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Macroeconomics Slide #1

Dr Nicola Pavoni

Office: DH 225

[email protected]~uctpnpa

B01: Macroeconomics

Macroeconomics

Oliver Blanchard (MIT)

Third (or fourth) Edition, Prentice Hall


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IntroductionIntroduction--The Issues and

Approach of Macroeconomics

Three time-frames ofmacroanalysis

Short-run

Medium-run

Long-run


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IntroductionIntroduction

Central Variables ofMacroeconomics

Output, Y Realgross domesticproduct (GDP)

Measures totalincome ofan economy

Unemployment, u

Measures the numberofpeople looking fora job,but whoare without a job

Inflation, The rate ofchange of the generalprice level

The Issues and Approach of Macroeconomics


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Aggregate OutputAggregate Output

1) Finalgood

2) Value added

3) Income

Defining GDP: Three Approaches


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Gross Domestic Product (GDP) Y

The value of the finalgoods and services

produced inan economy duringagiven

period

Aggregate Output (national income

and product accounts, or NIPA)


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Recall

GDP = the value of finalgoods and

services produced

Value is the price of the finalgood

Nominal & Real GDP

Therefore,

GDP = Price x Quantityof finalgoods

produced


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Real GDP = value of finalgoods inconstant

prices PtYt=Nominal GDPt=(Todays ) =

=PtcarsQt

cars+Ptban.Qt

bananas+

Yt= Real GDPt = (base year ) ==P0carsQt

cars+P0ban.Qt

bananas+

P0= base year (1980 forinstance)

Calculating Real GDP


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1991 -- 10,000

1992 -- 12,000 (20% increase)

1993 -- 13,000 (8.33% increase)

Real GDP in Units

Production of cars


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1991 -- 10 x 12,000 = 120,000

1992 -- 12 x 12,000 = 144,000 (20% increase)

1993 -- 13 x 12,000 = 156,000 (8% increase)

Real GDP in 1992 s

Note: Nominal 1992 GDP = Real 1992 GDP

Car Production x 1992 Prices


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Nominal and RealNominal and Real

U.S. GDP, 1960U.S. GDP, 1960--19981998


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2) Value Added Approach

The increase in the value ofgoods as a resultof the productionprocess

Value added

= value of production - value of intermediate goods

Defining GDP: Three Approaches


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Defining GDP

approacha eal eapproachgoo sinal|

chaipro uction

thealonga edvaluetheofum

goodsfinalofvaluetheofum |

Final Goods are purchased by the ultimate user

Intermediate Goods forminputs toother firms

productionprocesses


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3) GDP from the income side

GDP (income) (indirect taxes)

labor income

capital income

!

Defining GDP


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The Composition of GDP byThe Composition of GDP byType of IncomeType of Income

Labor income 60/70%

Capital income 20/30%

Indirect taxes 5/10%

In Percent


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GDP growth inyear t -- rate ofchange in realGDP inyear t

GDP growth = (yt - yt-1)/yt-1

Expansions -- periods ofpositive growth Recessions -- periods ofnegative growth

(2 consecutive quarters)

Technical Notes: For the Course


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The Other MajorThe Other Major

Macroeconomic VariablesMacroeconomic Variables

num. unemployed (Unemployment Rate ( ) 100labor force (

x!

Uu

L)

)

)(unemployed)(employed)(orceLabor UNL !

The Unemployment Rate

1 0 0lab or fo rce ( )

a r ti c ipa t ion R a tea du lt p o pu la tio n (1 6 )

x!

L


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1998

)6.2()(131.4

)(6.24.5%

6.2

131.4

UN

U

u

U

N

!!

!

!



Counting the Unemployed


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Okuns Law

High output growth -- reducesunemployment

Low output growth -- increases

unemployment

Unemployment and Economic Activity


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Social Implications of Unemployment

Unemployment rates and durationvary

bypopulationgroups

Certaingroups incura disproportionate

share ofunemployment when

unemployment increases

These are mainlyyoungpeople


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Change in the U.S. Unemployment RateChange in the U.S. Unemployment Rate

versus U.S. GDP Growth 1960versus U.S. GDP Growth 1960 -- 19981998


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The Inflation Rate,

A sustained rise in the average price level

TwoMeasures of the Price Level

GDP Deflator

Retail Price Index (RPI)


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Average price of finalgoods produced

GDP deflatorinyear t = Pt

nominal! !

t t

t

t t

YP

Y

RealGDP

The GDP Deflator

x!t t t

Y P Y


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Pt is anindex number

P1993 = 102.6 (1992 = 100) Index numbers are used tomeasure rate of

change over time

t

1-t

1-ttP

P

PP(!

! %inflationofRate

The GDP Deflator


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Average prices of goods consumed

1. List of goods consumed by the typical person

2. Calculate the weighted average level of prices

The RPI is not equal to the GDP deflator Some final goods are sold to business, government,

and foreigners

Some consumer goods are imported

The Retail Price Index (RPI)


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Why do we care about inflation?

Prices and wages donot rise

proportionally

Inflationcreates market distortions due to

Regulation

Taxation

Uncertainty forbusiness investment


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Change in the U.S. Inflation Rate versusChange in the U.S. Inflation Rate versus

the U.S. Unemployment Rate, 1970the U.S. Unemployment Rate, 1970--19981998


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Low unemployment --inflation rate

increases

High unemployment -- inflation rate

decreases

The Phillips Curve


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Growth, Unemployment, andGrowth, Unemployment, andInflation in the EU, 1960Inflation in the EU, 1960--20042004

1960-2000 1994-2000 2001-2004

(in percent) (average) (average) (average)

Output growth rate 3.1 2.3 1.5

Unemployment rate 5.8 9.0 7.8

Inflation rate 5.

4 2.

0 2.

3


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