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Lecture 1: Introduction to 14.02 Principles of Macroeconomics
MIT OpenCourseWare
·
May 11, 2026
Open on YouTube
Transcript
0:16
Okay, let's uh
0:18
let's start. So,
0:21
hello everyone. Um welcome to 1402,
0:25
uh introduction to microeconomics.
0:28
Um
0:30
I won't teach today, so that's a good
0:31
news. Uh I will start on Wednesday.
0:34
So, what I want to today is essentially
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0:36
tell you what macro is about,
0:38
macroeconomics is about,
0:40
and uh also the rules of of the game.
0:44
So, what a difference a single letter
0:47
makes. Many of you must have taken 1401.
0:50
In fact, some of you may be taking it
0:52
concurrently. It's a lecture right
0:54
before mine.
0:55
And uh
0:57
you know, that's microeconomics, 1401,
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1:00
and this is macroeconomics, and it
1:01
doesn't take a lot of imagination to
1:04
realize that this course is about big
1:06
things, no? We don't look at small
1:08
things. That's what micro is about.
1:10
Micro looks at a household, at a firm,
1:13
at an industry. Uh
1:15
in macro, we don't do that. We look at
1:18
the whole economy. We think about the
1:20
US. We think about China.
1:22
Uh we don't think about an individual
1:24
price. We think about inflation, so the
1:26
rate of change of all prices. We don't
1:28
think about whether a particular worker
1:30
is employed or unemployed. We think of
1:32
whether the rate of unemployment is very
1:34
high or low, things of that kind. Okay?
1:37
When we look at two countries, we look
1:38
at the exchange rate, which is the
1:39
relative price of two currencies, not
1:41
two individual goods in two different
1:43
countries, but the whole currency, and
1:45
so on. So, that's what macro is about.
1:48
Now, you could think that macro is
1:50
nothing else than the sum of lots of
1:52
micros, no? After all, that's what an
1:54
economy is made of. A population, a
1:56
whole population is made of lots of
1:58
individuals that can be analyzed with
2:00
the tools of 1401 and and the sequence
2:02
that follows uh 1401.
2:05
But that doesn't work. And there are
2:07
parallels in physics about this, and so
2:09
on. The way you want to study sort of
2:10
big bodies is different from the way you
2:12
want to understand the movements of a
2:14
small elements. And and that's the case
2:17
in macro. In macro, there's a big
2:21
line of research that has to do with uh
2:23
the microfoundations of macroeconomics.
2:27
But even in that case, which is very
2:28
close to micro, uh
2:31
most of the action ends up happening in
2:33
the non-micro part, in the interactions,
2:35
in in the in the equilibrium aspects
2:38
of the system. So, so it's a much more
2:40
complicated object, and if you were to
2:42
build it from the micro, it would be an
2:43
incredibly complicated object. So, one
2:46
of the things we need to do in
2:48
macroeconomics is take some shortcuts.
2:50
And and and that's what makes macro a
2:53
lot of an art. It's not a science per
2:55
se. It's some sort of a science. It has
2:58
the tools of a science,
2:59
but it's a lot about shortcuts and
3:01
tricks, and so on, to capture the
3:03
essence of a problem that is very
3:04
complex if you were to model it in in
3:06
the all the gory details. Okay? And um
3:11
and in this course, we're going to
3:13
exaggerate on that sense. We're not
3:15
going to do anything complicated. I
3:17
promise you that. Some occasionally,
3:18
conceptually, things will be
3:19
complicated, but the math will not be
3:21
complicated. Okay?
3:24
Uh so, we're going to keep things very
3:25
very simple. I want to communicate the
3:27
essence of the big macroeconomic
3:30
relationships.
3:31
This is not a PhD course. If you were to
3:33
take a a PhD course in macro, it would
3:36
be a very mathy type course.
3:38
In fact, most of the people that do
3:39
apply in micro in our PhD program
3:42
complain against macro because they find
3:44
it too mathy, and so on. Okay? But
3:46
that's not going to be the case here.
