absolute income hypothesis with graph

Introduction to Macroeconomics: Pluralist and Interactive

Franz Prante, Alessandro Bramucci, Eckhard Hein, Achim Truger

Why read this book?

This online book has two main objectives. First, it is intended to enable readers with little or no previous knowledge of economics to understand one of the most influential macroeconomic models of the last thirty years in its simplified textbook version. Readers will also learn how to use an interactive version of the model ( click here for a preview ). Second, the book shows how some of the fundamental assumptions of this model have been challenged by other schools of economic thought and it shows how the modification of these assumption leads to different suggestions for economic policy.

We explicitly introduce two competing paradigms, the new Keynesian “new consensus” and the post-Keynesian paradigm. Alongside the explanation in the text, interactive applications are offered allowing simulation of the models presented in the chapter. In the last two chapters, a series of interactive scenarios are provided. In the scenarios, users can take control of various model’s parameters and economic policy instruments and are guided through a series of interactive problems that require appropriate reaction in the context of the two competing paradigms.

The project

This online book is the result of the project “Model-theoretic Foundations of Controversies in Economic Policy” conducted at the Institute for International Political Economy Berlin of the Berlin School of Economics and Law . Aim of the project was to develop a digital instrument to teach bachelor level macroeconomics with a multi-paradigmatic perspective and that was able to give the opportunity to interactively explore some controversies at the foundations of the discipline.

Brief overview

Part I of the book deals with the measurement of aggregate economic activity and offers a brief introduction to national accounts, the empirical basis of macroeconomics.

Part II introduces the demand side of our model economy. First, we introduce the components of aggregate demand, namely consumption, investment and government demand. Then, we derive the income-expenditure model to illustrate the concepts of goods market equilibrium and the multiplier.

Part III deals with the supply side of the model economy. Here, the relationship between labour supply, productivity and employment for a given level of aggregate demand is discussed. The change in the price level is presented as a result of a distributional conflict between wages and profits.

In Part IV, the supply and the demand side of our model economy are combined together to form a full macroeconomic model. We introduce first the new Keynesian “new consensus” textbook model. We then show that, with few modification in the model’s assumptions, a different model in line with the post-Keynesian tradition can be derived. Implications in terms of economic policy are discussed.

Acknowledgements

We would like to thank the Ministry for Culture and Science of the State of North Rhine-Westphalia for financing the project. We would also like to thank Till van Treeck from the Institute for Socio-Economics of the University of Duisburg-Essen for many inspiring and motivating suggestions. Furthermore, we are grateful to Johannes Buchner for his help in initialising the project. Additional thanks go to the Research Institute for Social Development and especially to Janina Urban. This project would not have been possible without a number of open source software packages from the R-Universe . We therefore also thank the developers of the R community. We are also grateful to Anne Marie Martin and Michael Maguire for the proofreading of the English translation of the book.