Lecture 1

Macroeconomics in Context:
An Introduction

GHNRRT. Ch.1-2
 Lecture Outline
1. What is Economics About?
2. Different schools of economics
3. Macroeconomic Goals
– Achievement of good living standards
– Sustainability
4. Macroeconomics for the 21st Century
– Environmental issues
– Poverty and income inequality
 1. What is Economics?
A Mainstream (Neoclassical Economics) Definition

Economics is the study of how to allocate

scarce? resources in the most efficient?
manner to meet endless? human needs.

3 debatable assumptions in one definition:

1. Are resources really scarce?
2. Are human needs really endless?
3. Is efficiency the utmost priority problem in economics?
 What is Economics?
A more encompassing, non-mainstream definition
Economics is the study of the way people organize
themselves to sustain life and enhance its quality.

Economics is a social science that aims at the study of

production and consumption
of goods and services,

distribution of income
and
accumulation of wealth
in society.
 What is Economics?
A more encompassing, non-mainstream definition
Production: What is produced? (Construction? High-tech goods?)
How much? Using what method of production / technology?
(Capital/Labor intensive?)
Consumption: How do individuals take their consumption vs. savings
decisions? Who consumes how much of what type of good or
service?
Distribution: For whom it is produced? (For an upper income elite? For
the poor?) Who takes what share of total production? How is total
wealth distributed amongst the different social groups? (such as
class, race, nation, ethnic group, region, gender, etc.)
Accumulation: How fast does wealth accumulate (i.e.growth)? What
factors lead to fast growth? What factors hamper it? Why do
economic crises occur? How does growth translate into improved
standards of living for the people?
 What is Economics?
The mainstream framework of analysis

Factor Markets
Land, Labor, and Capital Services

Wages, Rents,
Interest, and Profits

Households Firms
Payments for
Produced Goods
and Services

Fig. 2.5 (Goodwin et al.)

Produced Goods and Services The Circular Flow
Diagram for the Basic
Product Markets Neoclassical Model
 What is Economics?
A more encompassing, non-mainstream framework
Physical Context

Social Context

Economic Activity

Core Business
Natural Inputs Households
Sphere
Sphere
Outputs
(flows of natural
resources and environmental (pollution and
Public
services) Purpose wastes)
Sphere

Goodwin, et.al. Figure 3.8: Social and Environmental Contexts of Economic Activity
A useful understanding of economics must take into account the interactions between the economy and
its contexts, showing how the economy is dependent on these contexts, and how these environmental
and social spheres are in turns affected by the economy.
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 Why Economists Disagree?
• Scientific reasons (positive analysis): They may
disagree about the validity of alternative
positive theories about how the world works.

• Value judgements (normative analysis): They

may have different values and, therefore,
different normative views about what policy
should try to accomplish.
Positive versus Normative Analysis
• Social scientists often make a distinction
between :
• Positive statements are statements that
attempt to describe the world as it is.
–Called descriptive analysis
• Normative statements are statements
about how the world should be.
–Called prescriptive analysis
Positive versus Normative Analysis
• Positive or Normative Statements?
?
– What is the level of poverty in our country?

? – How much effort should be given to

poverty reduction?
?
Positive versus Normative Analysis
• Positive or Normative Statements?
– Higher government budget deficits will
?
cause interest rates to increase.

? – The government should be allowed to

collect from tobacco companies the costs of
treating smoking-related illnesses among
the poor. ?
Positive versus Normative Analysis
• Positive or Normative Statements?
– What is the level of production in our
?
country?
? – What level of production would be the most
desirable?

• We cannot avoid the normative question of

what goals the macroeconomics should
achieve.
2. Different Schools of Thought in
Economics
The mainstream school of thought:
Neoclassical Economics

Non-mainstream schools of thought:

Marxian Economics
Keynesian Economics
Institutionalist Economics
Structuralist Economics
Feminist Economics
....among others
 Different Schools of Thought in
Economics
Questions of differences:
1. To what extent are competitive markets an efficient and
sustainable way of organizing economic relations?

2. To what extent, how, where and when the Government

should intervene in the economy?

