Macro econs

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Macroeconomics IIA ECON20401

Paul Middleditch

Course Text: MACROECONOMICS, G.MANKIW 8thEd.

@DrMiddleditch #20401


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Welcome to Macro IIA

The course web site is on Blackboard 9:

Please visit regularly and read the course outline.

Course text:Mankiw Macroeconomics Chpt. 1,2,3,6,10,11,12,13,14 - 8thEd

Chpt. 1,2,3,5,9,10,11,12,13 - 7thEd

Homework and Feedback SessionsQuestions marked H) in the tutorial sheets are homework.

If you take your completed homework to your GTA in their feedback sessions you

will get written and verbal feedback from your GTA.


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Welcometo Macro IIA

Communication

Primarily through course twitter account

#20401

Office hours

Arthur Lewis Building - Room 3.009

Wednesdays 11.00am - 1.00pm Open Surgery (No Need to Book)

Office hours are held during

30th September7th December 2013 (Sem. 1)


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Employability Skills

Vocation related learning outcome (VRLO):

1) To understand and explain to a non economist the causes ofthe recent global financial crisis.

2) To understand and explain to a non economist whygovernments have been unable to intervene to end this crisis.

@ManUniCareers


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Turning Point Responseware Running in Wks 1,3,5,7,9

Bring along any web-enabled phones, laptops, iPods etc.

Mobile Device Users

Use web-enabled phones, laptops, iPods etc.

1. Connect to the web via UoM wifi or use your phones/laptops/igear)

2. visit www.rwpoll.com

3. Session ID: manc

4. Dont enter details, just click Continue

5. Leave anonymous feedback at anytime during the session

6. Come and see me afterwards if you will not have a device for this course

Interaction Lectures


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ECON20401 Macroeconomics 11A

The Data of Macroeconomics

Paul Middleditch

MACROECONOMICS (Mankiw Chpt. 1 & 2)

@DrMiddleditch #20401


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In this lecture, you will learn

The Data of Macroeconomics:

Macroeconomic ConcernsModelling the Macroeconomy

Gross Domestic Product (GDP)

The Consumer Price Index (CPI)


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Defining Macroeconomics

Macroeconomics attempts to answer questions like:

Why some countries grow faster than others?

Why some countries experience high inflation while

others keep prices stable?

Why all countries experience recessions - periods of

falling incomes and rising unemployment?

Macroeconomics is the study of the economy as a whole.


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Macroeconomic Concerns

The data that we see published in the media

Unemployment Rate

The percentage of the work force who are out of work.

Quarterly Change in Output

Output is the production of all goods and services.

Rate of Inflation The rate at which prices are changing in the economy.

are all concerns to our policy makers.


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Economic Modelling

Economists use models to understand the world (like youngchildren use toys).

A model is a set of equations or a diagram to help explainmacroeconomic variables.

An economic model is a representation of the economy

Models have two kinds of variables:

Exogenous variables: what the model takes as given(inputs of the model)

Endogenous variables: what the model is trying to explain

(output of the model)


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Stocks vs. Flows

A flowis a quantity measured per unit of time.

E.g., U.S. investment was $2.5 trillion during 2006.

InvestmentCapitalA stockis a

quantity measured

at a point in time.

E.g.,The U.S. capital stock was

$26 trillion on January 1,

2006.?


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The Importance of The Circular Flow

Households Firms

Goods (Output)

Labour

Expenditure

Income


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GDP: Expenditure = Income

Two definitions:

Expenditure: Total expenditure on domestically-produced

final goods and services.

Income: Total income earned by domestically-locatedfactors of production.

Expenditure equals income becauseevery pound spent by a buyer

becomes income to the seller.


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Final goods, value added, and GDP

A firmsvalue addedis the value of its output minus thevalue of the intermediate goods the firm used inproduction.

GDP = value of all final goods produced

or

= sum of value added at all stagesof production.

Including intermediate and final goods in GDP would be

double-counting.


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The expenditure components of GDP

1. Consumption

2. Investment

3. Government Spending

4. Net Exports


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Consumption (C)

Includes:

durable goodslast a long timeex: cars, home

appliances nondurable goods

last a short timeex: food, clothing

services

work done forconsumersex: dry cleaning,air travel.

Def: The value of all goods and

services bought by households

C

Y T

C(YT)


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Government spending (G) and NX

Gincludes all government spending on goodsand services.

Gexcludes transfer payments(e.g., unemployment benefits), because theydo not represent spending on goods andservices.

Net Exports: The value of total exports, Xminus the value of total imports, Z.

NX=X-Z


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Aggregate Demand Identity

Y = C + I + G

aggregateexpenditurevalue of

total output

Given this identity, we can also define GDPas (the value of) aggregate output, not just

spending on output.

