Advanced Macroeconomics

Define Macro Economics:

Fundamental questions: what creates level of prosperity? What creates fluctuations in the GDP in the
short run?

1st part of the course: growth and prosperity in the long run (finnish teacher)
2nd part: short run business cycle (Federica)

Distinction between short and long run

Different fenomena that influence the framework used to tackle these questions. Some questions are
very policy focused. Give better guidelines for policymakers.

In long run models:

Exogenous fundamental factos: preferences, economic policy and technology. Everyone has the correct
expectations and…prices are fully adjusted in aggregate.

Put 50 macroeconomists in the room and you will have 52 opinions.

Economic Policy

Long run -> + growth -unemployment

short run -> dampen business cycle effects

Why are some countries richer than others? (long run and solow growth model)

We care about growth in income per person because it leads to a high level of income per person. Is it
the only thing we look at? What about the distribution of this growth(Inequality)?

Stylized growth facts for the U.S. : if you look at western countries in the past 50 years, there has been
some constant stable growth. Look at Slide 15 for the list of factors.

If you plot a time series of GDP we have a nice trend line with some fluctuations.
SOLOW MODEL

A model to study growth and predict how GDP and consumption per capita depend on structural
parameters. The Solow model replicates the U.S. stylized growth fact.

Initial state: N_0 people alive and the number of people in economy at date t is N_t.

People prefer more consumption to less and save a constant fraction s of income (they only care about
consumption)

In the Neoclassical model, people care also about their leisure time and have to make a tradeoff.

Population growth is exogenous.

SLIDE 22-23

Economy produces final good:

SLIDE 24

A (TFP) is also called SOLOW RESIDUAL, since it captures everything that is not capital and labor.

Properties of production function and why the Cobb Douglas is nice:

1) Diminishing returns
2) Positive marginal prodcuts
3) Constant returns to scale

PRICES:

No money in growth model, all prices are real prices. Wage rate and rental return are expressed in terms
of the single good or real terms. (SLIDE 29)

Supply of labor and capital are perfectly INELASTIC. Demand is then irrelevant and prices are set (SLIDE
30??)

After slide 33, I got bored.