Neoclassicals -- on the unregulated liberal markets side with

minimum government intervention

Keynesians, Marxists, Structuralists, Institutionalists -- on the

regulated markets side (and even socialist economies where all
production is public owned)
 Economic Systems
(prepared from Besim Üstünel, Ekonominin Temelleri; Section 4; Economic Systems )

Philosophical Foundations Institutional Framework

Capitalism •Liberalism •Right to private property and

•Individualism contracts
•Utility-disutility motivation •Market mechanism and price
signals

Socialism •Society’s desire to control its own •Collective ownership of means

destiny of production
•Collectivism •Central planning
•Service to people and social
welfare motivation
Mixed •Desire to live freely •Limited private property and
Economy •Balance between individual contracts
freedom and the collective good of •Democratic planning and
society social welfare state
•Desire for social security
 Market orientation

China Sweden USA

Hungary
Cuba UK

Command Free
economy market
economy

17
 3. Macroeconomic Goals
• Well-being: the broad goal of sustaining a good
quality of life

• Two important components

of well-being:
– achievement of good living standards
– sustainability
 3.1 Living standards
• One macroeconomic goal is to keep people’s
living standards high enough that their lives can
be long, healthy, and enjoyable
– Improvements in people’s diet, housing, medical
attention, education, working conditions and access
to care, transportation, communication,
entertainment, physical security and the like
• Living standards growth has been a top concern
for economists
Elements of well-being (Goodwin et al,
2022)
 How can living standards be
improved?
• However, for a long time, “raising living
standards” was considered to be nearly
synonymous with “achieving economic
growth”.

– Economic growth: growth in the level of

marketed production in a country or region
• Measured within a country by the growth of its
gross domestic product (GDP)
 Global economic growth has been
impressive in recent decades
90.000
GDP (constant 2015 US$) measured in

80.000

70.000

60.000

50.000
Billions

40.000

30.000

20.000

10.000

0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
Global Production, 1960-2020
 Increased production is necessary
but not sufficient:
The increase in production needs to keep pace
with a growing population
• Improvement in living standards can only
result if production per person (GDP per
capita) on average rises.
– production per person is measured by dividing
global production by global population
• It has also grown over the last several
decades, but not by as much.
Global production per capita has also grown but
not as much as the increase in global production

Figure 1.2: Global Production Per Capita, 1960-2020

Increased production is necessary
but not sufficient:
Changes in economic production vary
significantly across different regions and
countries
Between 1960 and 2020, GDP per capita
increased more than fivefold in East Asian
countries.
In Sub-Saharan Africa, however, GDP per
capita increased by only about 1.4 times.
 Income inequality in the world
• The growth in production has not been equal in all countries, and
living standards are still very low in much of the world
– According to the World Bank, about 697 mn people in
the world were living on less than $1.90 per day in
2017 (absolute poverty-deprivation of basic human
needs). Of these people, over %60 lived in Sub-
Saharan Africa and about %25 lived in South Asia.

Extreme The production of more

poverty is G&Ss is necessary to raise
still a
major living standards in such
concern situations
Absolute poverty started to rise in
2020!
Goodwin et al, 2022
 3.2 Sustainability
Issues of sustainability as a challenge to growth and
enhanced well-being

Are economic activities sustainable into the future?

• financially sustainable?
– a high amount of national debt may create a heavy burden on a
country’s future generations

• socially sustainable?
– the current structure of economic activity may set the stage for
future social disruption and political strife; crisis of inequalities

• ecologically sustainable?
– the natural environment may become depleted or degraded
 Briefly,
• Traditionally many economists did not recognize a
seperate goal of sustainability
• It was thought that economic growth would naturally
contribute to the achievement of any other goals

• Others argue that environmental, social and financial

sustainability need to be considered as goals in their
own right
– Requires a dramatic shift in how we think about
economic growth
 Growth is just one of the tools for
achieving well-being
Even if GDP per capita is rising (relates to the question HOW MUCH?)
other factors are still important

• Three basic questions:

WHAT, HOW and FOR WHOM to produce?
• First, it matters what is produced:
– military hardware vis a vis nutritious food, widely available health care.

• Second, it matters how it is produced.

