The basic questions /1

Transcription

1 The basic questions /1 1. How big is an economy? 2. How developed is an economy? 3. How costly it is to live in an economy? 4. s the economy doing well or badly? 5. How is the economy s output used? 6. How much money has an economy? 7. Why do financial assets exist? 8. Why are interest rates so important? 9. How does an economy create money? Topic 1 Topic 2 0

2 1. How big is an economy? Macroeconomics is the field in economics that studies the overall economic activity in a country or region by means of indicators of that activity. The overall economic activity in a country will be called, for short, an economy. One basic question with which macroeconomics is concerned refers to the size of an economy. A simple measure of the size of an economy: to evaluate the aggregate production in the economy. 1

3 Gross domestic product (GDP) GDP is the value of all the final goods ( goods will always mean goods and services ) produced in an economy (or territory) within a given period. Final good = not used to produce other goods Value = market value Theratey at which GDP varies is the growth rate of the economy, where GDP 1 is the GDP from the previous period y = GDP GDP 1 (to get a percentage, add 100 ). GDP 1 2

4 Spain GDP & GDP growth growth annual 3

5 Nominal GDP (GDP n ) GDP n, or GDP at current prices, is the value of the final goods produced in an economy during a givenperiodoftimewhenthevalueiscomputed using current prices (the prices of the period). GDP n is obtained by adding up the quantities of final goods multiplied by their current prices. GDP n may vary because prices change or because the quantities of final goods produced change. 4

6 Computing GDP n : an example time t p 1 t q 1 t p 2 t q 2 t GDP n at t = 1 is p 11 q 11 + p 21 q 21 = = 40 (monetary units of t = 1). GDP n at t =2isp 12 q 12 + p 22 q 22 = =60(monetary units of t =2).Fromt =1tot =2,GDP n has increased a 50% = (60 40)/40 multiplied by

7 Real GDP (GDP r ) GDP r, or GDP at constant prices, is the value of the final goods produced in an economy during a given period when the value is computed using the prices of a given fixed period (the base period). GDP r is obtained by adding up the quantities of final goods multiplied by their prices in the base period. GDP r is also called GDP adjusted for inflation or GDP in the monetary units of the base period (for instance, real GDP of 2010 in 2005 euros). 6

8 Computing GDP r : an example Continuing with the GDP n example, GDP r in t =1 at constant prices of period t =1isp 11 q 11 + p 21 q 21 = = 40 (monetary units of t =1).SoGDP r = GDP n at the base period (this always happens). GDP r in t = 2 at constant prices of period t =1is given by p 11 q 12 + p 21 q 22 = = 30 (monetary units of t = 1). Hence, GDP r has fallen a 25%. fthebaseperiodist =2,GDP r in t =1isp 12 q 11 + p 2 2 q 21 = =78andGDP r in t =2isp 12 q 12 + p 22 q 2 2 = = 60. Now, GDP r has fallen a 23%. 7

9 Spain, GDP r 8 base 2000, annual growth T 1972T 1973T 1974T 1975T 1976T 1977T 1978T 1979T 1980T 1981T 1982T 1983T 1984T 1985T 1986T 1987T 1988T 1989T 1990T 1991T 1992T 1993T 1994T 1995T 1996T 1997T 1998T 1999T 2000T 2001T 2002T 2003T 2004T 2005T 2006T 2007T 2008T 2009T 2010T 2011T

10 Objections to real GDP Theoretical: depends on the prices of the base period, which is always an arbitrary choice. Practical: excludes black market activities (underground or shadow economy, that is, legal economic activity that is not taxed) and does not value goods that are not exchanged in markets, like political institutions (democracy vs dictatorship) social and cultural institutions (people s values) the quality of education or of the environment the leisure time the way wealth is distributed among people 9