3:47
That's not what this course is about.
3:50
My goal,
3:52
so if this is a successful course, is
3:55
not that you come out being a researcher
3:57
in macro out of this. Hopefully, you'll
3:58
have a career eventually and do all the
4:01
next steps that you need to do that. But
4:03
I want you to be able to do is to read
4:05
something like this. This is a World
4:07
Economic Outlook. It's a publication
4:09
that the IMF puts out every 6 months, in
4:12
which it tells you what the how it sees
4:14
the world and where where heading, and
4:16
so on. No equations there. Lots of
4:18
tables and stuff like that. I'd like you
4:20
to be able to read that kind of document
4:23
very clearly. I would like you to be
4:25
able to read something, say, the Wall
4:26
Street Journal, and read it even
4:28
critically. Sometimes disagreeing with
4:30
what's in there.
4:31
Financial Times, The Economist. That's
4:33
the goal of this course. It's not a lot
4:35
more than that. It's just that. If you
4:37
do a summer inter- in Wall Street, and
4:39
you work in a macro hedge fund or
4:41
whatever,
4:42
this is going to be a good course for
4:43
that. I mean, this is what traders
4:45
really know. They don't know a lot more
4:47
than that. Many traders should know
4:48
that. They don't. But this that's the
4:50
level of knowledge. I'm not
4:53
if it gets to be very complicated, I'm
4:54
failing. That's not what I want to do
4:57
here.
4:59
The typical lecture, again, this is not
5:01
a lecture. The next The first lecture
5:02
will be on Wednesday.
5:04
The typical lecture, and not in the
5:06
first part of the course, because you're
5:07
not going to have the tools, the
5:09
definitions, and so on, to do it.
5:11
What I want to do is
5:13
is
5:14
uh
5:15
spend 5 to 10 minutes early on. Again,
5:17
the first part of the course, we can't
5:19
do that because you don't have the still
5:20
the knowledge to do that.
5:22
But as as you start building tools,
5:25
I want to be able to sort of
5:27
talk about current events, something
5:29
that is happening out there that I find
5:30
I find interesting, or something I
5:32
received that morning may even uh the
5:36
the morning of the lecture, in which I
5:37
which I find interesting. And if I think
5:39
you already have the tools to begin to
5:40
understand it, I'm going to be
5:42
repetitive. I'm going to sort of come
5:43
back to three, four times to the same
5:45
topic. Hopefully, you'll be know you'll
5:48
be more advanced in your knowledge in
5:49
the later stages, so you'll be able to
5:51
understand it more and more.
5:52
Okay? So, the typical lecture will have
5:54
5 to 10 minutes, in which we'll talk
5:56
about some facts, something that is
5:58
going on.
5:59
For example, a picture like this. This
6:01
is I received it this morning. I think
6:03
this came from Goldman, I think. Goldman
6:05
Sachs, yes.
6:07
And what you have in that picture,
6:08
again, don't worry about details today,
6:11
is you have two lines. One of them is a
6:14
measure of uh
6:16
uh wages,
6:18
wage growth, compensation to workers,
6:21
and another one is a measure of
6:22
inflation. Again, all those definitions
6:25
will come in the next lecture.
6:27
Uh and inflation, so it's the rate at
6:29
which, you know, you must have heard
6:30
about inflation. It's something prices
6:32
are rising, no?
6:34
And what that picture shows you is that
6:35
these two series are very highly
6:37
correlated.
6:38
Okay? So, when wage growth is high,
6:41
inflation tends to be high. Okay? And
6:44
that's a big issue on these days.
6:45
There's a lot of concern about this
6:47
stuff.
6:50
So, let me let me try to explain a
6:51
little bit what is a concern on these
6:53
days. Again,
6:55
if you don't understand anything, it
6:57
doesn't matter.
6:58
If you don't understand anything I'm
6:59
saying right now, in the last lecture,
7:01
then it matters. But now it doesn't
7:03
matter, you know? I'm just trying to
7:05
give you a flavor of the kind of things
7:06
we'll be talking about.
