ECO2004S - Macroeconomics

Course Introduction

Welcome to Macroeconomics II.

Macroeconomics is a highly contentious field, where views are often grounded more in ideology than empirics. Dealing with the big issues of growth, unemployment, inflation, interest rates and inequality, its impact is universal. In South Africa, with its Apartheid created dual economies, the debates around macroeconomic policy are no less fierce.

The aim of this course is to help you navigate these debates by providing a fundamental and comprehensive understanding of macroeconomics. Building on the strong base of ECO111s, the course aims to equip you with the necessary conceptual and empirical knowledge so as to aid your future careers and possible further study in the field.

As will become clear during the course, a major complication in macroeconomics, perhaps the key complication, is that there are three indistinct time frames, each with their own respective dominate forces, always present in a macroeconomy. In the short run, say over a few years, the demand side of the economy is dominant in determining the output level. To understand this we will be analysing the short run behaviour of the economy by means of the IS-LM model. This model builds on the Keynesian Cross you were taught in first year, and is a useful starting point in any macro analysis. In contrast, over the medium run, say a decade, it is the supply side of the economy that is dominant. For this, we will be using the famous AS-AD model to analyse this medium run behaviour of the economy. Finally, over the long run, a few decades, it is neither demand nor supply that sets the output level. It is the use of technology, education and capital stock, (all critically dependent on a countrys saving level), that determines the level of output. Japan today has a higher output level than South Africa not because it has more people or resources, but because its higher levels of capital stock, technology and education allow it to produce far more value per person than South Africa. We will be using the standard Solow growth model to help us to understand this vital link between savings and long run growth.

I hope you enjoy the course.

Nick Samouilhan
Convenor