11 Underground economy (estimation) (% of GDP)

12 2. How developed is an economy? Real GDP per capita provides a measure of how developed or prosperous an economy is. t can be interpreted as a measure of the average standard of living in the economy. Real GDP per capita is defined as the ratio of real GDP to the population of the economy. Real GDP per capita is positevely correlated with many indicadors of economic development and the quality of life: life expectancy, subjective wellbeing, education, health care expenditure 11

13 GDP per capita ( ) 12 Per capita GDP in 1990 GK dollars Source: Angus Maddison Historical Statistics of the World Economy: AD USA Western Europe Spain World

14 GDP per capita ( ) 13 Per capita GDP in 1990 GK dollars Source: Angus Maddison Historical Statistics of the World Economy: AD Canada Spain Argentina Brazil China ndia

15 GDP per capita ( ) Per capita GDP in 1990 GK dollars Source: Angus Maddison Historical Statistics of the World Economy: AD Spain Former USSR World Latin Am Asia Africa

16 GDP per capita & life expectancy GDP per capita (PPP $, 2011) SNGAPORE world factbook/rankorder/2004rank.html world factbook/rankorder/2102rank.html NORWAY US AUSTRALA GERMANY EUROPEAN UNON SOUTH KOREA SPAN JAPAN PORTUGAL GREECE BRAZL ARGENTNA CHNA MONGOLA MOROCCO AFGHANSTAN HAT EGYPT NDA ZMBABWE Life expectancy at birth (years, 2012)

17 GDP per capita & internet usage Principles of Economics, 6th ed., NG Mankiw, p. 508 (books.google.es/books?isbn= ) 16

18 GDP per capita & HD GDP per capita is strongly correlated with the Human Development ndex. 17

19 3. How costly it is to live in an economy? n essence, all the activities in an economy involve flows of either goods or money. A basic question in macroeconomics is how these flows are related. The purchasing power of an amount of money is its capacity to be exchanged for goods (the quantity of goods that the money can purchase). An average price of an economy is defined to quantify purchasing power and account for changes in the cost of living. The smaller the purchasing power of the money, the higher the cost of living. 18

20 Price indices A price index is a measure of the general price level of an economy. This level can be thought of as a weighted average of the prices of all the goods. By assuming the fiction that there is a unique good in the economy (the domestic product), if GDP measures the quantity of the good, then the price level would represent the price of the good. As distinguished from GDP, price indices have no units and the value by itself means nothing. t is the rate of change of the index that is informative. 19

21 GDP (implicit price) deflator The GDP deflator is a price index defined as GDP deflator = Nominal GDP Real GDP. t measures the changes in prices in all the goods produced in an economy between the base period used in the real GDP and the current period. fgdp n 2009 = 100, GDP r 2009 = 80, GDP n 2010 = 135, and GDP r 2010 = 90, then GDP 2009 deflator = 1.25 and GDP 2010 deflator = 1.5, indicating a price increase. 20

22 Consumer price index (CP) The CP is a measure on the cost of purchasing a fixed basket of goods of a consumer considered representative. TheCP t at period t is defined as CP t = Value of the basket at prices in period t. Value of the basket at prices in the base period. For the index to have base 100, just multiply the right hand side by

23 Difference between CP & deflator The CP generally includes imported goods. The GDP deflator does not: it only includes the goods produced in the economy, not abroad. The basket of goods in the GDP deflator may vary from period to period. The basket in the CP generally does not. Despite all this, both indices are strongly correlated and tend to move in parallel. 22

24 Spain, CP & GDP deflator CP GDP deflator

25 GDP deflator and CP, Spain 24 deflator imf data.html price index cpi

26 Computing a CP: an example The basket is given by (x, y, z) =(3,2,1). time p x p y p z V t = value of the basket at period t = = = = 20 Taking t =1 as the base period, CP 1 = V 1 /V 1 =1; CP 2 = V 2 /V 1 = 16/16 = 1; CP 3 = V 3 /V 1 = 12/16 = 0.75; and CP 4 = V 4 /V 1 = 20/16 =