7:08
That picture there,
7:10
again, a variable that we'll define in
7:11
the next lecture, not now, shows you the
7:13
unemployment rate. You don't need any
7:15
specific definition
7:17
to know that to feel, at least get a
7:19
sense that, well, if unemployment is
7:21
high, workers aren't very happy. It's
7:23
not a good thing to have lots of
7:24
unemployment.
7:26
And what that series shows you, the
7:27
shaded areas are recessions in the US.
7:30
What that series shows you is that
7:32
typically in recessions, unemployment
7:34
goes up. So, that's one of the features
7:36
one of the main features of a recession
7:37
is that unemployment is high.
7:40
This episode here
7:42
is is called the Great Recession, as a
7:45
parallel for the Great Depression. The
7:47
US had the Great Depression in the '30s.
7:49
This is the Great Recession, the biggest
7:51
sort of recession outside of the Great
7:53
Depression in the US. And it's also
7:55
known
7:57
as the Global Financial Crisis, because
7:59
this was a recession all around the
8:00
world. And what you can see is that
8:02
unemployment went very high.
8:04
That's a very feature a telltale sign of
8:07
a of of a big recession. And then it
8:09
took a long time. This was in in in sort
8:11
of recovery.
8:13
COVID was a massive shock to the labor
8:15
market. So, not surprisingly,
8:16
unemployment the unemployment rate did
8:18
spike there.
8:19
But then it also recovered a lot faster
8:21
than it recovered from that.
8:23
And today, we have unemployment rates
8:25
that are at historically low levels. And
8:28
that's a big issue.
8:30
The rate of unemployment in the US is at
8:33
historically low levels. Okay? Way below
8:36
what is normal
8:37
uh
8:38
forget recessions, obviously way below
8:40
what is in if it happens in recession.
8:42
But even way below what is normal, what
8:44
happens during normal times.
8:46
Okay?
8:49
Closely related to that is wage growth.
8:53
I have just one measure of wages there.
8:56
It's a wage It's a It's a series of
8:58
wages that is
8:59
that is particularly that that what I'm
9:01
about to say is particularly sharp,
9:03
which is the wages of in the
9:05
accommodation and food service sectors.
9:08
So, wages have been rising very steadily
9:09
and and very fast recently everywhere,
9:13
particularly in sectors like these, you
9:15
know, where we have some problems with
9:16
what we call labor supply. But we'll
9:18
I'll get back to that. Okay? So, those
9:20
are two facts. We have unemployment at
9:21
extremely low levels,
9:23
and we have wage growth at a very high
9:26
fast pace.
9:27
Now, that sounds wonderful, no? I mean,
9:29
what else do you want? An economy in
9:30
which few people are unemployed,
9:33
and and
9:34
and wages are growing a lot. I mean, if
9:37
this was micro, this would be fantastic.
9:39
Say, "Okay, look. The guy is employed,
9:41
and he's getting a high wage. This is
9:43
great."
9:45
Well, not so fast for macro.
9:48
Not so fast because I already showed you
9:51
in the first picture that I showed you
9:52
to motivate, there's a connection
9:54
between wage growth and inflation.
9:56
And that's what we're experiencing. The
9:58
normal level of inflation for an economy
10:00
like the US is around 2%. That's normal.
10:03
That's what central banks target in an
10:05
economy like the US, in the Euro area.
10:08
Japan has been dreaming with 2% but he
10:10
hasn't been able for decades to get it
10:12
but although
10:14
now they are but but they weren't for a
10:16
couple of decades to get to 2% but
10:18
that's about and we will discuss later
10:20
in the course why 2% is about right for
10:22
economies of the size of the US and so
10:24
on.
10:26
Obviously in in recessions these things
10:28
can go low and that's what
10:30
you know that in the COVID recessions
10:32
inflation went to zero essentially.
10:35
But then it began to pick up and it's
10:37
now at levels which are unheard of in
10:40
the US since the '80s.
