Intermediate Macroeconomics

Transcription

1 Intermediate Macroeconomics ZHANG, Guoxiong

2 Class Schedule: Friday 12:55am - 15:40am 东下院 103, Minhang campus Office Hours: Friday 12:00am - 12:55am 东下院 103, Minhang campus Contacts: guoxiong@sjtu.edu.cn Class Website:

3 Lecture 1 I. The science of Macroeconomics what macroeconomists study? how economists think? II. The data of macroeconomics. Measuring the value of economic activity Measuring the cost of living Measuring jobless From economic statistics to economic models

4 What Macroeconomists Study Macroeconomics as a study of the economy as a whole attempts to answer questions such as - why countries differ a lot in income growth (China 7.8% vs Japan 1. 3%) - why countries differ a lot in inflation (Venezuela 56% vs US 1.6%) - why all countries experienced recession and depression (great depression and great recession) Macroeconomic issues affect everyone and therefore play central role in national political debate(tax debate between Obama and Romney) Macroeconomic issues are also central to world politics (Euro zone debt crisis, Renminbi re-evaluation, QE II & III) Macroeconomists collect data across time and across countries, and attempt to formulate general theories to explain them Macroeconomists make policy recommendations based on the current economic state (not the right the person to predict the future)

5 Figure 1 US Real GDP Long-term upward trend. Income more than doubled over last 30 years 2. Short-run disruptions in the trend: recessions.

6 Figure 2 US Unemployment Super high unemployment rate during the great depression ( Spain already reached this record in 2012) 2. Unemployment generally counter-move with economic growth (except for the three wars)

7 Figure 3 US Inflation Inflation has become much less volatile and has been reduced steadily after 1980 (after Paul Volcker) 2. Inflation usually co-move with economic growth (except for the stagflation in the 1970s)

8 How Economists Think Economists often study politically charged issues but they always try to be scientific objective (normative vs positive) Economists use mathematical(or statistical)models to understand the world - economic models illustrate the relationship between variables - the purpose of an economic model is to show how exogenous variables affect endogenous variables - economic models help us to dispense with irrelevant details and to focus on the underlying connections essentially, all models are wrong, but some are useful - George E. P. Box

9 Car Supply and Demand: a Toy Model explains the factors that determine the price of cars and the quantity sold. assumes the market is competitive: each buyer and seller is too small to affect the market price Variables: Q d = quantity of cars that buyers demand Q s = quantity that producers supply P = price of new cars Y = aggregate income P s = price of steel (an input)

10 A general functional notation shows only that the variables are related: Demand Function d Q = D( P, Y ) A specific functional form shows the precise quantitative relationship Examples: d 1) Q = D( P, Y ) = 60 10P + 2Y 2) = (, ) = 0.3 d Y Q D P Y P

11 Demand and Supply Function A general functional notation for the demand of cars d Q = D( P, Y ) A specific functional form shows the precise quantitative relationship Examples: 1) d Q = D( P, Y ) = 60 10P + 2Y 2) = (, ) = 0.3 d Y Q D P Y P A general function notation for the demand of cars supply equation: s Q = S ( P, P s )

12 Market Equilibrium P Price of cars S equilibrium price equilibrium quantity D Q Quantity of cars

13 The Effects of an Increase in Income P Price of cars S An increase in income increases the quantity of cars consumers demand at each price (demand shock) which increases the equilibrium price and quantity. P 2 P 1 Q 1 Q 2 D 1 D 2 Q Quantity of cars

14 The Effects of an Decrease in Steel Price An increase in P s reduces the quantity of cars producers supply at each price (supply shock) P S 2 Price of cars S 1 P 2 P 1 D which increases the equilibrium price and reduces the equilibrium quantity. Q 2 Q 1 Q Quantity of cars

15 Demand and Supply Function We will learn different models for studying different issues (e.g. unemployment, inflation, long-run growth). For each new model, you should keep track of its assumptions which of its variables are endogenous and which are exogenous the questions it can help us understand and those it cannot For macroeconomics, it is important to differentiate long run and short run ( flexible price vs sticky price, neoclassical vs new Keynesian, fresh-water-school vs salt water school)

16 The Data of Macroeconomics In this chapter, you will learn about how we define and measure: Gross Domestic Product (GDP) - measures the value of economic activities Consumer Price Index (CPI) - measures the cost of living Unemployment Rate - measures jobless

17 Gross Domestic Products (GDP) Two definitions: 1. Total expenditure on domestically-produced final goods and services 2. Total income earned by domestically-located factors of production total expenditure total income as in every economic transaction the expenditure of the buyer equal the income of the seller Income ($) Labor Househol ds Fi r ms Goods (br ead) Expenditure ($)

