MODERN PRINCIPLES OF ECONOMICS Third Edition ECON 322 INTERMEDIATE MACROECONOMIC THEORY

Transcription

1 MODERN PRINCIPLES OF ECONOMICS Third Edition ECON 322 INTERMEDIATE MACROECONOMIC THEORY 1

2 MODERN PRINCIPLES OF ECONOMICS Third Edition Why learn about macroeconomics? 5 ECONOMIC QUESTIONS THAT WILL SHAPE THE NEXT FEW DECADES 2

3 1. How will the Fed unwind its balance sheet?

4 2. How will government debt affect the economy?

5 3. What s happened to economic growth? 6.0 US Real GDP Growth - 10 year Moving Average

6 3. What s happened to economic growth?

7 4. Where are the workers going - and will they come back?

8 5. What are the causes and consequences of rising inequality?

9 MODERN PRINCIPLES OF ECONOMICS Third Edition Why learn about macroeconomics? ECONOMISTS MATTER 9

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12 MODERN PRINCIPLES OF ECONOMICS Third Edition Chapter 1: Introduction 12

13 What is macroeconomics? Macro = large Study economy as a whole Microeconomics = study individual decisions Macroeconomics = study all these decisions in aggregate 13

14 Macro topics Can divide topics into two groups: 1. Long-run issues: Economic growth Structural changes to economy like secular changes in labor-force participation, productivity 2. Short-run issues: Economic fluctuations - i.e., business cycles Note: LR and SR are vague terms. Think of long-run in terms of several years or decades for growth, short-run in terms of months to a few years 14

15 How economists think Economists think about the world through models. This class is Intermediate Macroeconomic Theory So we are going to focus on models as a way to view the world. Models give us a framework through which to think about how the world works. 15

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17 Two ways to predict an eclipse 1. The Big Data approach Observe the time and locations of solar eclipses Use these patterns to predict when and where the next eclipse will be With enough data, this is bound to work But how much data? Next eclipse in the US is 2024, then 2045 need many, many years to discern the pattern. 17

18 Two ways to predict an eclipse 2. The theoretical approach Know moon and sun involved Know location of moon over lunar month Know location of sun at different times of year A little theory can go a long way in predicting when the paths of these two bodies will cross paths! 18

19 Economic Theory 19

20 Economic models Economic models tell a story They use math to be precise about this story The equations describing a model relate economic variables to one another: Exogenous variables: The values of these variables are determined outside the model. Endogenous variables: The values of these variables are determined within the model 20

21 MODERN PRINCIPLES OF ECONOMICS Third Edition Chapter 2: Data 21

22 Key points Know how GDP, unemployment, and inflation are calculated Understand the circular flow model Know the difference between stocks and flows Know the difference between nominal and real variables 22

23 The National Accounts GDP is a flow variable It is measured as an amount over a period of time How many final goods and services are produced within a country over a year GDP can be defined 2 ways: 1. Expenditure approach Add up dollar value of all expenditures in a country in a year Recall: Y = C + I + G + NX 2. Income approach Add up dollar value of all income in a country in a year Y = wages + rent + interest + profit 23

24 The Circular Flow Model These two methods (in theory) yield the same value Can see this through the circular flow model You can look up GDP and GDI (gross domestic income) and you ll see some difference due to statistical methods 24

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28 Investment Most volatile of GDP components Represents a flow of capital The stock of capital evolves as:! "#$ =! " '! " +) " or! "#$ =(1 δ)! " +) " 28

29 Real and Nominal GDP Nominal GDP measures the market value of goods and services using current prices Real GDP measures the market value of goods and services using constant prices 29

30 Inflation Inflation is the growth rate (i.e., the percentage change) in the level of prices Level of prices means we are looking at overall prices some go up, some go down, but what happens overall? Many measures of the price level: GDP Deflator Consumer price index (CPI) Personal consumption expenditure index (PCE) Producer price index (PPI), others... (e.g. Billion Prices project) 30

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32 2 Types of Price Indices Fixed basket Basket of goods used to compute overall prices stays the same over time A Laspeyres index E.g., the CPI Variable basket Basket of goods changes over time A Paasche Index E.g., the GDP deflator 32

33 Inflation measures matter 33

34 Labor Market Measures There are 2 important labor statistics: 1. Unemployment rate = # "#$%&'()$* # +#,-$ './(0 1(02$ # +# './(0 1(02$ 2. Labor force participation rate = #.*"',3 We also look at the jobs numbers This is the change in the number of people on businesses payrolls 34

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