27 nflation rate The inflation rate associated with the price index P is the rate of change in the price index P: = P P 1 P 1 where P is the price index in the current period and P 1 is the one in the immediately preceding period. To express the inflation rate as a percentage, multiply by 100 the right hand side. For instance, if P =50andP 1 = 40, then =¼=0.25(=25%):the price index has been pushed up a 25%. 26

28 nflation rate, Spain (Jan11 Dec12) cpi 27

29 Spain, CP & deflator inflation rate CP GDP deflator

30 nflation rate: an example Let be the inflation rate associated with the CP of the previous example. nthiscase: 1 is not defined (since there is no CP 0 ) 2 =(CP 2 CP 1 )/CP 1 =(1 1)/1 = 0 3 =(CP 3 CP 2 )/CP 2 =(.75 1)/1 =.25 = 25% 4 =(CP 4 CP 3 )/CP 3 = ( )/.75 = 66.6%. f is calculated, for instance, from t =1tot =4, then =(CP 4 CP 1 )/CP 1 = (1.25 1)/1 =.25 = 25%. 29

31 nflation concepts As an economic phenomenon, inflation refers to the sustained increase of the CP. t occurs for periods during which the inflation rate is positive. Deflation is the opposite phenomenon: sustained decrease of the CP (negative inflation rates). Disinflation takes place when, during inflation, the inflation rate diminishes (but remains positive). Hyperinflation occurs with astronomical inflation rates (montly inflation rates of at least 50%). Under a hyperinflation, inflation is out of control. 30

32 nflation rate, Spain (1962M1 2012M12)

33 32 nflation rate, Spain (1990M1 2012M12) 7,5 7 6,5 6 5,5 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0-0, ,

34 Core inflation rate The core (as opposed to headline) inflation rate is computed by excluding the prices of food and energy prices, which tend to be very volatile. t is a measure of underlying long term inflation. t can also be used as an indicator of future inflation. inflation rate 33

35 4. s the economy doing well or badly? Potential (or natural ) GDP refers to the maximum GDP level that an economy can sustain over time. The output gap is the difference between actual GDP and potential GDP. When GDP is below potential, some production inputs must lie idle (remain unused). Since labour services constitute one of the main inputs, its rate of employment is a measure of the degree to which an economy is performing well. 34

36 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0-0,5-1 -1,5-2 -2,5-3 -3,5-4 -4,5-5 -5,5 35 Output gap, Spain (in % of potential GDP)

37 Unemployment rate Employment = number of people having a job Unemployment = number of people not having a job but looking for one Labour force = Employment + Unemployment Unemployment rate = Unemployment Labour force Participation rate = Labour force Total population of working age 36

38 Participation rate, Spain & Catalonia Men CAT Men SPA Total CAT Total SPA Women CAT Women SPA /2001 /2001 /2002 /2002 /2003 /2003 /2004 /2004 /2005 /2005 /2006 /2006 /2007 /2007 /2008 /2008 /2009 /2009 /2010 /2010 /2011 /2011 /2012 /2012

39 Types of unemployment Actual unemployment is divided into 3 categories (the first two define natural unemployment ). Frictional. Occurs while workers are changing jobs. Structural. Due to structural changes in the economy that create & eliminate jobs and to the institutions that match workers and firms (firing & hiring costs, minimum wages, unemployment benefits, mobility restrictions, lack of training ). Cyclical. Generated by the short run fluctuations of GDP (rises with recessions, falls with booms). 38

40 Registered unemployment, Spain Diciembre 2012 SEXO MENORES 25 AÑOS MAYORES 25 AÑOS SECTORES DATOS ABSOLUTOS MES MES ANTEROR VARACONES NTERANUAL ABSOLUTA RELATVA ABSOLUTA RELATVA HOMBRES , ,97 MUJERES , ,31 AMBOS SEXOS , ,64 HOMBRES , ,86 MUJERES , ,51 AMBOS SEXOS , ,85 HOMBRES , ,47 MUJERES , ,24 AMBOS SEXOS , ,86 AGRCULTURA , ,72 NDUSTRA , ,59 CONSTRUCCÓN , ,59 SERVCOS , ,58 SN EMPLEO ANTEROR , ,

