB, WA, maps? Many thousand USD!?1
• Ignores externalities
• Ignores distribution of output (inequality)
• Little information on the composition of production
• Fails to reflect the effort of working
• Misses black market <- Bolivia 61%, CHE 7% 2
• Precise measurement is difficult
1 Striking study: https://bit.ly/3HdEFMb 2 IMF 2021. More about this here: https://bit.ly/3sePTfh
Alternative indicators of well-being
Many other aggregates/indexes can be used to complement national
accounting aggregates in order to measure economic well-being
E.g.
• Life expectancy
• Education level
• Employment rate/working hours
• Employment conditions
• Access to leisure
• Political freedom
• Accommodation quality

Inequality: Gini index
Popular indicator of income inequality: Gini index IG
Cumulative
part of total
income
Lorenz curve
Gini Index IG ≡
Cumulative part of total
population
hatched area/0.5
(0 < IG < 1)
IG close to 1 ⇨ very unequal distribution
IG close to 0 ⇨ very equal
Careful: Often Gini is indicated on a basis of 100 rather than 1!
Country Name 2017 Country Name 2017 Country Name 2017

Armenia 33.6 Hungary 30.6 Portugal 33.8
Austria 29.7 Ireland ? Romania 36
Belarus 25.4 Italy 35.9 Russian Federation 37.2
Belgium 27.4 Kazakhstan 27.5 Serbia 36.2
Croatia 30.4 Kosovo 29 Slovak Republic ?
Cyprus 31.4 Kyrgyz Republic 27.3 Slovenia 24.2
Czech Republic 24.9 Latvia 35.6 Spain 34.7
Denmark 28.7 Lithuania 37.3 Sweden 28.8
Estonia 30.4 Luxembourg 34.9 Switzerland 32.7
Finland 27.4 Moldova 25.9 Tajikistan ?
France 31.6 Netherlands 28.5 Turkey 41.4
Georgia 37.9 North Macedonia 34.2 Ukraine 26
Germany ? Norway 27 United Kingdom ?
Greece 34.4 Poland 29.7
Source: World Bank, Europe and Central Asia regions

What is the Gini index if …
a. Half of the people have no Cumulative
income, and all income is part of total 1
equally spread over the other income
half of the population?
b. One person earns everything

and all others nothing?
0 1 Cumulative
part of total
c. All earn the same? population
© EHL
4.1. Actors
4.4. Beyond GDP
4.6. Varia

Fiscal policy & Monetary policy
Fiscal policy (state) ≡ Taxes & government spending
• Who’s taxed? Households, firms, commodities, imports
• Spending on public goods; subsidies
• Social security, unemployment benefits (“redistribution”), public pension system
• Leads to budget deficit (⇨ accumulate debt) or surplus
Monetary policy (central bank CB) ≡ Money supply & related

interventions
• Choosing interest rates, money supply, other monetary interventions (e.g., asset
purchases by the central bank to support the economy)
• Official aim(s): target low inflation; possibly support gvmt in limiting unemployment
and stimulate healthy growth
4.1. Actors
4.4. Beyond GDP
4.6. Varia

Comme peut-être vu aussi en micro
Analyse positive vs. normative

• Pascale «The minimum wage law causes unemployment»
• Sophie «The government should increase the minimum wage»
Positive statement = Description (correct or false!) of the state of the world
→ Description (correct or false!) of the world as it is
Normative statement = Opinion, how the world should be
→ Statement of idea about what would be good
Tools of economics allow to make positive assertions
➔ Key value of economics
Only under certain assumptions about preferences can normative statements be derived
➔ Politics (including economist's advice to politicians)
Important to keep this distinction in mind! In moral and political discourse, the
distinction is too often ignored, to the detriment of the quality of the discourse!
Comparative advantage – Might it “always” be good to trade?
• Consider the following situation
Labor hours Baguette Chocolate 150 working hours
(for producing 1 unit)
available in each
Switzerland 5 10 region
France 2 8
• France has an absolute advantage in producing anything!

• Intuition: Will one country loose and the other one win if they trade?
• Assume consumers strictly want to always combine {1 choc + 1 baguette}
• Can you proof that trade can benefit both regions, compared to autarky?
• Hint: 1. Calculate a sensible “welfare” of each in autarky; 2. Show one trade (exchange) that makes
each better off! ∎
Comparative advantage – Might it “always” be good to trade?