10:42
Okay? So depending on the particular
10:44
measure you use of inflation is around 6
10:47
and 1/2% to 8%. That's the level of
10:49
inflation we have which is way way above
10:52
what is considered a normal reasonable
10:55
target for the central banks for the
10:57
inflation. Okay? So that's a problem. We
10:59
have had some good news recently in that
11:02
inflation clearly picked already.
11:04
Again definition of inflation formal
11:06
definition inflation happens in the next
11:08
lecture but
11:10
it already picked and it's declining but
11:12
it's still a very very high level and
11:14
that's a problem. That's a big
11:15
macroeconomic problem and one of the
11:17
things we want to understand in this
11:18
course is well what to do about it. How
11:21
do you do how do you deal with that?
11:22
What do central banks need to do
11:25
in order to deal with that? Now
11:27
I've been talking about the US but this
11:29
is not specific to the US.
11:32
Uh
11:33
this is episode this recovery from COVID
11:36
is is incredibly common across different
11:40
regions of the world. I mean you see it
11:41
everywhere with a few exceptions and I'm
11:43
going to talk about one major exception
11:45
in a minute.
11:46
But but it's it's it's it's widespread.
11:49
It's a widespread phenomenon that you
11:51
know we had high unemployment then we
11:52
had sort of very high uh
11:56
uh well I haven't told you that part yet
11:58
but then we had sort of low inflation
12:00
then inflation pick up enormously and
12:02
now we're all worried about this very
12:04
high levels of inflation. In fact
12:06
uh
12:08
if you look at sort of what happened
12:09
between the great recession and the
12:11
COVID recession it was pretty normal to
12:13
have 70 to 80% of the economies in the
12:16
world having inflation levels at or
12:18
below 2%. So that's a norm. You so if if
12:22
I throw you into a country say drop you
12:23
into a country the normal thing would be
12:25
well it's about 2% that's the level of
12:27
inflation. Obviously if I drop you in
12:29
Argentina you're going to find a much
12:30
bigger number no?
12:32
10,000% but but but but the the bulk of
12:35
the countries were around uh 2% or so.
12:39
Today you don't find any country with
12:41
inflation below 2%.
12:44
Okay? Not even Japan that for years were
12:46
in deflation and trying to get sort of
12:49
uh above zero. That's what they all they
12:51
wanted.
12:52
Not even in Japan you have inflation
12:54
below 2% So this thing I show you and
12:57
for more or less the same reasons uh is
13:00
happening everywhere.
13:02
Not exactly the same factors is the same
13:05
episode in for example in
13:08
and then with differences
13:09
depending on the structure of the
13:11
economy or in additional shocks. In
13:13
Europe for example they have very high
13:15
inflation.
13:16
Uh
13:17
but the problem is not
13:19
the origin of the problem the
13:20
the bulk of the of the problem is the
13:23
same as in the US.
13:24
But the but at the margin they're
13:26
different. In in Europe the big driver
13:28
of inflation the big recent driver of
13:31
inflation
13:32
is unlike the US which is I is aggregate
13:35
demand I will discuss later is
13:37
essentially the war in Ukraine. That has
13:39
increased the price of energy and the
13:40
price of energy has led to lots of
13:42
inflation. So there are different
13:43
reasons but all of them are sort of
13:46
different reasons that you add on top of
13:48
what is a common story which is that we
13:51
overheated coming out of the COVID COVID
13:54
episode and and and now
13:57
we're struggling struggling with that.
14:00
Now the main tool and we're going to
14:01
talk a lot about this in this course.
14:03
The main tool that central banks have to
14:05
deal with inflation is the interest
14:07
rate.
14:08
Okay? So for reasons you'll understand
14:10
later uh although you may have an
14:12
intuition about some of those now
14:15
obviously when the central bank lowers
14:17
the interest rates then that helps the
14:19
economy to expand.