18 Measuring GDP Gross Domestic Product: The market value of all final goods and services produced within a country in a given period of time. market value: items without open market excluded (domestic work, illegal goods, etc.) final goods: intermediate goods excluded (e.g. hard drive) within a country: different from gross national product (GNP) given period of time: existing goods excluded (e.g. used cars, inventory)

19 Components of GDP GDP (Y ) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX This is called the national income accounts identity

20 Consumption Consumption: The value of all goods and services bought by household. durable goods e.g. cars, TV non-durable goods e.g. food, clothing services e.g. haircut, doctor visits US 2007 billion $ % of GDP Consumption Durables Non-durables Services

21 Investment Investment: Spending on goods and services for future use. business fixed investment spending on plant and equipment that firms will use to produce other goods and services residential fixed investment spending on new housing by households and landlords inventory investment the change in the value of all firms inventories US 2007 billion $ % of GDP Investment Business fixed Residential fixed Inventory investment -4 0

22 Government Spending Government Spending: goods and services bought by the government (transfer payments excluded) Federal Spending defense, social security, medicare & mediaid, interest payment for national debt State and Local Spending roads, schools, police service US 2007 billion $ % of GDP Government Spending Federal Spending Defense Non-defense State and Local Spending

23 Net Exports Net Exports =Exports - Imports (NX = EX - IM)

24 GDP vs GNP Gross National Product (GNP): total income earned by the nation s factors of production, regardless of where they are located Gross Domestic Product (GDP): total income earned by domestically-located factors of production, regardless of nationality GNP GDP = (factor payments from abroad) (factor payments to abroad) - labor payments from abroad (Philippine) - capital payments from abroad(japan)

25 Cross Country Comparison of GNP/GDP GNP/GDP China USA Singapore Kuwait Chile How can we explain why these countries have difference patterns on GNP/GDP?

26 Real vs Nominal GDP Real GDP: measured using a constant price (usually the price in the selected base year) Nominal GDP: measured using current year price GDP deflator = Nominal GDP/Real GDP - used to measure change of the overall price for domestically and newly produced goods and services

27 Exercise Republic of Antai produces three major goods, Bachelors, MBAs, and Ph.D.s, every year. The production and prices of these three goods in 2007, 2008, and 2009 are as follows: Bachelors MBAs Ph.D.s Quantity Price Quantity Price Quantity Price , , , , , , , , , Find Nominal GDP and Real GDP (base year 2007) for each year. 2. Calculate the annual growth in Nominal and Real GDP. 3. Find the GDP deflators of Antai Republic over years.

28 Working with Percentage Change USEFUL TRICK #1 For any variables X and Y, the percentage change in (X Y ) = the percentage change in X + the percentage change in Y USEFUL TRICK #2 For any variables X and Y, the percentage change in (X /Y ) = the percentage change in X - the percentage change in Y How to prove? Hint: dln x dx x = (percentage change) and ln(xy) = lnx+ lny ln(x/ Y) = lnx lny

29 Consumer Price Index (CPI) CPI : The price of a basket of goods relative to the price of the same basket in some base year. How is CPI determined: 1. Survey consumers to determine composition of the typical consumer s basket of goods. (survey once in a couple of years, most recent survey for the US is 2009 and 2010) 2. Every month, collect data on prices of all items in the basket; compute cost of basket 3. CPI in any month equals Cost of basket in that month 100 Cost of basket in base period

30 Both CPI and GDP deflator are measures of overall price level. But they are NOT identical CPI vs. GDP deflator CPI GDP Deflator Usually published monthly Goods and services purchased by consumers. Both domestic and imported goods and services. Both newly produced and previously produced goods and services. The basket of goods and services is (relatively) fixed Usually published quarterly or annually Goods and services purchased by consumers, firms, and government Only domestically produced goods and services. Only newly produced goods and services. The basket of goods and services changes every year.

31 CPI vs GDP Deflator for the US Percentage change CPI GDP deflator Year

32 Categories of the Population Entire Population Adult Population Labor Force Employed : work as a paid employee, work in their own business, work in a family member s business(unpaid), temporary absent from a job(vacation, illness) Unemployed: not employed but available for work, have tried to find a job in the last four weeks (including laid off workers that waiting for a recall) Unemployed Labor Force = Employed + Unemployed

33 Categories of the Population, Cont d Number unemployed Unemployment rate = 100% Labor force US Population Composition in 2008 Labor force Labor force participation rate = 100% Adult population Discouraged worker: wants a job but has given up looking for, NOT included in the labor force.

34 Exercise Suppose the population increases by 1% the labor force increases by 3% the number of unemployed persons increases by 2% Compute the percentage changes in the labor force participation rate and the unemployment rate: Hints: use the two tricks that can be used to work with percentage change.

35 Exercise Percentage change in real GDP Okun s Law : a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP Percentage change in unemployment rate