41 Registered unemployment, Spain TOTAL WOMEN MEN

42 Registered unemployment, Spain Services ndustry Agriculture Construction No previous occupation

43 Estimated unemployment, Catalonia /2001 /2001 /2002 /2002 /2003 /2003 /2004 /2004 /2005 /2005 /2006 /2006 /2007 /2007 /2008 /2008 /2009 /2009 /2010 /2010 /2011 /2011 /2012 / TOTAL MEN WOMEN 42

44 Unemployment rate, Spain, Catalonia /2012 /2012 /2012 V/2011 /2011 /2011 /2011 V/2010 /2010 /2010 /2010 V/2009 /2009 /2009 /2009 V/2008 /2008 /2008 /2008 V/2007 /2007 /2007 /2007 V/2006 /2006 /2006 /2006 V/2005 /2005 /2005 /2005 V/2004 /2004 /2004 /2004 V/2003 /2003 /2003 /2003 V/2002 /2002 /2002 /2002 V/2001 /2001 /2001 /2001 Men CAT Women CAT Total CAT Total SPA <24 CAT &lang=es&cp=04&x=7&y=10

45 Unemployment rate, Spain, Catalonia &lang=es&cp=04&x=7&y= CAT Total CAT <24 SPA <24 CAT >54 CAT Total SPA /2001 /2001 /2001 V/2001 /2002 /2002 /2002 V/2002 /2003 /2003 /2003 V/2003 /2004 /2004 /2004 V/2004 /2005 /2005 /2005 V/2005 /2006 /2006 /2006 V/2006 /2007 /2007 /2007 V/2007 /2008 /2008 /2008 V/2008 /2009 /2009 /2009 V/2009 /2010 /2010 /2010 V/2010 /2011 /2011 /2011 V/2011 /2012 /2012 /2012

46 Spain & Catalonia at a glance (3 Feb 2013)

47 Source: Tradingeconomics.com, accessed the 13th of January,

48 Nominal variable A nominal variable is measured in terms of current prices. Changes of current prices may affect the nominal variable. The typical nominal variable is measured in (current) monetary units. Examples: the GDP at current prices, the stock of money, the (nominal) interest rate, the (nominal) exchange rate, and the CP. 47

49 Real variable A real variable measures physical quantities. Real variables are not affected by current prices. Some real variables, like total employment or the unemployment rate, need no price to be defined. Others are defined by fixing prices, like GDP at constant prices, which measures production using the prices of a base period. Still others come from nominal variables by removing the effects of prices, like the real interest rate. 48

50 Stock variable & flow variable A stock variable is measured in levels rather than rates of change. A flow variable is measured in rates per unit of time rather than levels. GDP is a flow variable, since it measures production during a period of time (so GDP is production per unit of time). Unemployment at a given moment of time is a stock variable. 49

51 5. How is the economy s output used? With all variables being real, the 1st fundamental national income accounting identity states that Y C + + G + NX. ex post supply of output ex post demand for output C = consumption spending by households = investment spending by firms and households G = government purchases of goods NX = net exports of goods = exports imports EX M 50

52 nvestment identical to savings T = taxes paid by households and firms TR = transfers paid to households and firms S = private saving (saving by households & firms) C + S Y D (disposable income) Y + TR T By adding TR T to each side of Y C + + G + NX and rearranging, the following identity obtains: S + (T TR G) + (M EX). investment private saving government saving foreign saving 51

53 Why M EX (or NX) is foreign saving magine that China exports only cars to Spain and that China imports nothing from Spain. China cars money Spain China runs a trade surplus (with Spain) and Spain a trade deficit (with China). China delivers goods and receives in exchange money. Thus, China is saving and has lending capacity: has money (in general, financial assets) to lend. So trade surplus means lending capacity. 52

