Lecture 1: Introduction to 14.02 Principles of Macroeconomics

This segment clearly distinguishes macroeconomics from microeconomics, emphasizing its focus on large-scale economic phenomena like inflation, unemployment, and exchange rates, rather than individual markets. The professor highlights that macroeconomics is not simply the sum of microeconomic interactions, but a distinct field of study requiring its own methodologies and approaches. not what I want to do here. The typical lecture again, this is not a lecture. The next the first lecture will be on Wednesday, the typical lecture and not in the first part of the course because you're not going to have the tools, the definitions and so on to do it. What I want to do is is ER, spend five to 10 minutes early on Again, the first part of the course we can't do that because you don't have still the knowledge to do that. But as as you start building tools, I want to be able to sort of talk about current events, something that is happening out there that I find interesting or something I received that morning may even the morning of the lecture in which I, which I find interesting. And if I think you already have the tools to begin to understand it, I'm going to be repetitive. I'm going to sort of come back to three, four times to the same topic. Hopefully you'll be know, you'll be more advancing your knowledge in the later stages. So you'll be able to understand it more and more. Okay, so the typical lecture, we have five to 10 minutes in which we'll talk about some facts, something that is going on, for example, a picture like this This is I received it this morning, I think this came from Goldman. I think Goldman Sachs. Yes. And what you have in that picture again, don't worry about details Today is you have two lines. One of them is a measure of ER wages, wage growth compensation to workers and another one is a measure of inflation. Again, all those definition will come in the next lecture and inflation. So it's a rate at which you know, you must have heard about inflation. it's something prices are rising. No. And what that picture shows you is that these two series are very highly correlated. Okay, so when wage growth is high, inflation tends to be high. Okay. And that's a big issue on these days. there's a lot of concern about this stuff. So let me let me try to explain a little bit. What is a concern on these days. Again if you don't understand anything doesn't matter if you don't understand anything saying right now in the last lecture then it matters but now it doesn't matter you know i'm just trying to give you a flavor of the kind of things we'll be talking about that picture there. Again a variable that we'll define in the next lecture. Not now shows you the unemployment rate. You don't need any specific definition to know that to feel at least get a sense that well if an employment is high workers aren't very happy. it's not a good thing to have lots of unemployment. And what that series shows you the shaded areas are recessions in in the US. what that series shows you is that typically in recessions unemployment goes up. So that's one of the features One of the main features of a recession is that unemployment is high. This episode here is, is called the Great recession. As a parall for the Great depression, The US had the Great Depression in the 30s. This is the Great recession, the biggest sort of recession outside of the Great depression in the US. And it's also known as the global financial crisis, because this was a recession all around the world. And what you can see is that employment went very high. that's a very feature, a tell sign of a of, of a big recession. And then it took a long time, this was in, in sort of recovery. COVID was a massive shock to the labor market. So not surprisingly, an employment, the employment rate is spike there. but then he also recover a lot faster than he recovered from that. And today, we have unemployment rates that are at historically low levels. And that's a big issue. The rate of unemployment in the US is at historically low levels. Okay, way below what is normal? Forget recessions obviously, way below what is in happens in recession, but even way below what is normal? What happens? Dur normal times. Okay, closely related to that is wage growth. I have just one measure of wages, there is a wage. it's a it's a series of wage that is, that is particularly what I'm about to say is particularly sharp, which is the wages of in the accommodation and food service sectors. So wages have been rising very steadily and and very fast recently, everywhere, particularly in sectors like this, you where we have some problems, what we call labor supply. But we'll I'll get back to that. Okay, so those are two facts. We have an employment at extremely low levels. and we have wage growth. at a very high fast pace. Now that sounds wonderful. No I mean what else do you want an economy in which there's few people unemployed and and the and the wages are growing a lot. I mean if this was micro this would be fantastic say okay look guy is employed and he's getting a high wage. This is great well not so fast for macro not so fast because I already showed you in the first picture I show you to motivate there's a connection between wage growth and inflation and that's what we're experiencing the normal level of inflation for an economy like the US is around 2%. That's normal. That's what central banks target in an economy like the US in the Euro area. Japan has been dreaming with 2% but it hasn't been able for decades to get it. But although now they are but but they weren't for a couple of decades to get to 2%. But that's about and we will discuss later in the course why 2% is about right For economies of the size of the US and so on obviously in recessions these things can go low and that's why you know in the COVID recessions inflation went to zero essentially but then it began to pick up and it's now at levels which are unheard of in the US since the 80s. Okay. so depending on the particular measure you use of inflation is around 6 and a half% to 8%. that's the level of inflation we have which is way, way above what is considered a normal a reasonable target for the central banks for the This segment analyzes China's post-zero-COVID economic recovery and its significant global impact. The speaker explains how China's shift from strict COVID policies is expected to boost its economy, leading to increased global demand, particularly for commodities. However, this surge in demand could exacerbate inflationary pressures in countries actively trying to curb inflation, creating a complex global economic scenario. The discussion highlights the interconnectedness of global economies and the potential challenges of managing differing economic cycles. This segment explains the role of monetary policy, particularly interest rates, in managing inflation. It also illustrates the interplay between monetary policy decisions, asset values (specifically the stock market), and the overall economic climate. The discussion connects the theoretical concepts to real-world events and market reactions. the the the actual change in the payroll was not 190k it was over 500,000 k so enormous addition of jobs to the economy and look what happens to the equity market Boom it imploded immediately so this is wonderful news now for the economy lots of jobs the equity market imploded as a result of that. Why do you think that happened I already given you a little bit of the ingredients for why for an answer in in in in the previous slides. The reason I'm showing you this is because it's a in in in one in 15 minutes. It summarizes all that I was talking about in the previous 30 minutes. Why do you think that happened? This is wonderful news. Why why the so market should crash like 2% from top to bottom as a result of that there a lot more labor because um, that gives a lot more, um, supply of, um, that thing and thus it dees price because high supply. No, but ah, okay, that's an interesting, Okay, that that's an interesting explanation is not the one I have in mind. It's a the explanation says look that means firms hire lots of people. So the price the that means there going to be lots of supply of whatever goods they're producing the price of those goods is going to decline and that's going to be bad for profits. That's the story you had in mind. Yeah, maybe some of that, but I I'm willing to bet that it's not the main thing. So the only clue I give you is that I already talk about these things five minutes ago employment is um, very closely um, related to inflation rates. Yes up to 0.81 So this could be result of expectations of high contin high inflation. Okay, you're are very close one step more Yes, that that means that that means that so okay, that there you are so what happens The bank the the the shareholders wouldn't have done anything if they thought that the fed would not be able to see this data, But they know that the fed also sees this data and say, whoa, these guys are going to be worried because the econom is going to keep overheating. They're going to have to hike interest rates even more in order to cool down this economy. Okay, I already show you that what happens in the labor lab market is very connected to what happens in with inflation, the the central bank knows that. And now you get this big surprise. That means they're not really being able to, they're not been successful at really slowing down. One of the main drivers of inflation. And so financial markets are very forward looking. They, whoa, this is coming. This is only means that not going, the