[space for calculations]
Labor hours Baguette Chocolate
(for producing 1 unit)
Switzerland 5 10
France 2 8
Assume 150 hours each, and
consumers strictly want to combine
{1 choc + 1 baguette} always
Comparative advantage – Might it (for producing 1 unit)
Switzerland 5 10
“always” be good to trade? France 2 8
Conclusion Autarky:
• CH consumers 10 B + 10 C
A. Both can gain from trade: ↑ Consumption than in autarky • FR consumers 15 B + 15 B
Trade enables:
B. Each country exports what it has a comparative advantage • CH consumers 11 B + 11 C
in, independently of possible absolute (dis-)advantages • FR consumers 16 B + 16 C
Intuitive explanation
1. “Can’t eat money”: Implicitly, whenever FR export B., they’ll want some C. in return for
it. Money is an intermediary; none wants to indefinitely accumulate money when one
must give away ones’ goods for it.
2. Structural changes: Eventually workplaces and wages adjust; people work, and produce
what the country can produce best.
3. Workers are consumers. As consumers, they enter in a mutually beneficial market
exchange: The FR are happy to get the Swiss C. for their B., and vice versa. Both benefit.
This extends to more complex situations. In simple models, trade is a “win-win”, even
between dissimilar countries. The total win is largest with free trade!
Comparative advantage – Might it (for producing 1 unit)
Switzerland 5 10
“always” be good to trade? France 2 8
Autarky:
We have shown that a common view that • CH consumers 10 B + 10 C
feeds Protectionism is too simplistic. • FR consumers 15 B + 15 B
Trade enables:
Careful! • CH consumers 11 B + 11 C
- Many reasons still exist why trade can hurt • FR consumers 16 B + 16 C
specific workers, the environment, etc. (even
if simple models miss this)! Good to know: One can also look at
the problem based on opportunity
costs:
- Between rich and very poor c’tries: Free
trade may give some poor an opportunity for CH exports C. to FR, because CH has a
growth, but: it equally means a risk that poor lower opportunity cost of C. than FR
sweatshop workers toil in dire conditions for a has.1 So FR is willing to give the Swiss
tiny salary they’d never accept were they not more B. for the Swiss C., than the
Swiss must give up for producing more
so dependent on the job for survival – and this C.
for possibly rather trivial benefits to the rich.
1. Opportunity cost of C. (measured in B.): CH: 2B./C. FR: 4B./C.
Comparative advantage – Bastiat’s “Candle Makers’ Petition”
Bastiat’s famous satire (1845) challenges basic protectionist intuitions using entertaining
and powerful language. Excerpt:
• We are suffering from the ruinous competition of a rival who apparently works under
conditions so far superior to our own for the production of light that he is flooding the
domestic market with it at an incredibly low price; for the moment he appears, our sales
cease, all the consumers turn to him, and a branch of French industry whose ramifications
are innumerable is all at once reduced to complete stagnation. This rival, [..] is none other
than the sun.
• We ask you to be so good as to pass a law requiring the closing of all windows, dormers,
skylights, inside and outside shutters, curtains, casements, bull’s‐eyes, deadlights, and
blinds — in short, all openings, holes, chinks, and fissures through which the light of the
sun is wont to enter houses, to the detriment of the fair industries with which, we are
proud to say, we have endowed the country.
• Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron,
wheat, and textiles, in proportion as their price approaches zero, how inconsistent it
would be to admit the light of the sun, whose price is zero all day long!
• Full text: E.g., https://bit.ly/3t3Mmzj

End

Annex

GDP subtleties: Government spending
• When government invests in some infrastructure, this can still be
classified as gvmt spending (G)
• When government purely transfers money, say taxing rich and giving
the money directly to poor, this is not counted as gvmt spending
when calculating the contribution “G” for the GDP
• Mind, in some other cases when we want to indicate the share of incomes gvmt
takes away from the private sector, this transfer may well be counted as gvmt’s part

GDP subtleties: Investment II
Investment includes Inventory changes!
• Firm inventories can be sold later, so they represent something

‘invested’ into now, to create revenues later
• Mostly a small part in GDP measures