54 2nd fundamental accounting identity The identity in 51 says that domestic investment is financed by private saving, public saving, or foreign saving. t can also be expressed as follows: (S ) (G + TR T) + NX. net private saving budget surplus if T > G + TR budget deficit if T < G + TR government budget = = spending receipts (can also be defined the other way round) trade balance or net exports lending capacity = trade surplus if NX > 0 trade deficit if NX < 0 financial need 53

55 Where do savings go? The 2nd identity can also be formulated as S + ( G + TR T ) + NX. This says that there are three ways of disposing of the savings of an economy. Savings can go to firms to finance investment to the government to finance a budget deficit or to foreigners, when they buy more from the economy than the economy buys from them. 54

56 Twin deficits: twice the fun f investment equals savings, so = S, the 2nd identity implies that the government budget deficit equals the trade balance. This means that if the government runs a budget deficit, then it must be financed by foreigners: if = S,thenG + TR T > 0 implies NX <0. n sum, the government spends more without having to increase taxes, and households and firms buy from abroad more goods than they sell. The US in the 80s and 90s illustrates this situation. 55

57 Twin deficits: the US case (% of GDP) Source: Wikipedia 56

58 57 Twin deficits: the Spanish case 2,5 2 1,5 1 0,5 0-0,5-1 -1,5-2 -2,5-3 -3,5-4 -4,5-5 -5,5-6 -6,5-7 -7,5-8 -8,5-9 -9, , ,5-12 Government net lending/borrowing (% GDP) Current account balance (% GDP)

59 From expenditure to GDP According to national income accounting, GDP equals expenditure, income, and value added. The expenditure approach to measure GDP splits GDP into four components (C,, G, and NX) according to the identity of the purchaser (or according to the purpose of the expenditure). The expenditure approach leads to the identity Y C + + G + NX: everything that is produced is purchased by consumers to be consumed, by firms to be invested, by the government, or by foreigners. Hence, production expenditure. 58

60 GDP, Spain, expenditure approach Billions of C G EX M GDP Q Q Q Q Q Q Q Q Q Q Q % % % % % % 1,048 1,063 1,

61 From income to GDP The income approach to measure GDP obtains GDP as the sum of the payments made to all the factors of production (inputs). nputs are aggregated into two categories: labour (workers) and capital (firms). The government, as a third category, collects taxes. The income approach leads to the identity output (Y) wages + profits + taxes: everything that is produced becomes the income of workers (wages), of firms (profits), or of the government (taxes). Summing up, production income. 60

62 GDP, Spain, income approach Billions of wages profits taxes GDP 2010 Q Q Q Q Q Q Q Q Q Q Q % % % % 1,048 1,

63 From value added to GDP The value added approach to measure GDP views GDP as the sum of the value that each producer adds to the production purchased by the producer. f the reprographic industry buys paper worth 100 and energy worth 200 to make copies worth 600, then the added value of the industry is = 300. f that value were 600, the production of paper and energy would be counted twice. Value added = value of the final (new) goods produced value of the intermediate goods. n this case, production total value added. 62

64 GDP, Spain, value added approach 63 Billions of agriculture industry construction services taxes GDP 2010 Q Q Q Q Q Q Q Q Q Q Q % % % % % % 1,048 1,063

65 64 Catalonian GDP 2011 (billions of ) GDP 210,1 C 122,9 34,9 G 43,8 NX 8,4 GDP C NX G

66 A stockpile of definitions Government budget: GB = T TR G. A budget surplus occurs when GB >0. A budget deficit occurs when GB <0. Trade balance: NX = EX M. A trade surplus occurs when NX >0. A trade deficit occurs when NX <0. Domestic demand for GDP = C + + G Net foreign demand for GDP = NX = EX M Disposable income = Y + TR T(also equals C + S) 65

67 The circular flux of income 66