14:21
Uh and when it increases interest rate
14:23
then it does the opposite. Raising
14:25
interest rate makes mortgages more
14:26
expensive makes everything more
14:28
expensive so people tend to consume less
14:30
firms tend to invest less and so on
14:32
because it's more expensive to invest to
14:34
borrow to to do something. Okay? And and
14:38
there
14:39
there you see it. I mean this was the
14:41
level of the interest rate in the US
14:43
before COVID. When COVID came boom they
14:46
brought it all the way down. It happens
14:48
that you cannot bring interest rate a
14:49
lot lower than zero. That's the reason
14:52
it stayed close to zero there. We're
14:53
going to talk about that later on.
14:55
But then eventually they realized that
14:57
were behind the curve. Inflation had
14:58
picked up a lot and the central banks
15:00
were
15:01
behind it behind the curve. So they
15:02
began to hike rates
15:04
in a hurry. Okay? And that's what we
15:06
have been experiencing for for the last
15:08
uh
15:09
year or so.
15:10
Okay? Very fast increase in the interest
15:13
rate.
15:14
Now this is a course about
15:15
macroeconomics but I happen to do a lot
15:17
of research between macro and finance so
15:19
I'm going to put a little bit more of a
15:21
component of finance into in the in the
15:24
I think I'm going to do most of that
15:26
in the last third of the course.
15:28
But monetary policy has lots of
15:30
implications for for for for finance for
15:34
equity values for the stock market and
15:36
stuff like that.
15:38
So what you see here
15:40
is the
15:41
the this line here is the is the S S S
15:44
S&P X 500. It's the index the main
15:48
index of equity in the US of shares.
15:51
Okay? And there are several indices
15:52
Nasdaq S&P Dow and so on. This is the
15:56
main index the most comprehensive the
15:58
one that takes the largest
16:00
the largest companies
16:01
and so on and so forth.
16:03
And when you can see what happens here
16:05
is that when COVID happened the
16:07
the surprise that we had really a
16:09
pandemia
16:11
then the stock market crashed. It
16:13
declined like 30% or something like that
16:15
at the time.
16:16
That's interesting of assets. I mean
16:17
that's one of
16:19
one characteristic of of
16:21
equity that I like a lot. Other risky
16:23
assets as well but but but but they like
16:26
a lot they they anticipate what happens.
16:28
What happened there is
16:30
the stock market the shareholders
16:31
realized that something big was negative
16:34
and big was happening in front of us so
16:36
it was time to sell you know and so the
16:38
equity market collapsed.
16:40
What happens next is even more
16:41
interesting for a macroeconomist
16:43
which is this
16:45
this big boom here.
16:47
It's an enormous boom. The the economy
16:48
here is still was at levels of activity
16:51
below what it had before COVID but the
16:53
stock market the value of the stock
16:54
market had way exceeded
16:56
the level we had before
16:59
the pandemia.
17:00
Okay?
17:01
And the main driver of that I've shown
17:03
that in some papers. The main driver of
17:05
that is not I mean people tell lots of
17:07
stories you know you know Amazon and so
17:10
on and so on but Tesla blah blah. If you
17:12
look at the aggregate the main reason
17:14
for that rise was monetary policy. Was
17:17
you can explain
17:18
all that increase in the equity value in
17:20
the US
17:21
of the index not individual shares of
17:23
the index by the effect of interest
17:25
rates. Okay? So monetary policy plays a
17:28
big role. If you care about finance well
17:30
it plays a huge role in the value of
17:32
assets. When monetary policy is very
17:34
loose that tends to increase the the
17:36
value of assets and that's
17:38
one of the mechanism the central banks
17:40
use to expand aggregate demand when they
17:42
want to expand aggregate demand. They
17:43
want people to feel if you are in a
17:45
recession you want people to feel richer
17:47
so they spend more and so on and so
17:48
forth.
17:50
What happened here?
17:51
This decline you can also explain it
17:53
fully with the hiking interest. Remember
17:55
I showed you that the interest rate
17:57
began to rise very rapidly here.
17:59
Well last year the equity market in the
18:02
US and most major equity markets around
18:04
the world declined by 20% or more.