– Work conditions (e.g. the use of child labour in some poorer countries.)
– Ecological degradation
– …
 Growth is just one of the tools for
achieving well-being
• Third, it matters for whom economic growth
occurs.
– How are the incomes distributed among the
population?
• Do some regions, or some groups of people as defined by
income class, race, ethnicity, gender, or other factors,
receive more of the gains from growth than others?
– If the benefits of economic growth only go to a tiny
global or national elite, the bulk of the population
may remain desperately poor.
4. Macroeconomics for the 21st Century
• New developments are demanding new ways of
looking at the economic world
• First, the environmental impact of long-term,
fossil-fuel-based economic growth is becoming a
topic of economic, social, and political concern
increasingly (Fig. 1.4)
– Floods, droughts and irreversible disturbances to
ecosystems, disruptions in water supply, expansion of
tropical diseases…
• Sustainability of Food Provisioning
– Economic growth vs. ecological sustainability
• Environmental crisis as a challenge to sustained growth
The rise in environmental problems

Figure 1.4: Growth in Atmospheric Carbon Dioxide,

1820-20200
Macroeconomics for the 21st Century

• Second, the persistence of substantial global

poverty; income and wealth inequalities has
called into question the appropriateness of
traditional ideas about economic development
 Growing income and wealth
inequalities
• Income and wealth inequalities have been on
the rise nearly everywhere since the 1980s,
following a series of deregulation and
liberalization programs in different countries.
• The rise has not been uniform:
– certain countries have experienced spectacular
increases in inequality (including the US, Russia
and India)
– while others have experienced relatively smaller
rises (European countries and China)
 Figure 3.7: Income Shares of the Richest and Poorest
Households, 1968-2010 (US)
25,0 Top 5% of
households

20,0
Share of Income (%)

15,0

10,0

Bottom 20% of
5,0 households

-
1968 1974 1980 1986 1992 1998 2004 2010
 Contemporary income and wealth
inequalities are very large

2022 World Inequality Report

 “MENA” is the most unequal region in the
world, Europe has the lowest inequality levels
 GDP per Capita, 2020 (US dollars)

Central African Republic 237

Bangladesh 177
India 163
Turkey 58
European Union 35
OECD members 32
Canada 26
Australia 22
Belgium 21
Germany 19
Iceland 17
United States 11
Norway 8
Qatar 4
Luxembourg 1

0 20.000 40.000 60.000 80.000 100.000 120.000

Average national incomes tell us little
about inequality
 Turkey
The top 10% captures 54.5% of
total income while the bottom 50%
takes 12%.

The bottom 50%: 4%

middle 40%: 29%
top 10% hold 67% of total
national wealth.
 Global income and wealth inequalities are tightly
connected to ecological inequalities and to inequalities
in contributions to climate change
 Thus…
• Questions of what, how and for whom—
rather than just “how much”—are becoming
increasingly important in evaluating the effect
of economic activity on human well-being

• The purpose should not be simply growth in

output but also improvement in human well-
being in the present and the future.
Microeconomics and Macroeconomics
Microeconomics focuses on the individual parts of the
economy
How households and firms make decisions and how they
interact in specific markets
– HHs → consumption/savings decisions; labor
supply decisions
– Firms → production decisions: what and how much
to produce, technology choice, employment of
factors of production, investment decisions.
– Particular markets → real estate; wheat;
automobile...
 Microeconomics and Macroeconomics
• Macroeconomics looks at the economy as a whole;
i.e. at Economy-wide aggregate phenomena such as:
– National income, Economic growth, Inflation,
Unemployment, Economic fluctuations (expansions
and recessions/crises), International Trade, Capital
Flows, Exchange Rates
• Macroeconomics is concerned with the characteristics
and the performance of the economy as a whole rather
than of the economic actions of individual agents.
 Macroeconomics
• Macroeconomics answers questions like the
following:
– Why is average income high in some countries
and low in others?
– Why do prices rise rapidly in some time
periods while they are more stable in others?
– Why do production and employment expand
in some years and contract in others?
 Mainstream Macroeconomics:
The Time Dimension in Macroeconomic Analysis
• Short-run: a time frame of a few years
– Output (Y) is demand determined
• Medium-run: a time frame of a decade or so
– Output (Y) is determined by supply factors
• capital stock (K), level of technology, size & skill level of the
labour force → more or less fixed
• Long-run: a time frame of a few decades or more
– Output is determined by technological progress and capital
accumulation (increase in K)
• neither technology, nor capital, nor skills are given in such a
period.

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