• Relevant later when discussing the equilibrium on the goods market

Interesting Resources: Blogs, Podcasts…
The following slides indicate just a few particularly interesting

resources, many of whom discuss a very broad palette of topics
There is a tremendous amount of content out there on economics, for

example many more blogs and podcasts on various types of economics,
and they may also be very good.
General suggestion: Never take automatically for granted what you

year from the authors. The fun in economics is to always see whether
their argumentation sounds truly plausible to you, or whether you find
reasons why the world may be different despite their argumentations…

Interesting Resources – Economics in One Lesson
Provocative analysis of economic insights,

particularly relevant for everyday life, and how they
may be missed by many people, as a very
entertaining short read:
Henry Hazlitt, Economics in One Lesson (1946)

https://fee.org/resources/economics-in-one-
lesson/
‘This primer on economic principles brilliantly

analyzes the seen and unseen consequences of
political and economic actions. […] "no other modern
book from which the intelligent layman can learn so
much about the basic truths of economics in so short
a time.“’
Prof. Habermacher © EHL 91

Interesting Resources – EconTalk Podcast
“EconTalk is an award-winning
weekly talk show about economics in
daily life. Featured guests include
renowned economics professors,
Nobel Prize winners, and exciting
speakers on all kinds of topical
matters related to economic
thought.”
EconTalk by Russ Roberts
https://www.econtalk.org/

Interesting Resources – Freakonomics Radio
[Quite entertaining, but maybe a bit

less truly high-quality economics]
“Even though Freakonomics isn't
strictly just about economics […] it
definitely provides some interesting
food for thought. It tries to explain lots
of the quirks of human behaviour, that
is not always as rational as we like to
believe it is. In one episode,
Freakonomics Goes to College, they
explore the real value of college
degrees and the market for fake
diplomas. Fascinating stuff.”
Freakonomics Radio
http://freakonomics.com/archive/

Macroeconomics: Chapter 1: Introduction & Macroeconomic Concepts

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Macroeconomics

Chapter 1: Introduction & Macroeconomic

• Understand what macroeconomics is

• Understand some crucial macroeconomic concepts, in particular

© EHL Prof. Habermacher 2

• Various macroeconomic concepts

• National accounting: track all economic activity

• Is GDP a good measure of prosperity?

© EHL Prof. Habermacher 3

© EHL Prof. Habermacher 4

In the Annex, often useful/interesting information!

© EHL Prof. Habermacher 5

© EHL Prof. Habermacher 7

“Buying from foreign country B,

Accurate or rather misguided?

© EHL Prof. Habermacher 8

Source: Penn World Table, version 9.1

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© EHL Prof. Habermacher 10

© EHL Prof. Habermacher 11

• The government has just announced measures to remedy the crisis.

© EHL Prof. Habermacher 12

• Normative macroeconomic (?) question:

• Positive affirmation* ≡ How the world is

© EHL Prof. Habermacher 13

How much debt is sustainable anyway?

© EHL Prof. Habermacher 14

Is Switzerland really one,

The Wall Street Journal, 16 December 2020

• Macroeconomics is an evolving science

The difficulty of macroeconomics

Microeconomics: Sometimes possible

Macroeconomics: Very often impossible

• Technology • Mobility structures

➔Often difficult to identify what exactly influenced what

© EHL Prof. Habermacher 18

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• LMS: Additional material complementing slides (can be articles, quizzes, …)

• Course textbook: "Macroeconomics, a European Perspective", Blanchard et

© EHL Prof. Habermacher 21

© EHL Prof. Habermacher 22

• No need to read the slides before the lesson

• Constructive comments highly welcome

Ecole hôtelière de Lausanne Prof. Habermacher 23

• Final exam: 70% of final grade, 90 minutes, open book

Ecole hôtelière de Lausanne Prof. Habermacher 25

Tip = Printed slides (4 per page) + Marker + Pencil + Paper

Ecole hôtelière de Lausanne Prof. Habermacher 26

He ensures that we are not hypnotized by abstract theory:

• Supports your critical interpretation of the economic analyses

• Better understand and interpret the economic world around us

Ecole hôtelière de Lausanne Prof. Habermacher 27

⇨ For this, we aim to develop a framework/language to

➔Ask questions to Prof./TA!

2. Quizzes & exercises help to verify whether you’ve learned the

© EHL Prof. Habermacher 30

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Inv. 300 Cons. 700

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