18:07
You can explain all that decline simply
18:09
by the increase in the interest rate. So
18:11
that's another thing we need to
18:11
understand is why is it the interest why
18:14
is it the interest rate matters so much
18:16
for something like equity? So we want to
18:18
value assets and we want to see what is
18:19
the effect of the interest rate and then
18:22
we're going to think about well why
18:23
would the central bank worry or not
18:25
worry about these things and so on and
18:27
so forth. But the truth is that
18:28
financial markets
18:30
and the central banks
18:32
interact all the time. I mean
18:34
it's the
18:35
If you are in again in into Wall Street
18:37
type thing you're going to be watching
18:40
every day every time that the monetary
18:42
minutes the minutes of the central banks
18:44
are released you're going to be watching
18:45
because it has a big implication
18:48
uh for the value of your equity.
18:51
Actually something very interesting of
18:52
this nature happened last week. On
18:54
Friday
18:56
uh
18:57
last Friday
18:58
um the there was a release of payroll
19:01
numbers. So it's an employment index.
19:04
Okay? Employment numbers.
19:06
And
19:08
people expected uh
19:10
and and the the payroll to increase to
19:13
so to add non-farm payroll we'll talk
19:16
about these things later by about
19:17
190,000
19:19
workers.
19:21
At 8:30 well and this
19:23
you're seeing here is the behavior of
19:25
the same index I showed you before but
19:27
the futures. So these things you can
19:29
trade before the market actually opens.
19:31
The market in the US opens at 9:30 a.m.
19:33
but you can trade futures since Asia
19:36
times. Okay?
19:38
Anyway so this is the path. It's all
19:39
very quiet tranquil. Everyone is waiting
19:41
the release of this news at 8:30 a.m.
19:44
At 8:30 a.m.
19:46
great news for the labor market.
19:49
Not only
19:50
not
19:51
the the the actual change in the payroll
19:54
was not 190k. It was over a 500,000k.
19:58
So, enormous addition of jobs
20:01
to the economy.
20:02
And look what happens to the equity
20:03
market. Boom.
20:05
It imploded immediately.
20:07
So, this is wonderful news now for the
20:08
economy. Lots of jobs. The equity market
20:11
imploded as a result of that.
20:14
Why do you think that happened?
20:18
I've already given you a little bit of
20:19
the ingredients for why
20:21
for an answer
20:22
in in in in the previous slides.
20:26
The reason I'm showing you this is
20:27
because it's a in in one in 15 minutes,
20:31
it summarizes all that I was talking
20:32
about in the previous 30 minutes.
20:36
Why do you think that happened?
20:38
This is wonderful news.
20:40
Why why the stock market should
20:42
crash like 2% from top to bottom as a
20:45
result of that.
20:47
Um
20:48
because there's a lot more
20:50
labor because
20:51
um that
20:52
gives a lot more um supply of
20:56
um that thing and thus it increases the
20:59
price because high supply.
21:02
No, but uh okay, that's an interesting
21:06
Okay, that that's an interesting
21:08
explanation. It's not the one I have in
21:10
mind.
21:11
It's a this this explanation says,
21:13
"Look, that means firms hire lots of
21:15
people, so the price
21:17
that means there's going to be lots of
21:19
supply of whatever goods they're
21:20
producing. The price of those goods is
21:22
going to decline and that's going to be
21:23
bad for profits." That's the story you
21:24
had in mind?
21:25
Yeah.
21:28
Maybe there's some of that, but I I'm
21:30
willing to bet that it's not the main
21:31
thing.
21:34
Is
21:35
So, the only clue I'll give you is that
21:37
I already talked about these things 5
21:39
minutes ago.
21:44
Um employment is very closely um related
21:48
to inflation rates. Yes. to uh 0.81, so
21:51
this could be result of expectations of
21:53
higher uh continued high inflation.
21:54
Okay, you're very close. One step more.
21:57
Yes.
21:59
That that means that that means that so
22:02
expect higher interest rates. Okay, that
22:04
there you are. So, what happens? Uh the
22:07
bank the
22:08
the shareholders wouldn't have done
22:10
anything if they thought that the Fed
22:12
would not be able to see this data.
22:15
But they know that the Fed also sees
22:16
this data. They say, "Whoa, these guys
22:18
are going to be worried because the
22:19
economy's going to keep overheating.
22:21
They're going to have to hike interest
22:22
rates even more in order to cool down
22:24
this economy." Okay? I already showed
22:27
you that what happens in the labor
22:28
market is very connected to what happens
22:30
in with inflation. The the central bank
22:32
knows that. And now they get this big
22:34
surprise that means they're not really
22:36
been able to they're not been successful
22:38
at really slowing down one of the main
22:40
drivers of inflation.
22:42
And so
22:43
financial markets are very
22:44
forward-looking. They say, "Whoa, this
22:46
is coming. This is only means that
22:47
they're going to
22:48
financial markets were betting that that
22:51
the Fed was going to begin to cut
22:53
interest rate
22:54
uh in six four months more or so."
22:57
And if you look at what the forwards
22:59
deal there is, so what the market you
23:01
can you can extract what the market
23:02
thinks. Right after this, it only got
23:05
immediately pushed out to the end of of
23:07
the year. Okay, so so it's precisely
23:09
this anticipation that the central bank
23:11
will have to do something. And and so I
23:13
thought it was
23:14
very interesting from that point of
23:16
view.
23:19
Recessions, well
23:20
Look, and these are all very good news,
23:23
but
23:24
everyone knows that the Fed needs to
23:26
cool off the economy.
23:28
So, despite the fact that we're getting
23:30
good news now,
23:32
uh people expect the majority of people
23:35
expect a recession in the US for this
23:37
year.
23:38
I'm not going to explain this bar
23:39
graphic here, but these are forecasters.
23:41
These are professional forecasters and
23:44
more than half of them uh
23:47
so the median of them thinks that there
23:49
is a 65% probability that there is a
23:51
recession in the US this year.
23:55
I'm a little Well, we're going to talk a
23:56
lot about this. And probably you're
23:58
going to be getting news about this
24:00
while we're taking the course. So, this
24:01
is going to be a sort of picture that
24:03
we're going to discuss
24:04
extensively. Uh
24:06
and the reason for the recession is
24:08
nothing else than the reason you ask at
24:11
this forecast, "Why do you think we may
24:13
have a recession?" Well, because the Fed
24:16
is trying to fight inflation. It's going
24:18
to keep hiking interest rate and at some
24:19
point it may break something.
24:22
Okay?
24:23
And and and that's that's the reason.
24:25
But we're going to all these things you
24:26
are going to be able to understand very
24:28
clearly hopefully through models.
24:31
The last thing I want to say before
24:33
uh
24:34
telling you a little bit the rules of
24:35
the game
24:37
is that I said before that the story I
24:39
told you about the US is more or less
24:41
what has happened all around, you know?
24:43
I was in Chile uh
24:46
a month ago. I'm Chilean and they have
24:48
the same story. They started hiking
24:50
interest rate a little earlier because
24:51
they had more inflation than the US, but
24:53
they're going through the same cycle. Um
24:58
There's one big economy, the second
24:59
largest economy in the world that has
25:01
not been part of this,
25:03
which is China.
25:05
China was very aggressive in the COVID
25:07
uh policy, you know? So, zero COVID
25:10
policy. So, they really slowed down
25:12
their economy. That's a consequence.
25:13
They didn't want to do that, but as a
25:14
result of a very strict COVID policy,
25:17
they essentially shut down big parts of
25:19
the economy for a long time. That, by
25:21
the way, had big impact in the rest of
25:24
the world through the
25:25
network of production, the chains of
25:27
production and stuff like that. That was
25:29
inflationary in itself. That part is
25:31
dissipating.
25:32
But but for the the their own economy,
25:35
for the domestic economy, that really
25:36
slowed down China. An economy that, you
25:39
know, grew typically at 5 and 1/2 to 6%.
25:42
A lot higher 15 years ago. I'm going to
25:45
try to understand why later on.
25:47
But last year, I don't know, it was 3%
25:49
or or or less.
25:51
Numbers in China are
25:53
difficult to
25:55
to figure out. They're not equally
25:58
transparent to other numbers.
26:00
But but in any event, but it's very
26:01
clear that China slowed down a lot.
26:04
And that policy recently changed.
26:06
Okay, the zero COVID policy has changed.
26:10
And so there's great expectation that
26:11
now there's going to be a big boom in
26:13
China because they're lagging behind. I
26:15
mean, in in in the US when COVID began
26:18
to dissipate, we got a huge boost to
26:20
growth. And that's part of the reason we
26:21
got all this inflation is because we had
26:23
lots of growth
26:25
coming out of the recession that
26:26
happened in COVID. And the more or less
26:28
the same is expected in China. And one
26:31
of the big reasons behind those big
26:33
bounce backs is well, people are
26:34
desperate. They want to spend on
26:36
something. They want to go to
26:37
restaurants and cinemas and stuff like
26:38
that.
26:39
And the other one is they have the means
26:41
to do it because they couldn't spend on
26:43
anything for a while, you know? And so
26:44
they can travel and
26:46
and stuff like that. So, so people
26:48
expect and this is a
26:50
very large economy that suddenly sort of
26:53
wakes up.
26:55
You know, that's a big thing for China,
26:57
but it's also a big thing for the world.
27:00
You know, what what happens in China
27:01
doesn't stay in China. It's a big giant,
27:04
so it moves. And for some countries it's
27:06
very very important. In this picture
27:08
here it shows what is the impact on
27:10
different regions of the world on the
27:12
growth rate in different regions of the
27:13
world of an increase in by 1% in the
27:17
rate of growth of China.
27:19
One of the the most
27:21
uh
27:22
obviously all the neighbors are benefit
27:24
a lot. But Latin America benefits even
27:26
more. Why is that? Well, because Latin
27:29
America produces lots of commodities and
27:32
China consumes lots of commodity when
27:34
it's building and and stuff like that.
27:36
And so that's the reason big impact on
27:37
Latin America. So, this is
27:39
a piece of good news for the world in
27:41
the sense that activity will go up.
27:44
But
27:46
it's good news on average,
27:49
but it may be too much of a good thing
27:50
as well. Why? Because many economies are
27:53
going through what we described before.
27:55
They're trying to bring down inflation.
27:56
They don't want more demand. They want
27:58
less for now because we're going to
28:00
understand the connection later on how
28:02
demand connects to inflation, but but
28:05
you want less. And now you're going to
28:06
get this the this impulse from China,
28:09
which is going to fuel more inflation.
28:11
It's okay for China because they don't
28:12
have an inflation problem. But it may be
28:14
a problem for many of the countries that
28:16
are trying to uh undo uh the
28:19
inflationary
28:21
consequences of the previous expansion,
28:23
the expansion that followed COVID.
28:26
Okay, anyways, but this is the kind of
28:27
things we're going to be talking about.
28:29
The I said the course is not going to be
28:31
mathy, but it's going to be all about
28:33
models. The next lecture is the most
28:35
boring lecture of the course. I
28:37
tell you in advance because it's
28:38
definitions. I need to go through
28:39
definitions. At least I get bored.
28:41
But but the rest those always which are
28:44
little models, but simple models, okay?
28:46
But the models
28:48
are going to try to explain the kind of
28:49
things I I I discussed today. So, that's
28:51
what this course is about. It's It's
28:53
It's
28:54
is ideally, if we're successful, you're
28:57
going to be able to read something like
28:58
the World Economic Outlook, which will
29:00
have lots of pictures like these,
29:03
and you're going to be able to write a
29:04
little equation, very simple, on the
29:06
side to try to understand what is going
29:07
on there. And to catch the mistakes as
29:09
well.
29:10
Okay? I we all have less mistakes than
29:12
the Wall Street Journal, but but you
29:13
will catch mistakes. You'll see. You'll
29:16
be proud of it.
— end of transcript —
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