+NX


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In the next slide we will be actually voting:

In preparation, use your mobile phone

visit www.rwpoll.com

Session ID: manc (lower/upper case)

Dont enter details, just click Continue

You should see Polling Closed

Feel free to leave feedback via your mobiledevice during any part of this presentation

Warm Up to Classroom Voting


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A question for you:

Suppose a firm produces $10 million worthof final goods but only sells $9 millionworth.

Does this violate the output/expenditureidentity?

Ans: Unsold output goes into inventory, and is counted asinventory investment whether or not the inventory buildupwas intentional.


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An important concept

We have now seen that GDP measures

total income

total output

total expenditure

the sum of value-added at all stages

in the production of final goods

We see this in the circular Circular Flow!


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GNP vs. GDP

Gross Domestic Product (GDP):Total income earned by domestically-locatedfactors of production, regardless of nationality.

Gross NationalProduct(GNP):Total income earned by the nations factors ofproduction, regardless of where located.

(GNPGDP) = (factor payments from abroad)(factor payments to abroad)


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Real vs. Nominal GDP

GDP is the value of all final goods and servicesproduced.

Nominal GDPmeasures these values using currentprices.

Real GDPmeasure these values using the prices of abase year.


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Practice problem, part 1

Compute nominal GDP in each year.

Compute real GDP in each year using 2006 asthe base year.

2006 2007 2008

P Q P Q P Q

Pearls $30 900 $31 1,000 $36 1,050

Jam $100 192 $102 200 $100 205


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Answers to practice problem, part 1

nominal GDP multiply Ps & Qs from same year

2006: $46,200 = $30 900 + $100 192

2007: $51,400

2008: $58,300

real GDP multiply each years Qs by 2006Ps

2006: $46,200

2007: $50,000

2008: $52,000 = $30 1050 + $100 205


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Real GDP controls for inflation

Changes in nominal GDP can be due to:

changes in prices.

changes in quantities of output produced.

Changes in real GDP can only be due to changes inquantities, because real GDP is constructed using

constant base-year prices.


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GDP Deflator

The inflation rate is the percentageincrease in the overall level of prices.

One measure of the price level isthe GDP deflator, defined as

Nominal GDPGDP deflator = 100

Real GDP


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Practice problem, part 2

Use your previous answers to computethe GDP deflator in each year.

Use GDP deflator to compute the inflation ratefrom 2006 to 2007, and from 2007 to 2008.

Nom. GDP Real GDPGDP

deflator

Inflation

rate

2006 $46,200 $46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000


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Answers to practice problem, part 2

Nominal

GDPReal GDP

GDP

deflator

Inflation

rate

2006 $46,200 $46,200 100.0 n.a.

2007 51,400 50,000 102.8

2008 58,300 52,000 112.1

2.8%

9.1%


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Consumer Price Index (CPI)

A measure of the overall level of prices faced by consumers.

Tracks changes in the typical householdscost of living. It is aggregated across all markets/sectors.

Published by by the Office for National Statistics (ONS) in theUK and the Bureau of labour Statistics (BLS) in the US

@statisticsONS


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How the CPI is constructed

1. Surveys to determine the composition of thetypical consumers basket of goods.

2. Every month, data on prices of all items in thebasket is collected; cost of basket is computed

3. CPI in any month equals:

Cost of basket in that month

Cost of basket in base period100


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Answers:

Cost of Inflationbasket CPI rate

2002 $350 100.0 n.a.

2003 370 105.7 5.7%

2004 400 114.3 8.1%

2005 410 117.1 2.5%

Example: 2004 CPI = 100 x 400/350 = 114.3


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CPI vs. GDP Deflator

prices of capital goods included in GDP deflator (if produced domestically)

excluded from CPI

prices of imported consumer goods included in CPI

excluded from GDP deflator

What is fixed? CPI: basket of goods (quantity)

GDP deflator: base year price (price)


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CPI vs. GDPProblems with Both

The GDP deflator and the CPI index are aggregated series and

therefore affect different parts of society differently. Lets look at thedisaggregated series:

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep-11 Oct-11 Nov-11

CPI (overall index) 01 Food and non-alcoholic beverages

02 Alcoholic beverages and tobacco 04 Housing, water, electricity, gas and other fuels

07 Transport 09 Recreation and culture

UK 2010/11 - CPI by Component


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Chapter Summary

1. Gross Domestic Product (GDP) measures both totalincome and total expenditure on the economys outputof goods & services.

2. Nominal GDP values output at current prices;real GDP values output at constant prices. Changes inoutput affect both measures,but changes in prices only affect nominal GDP.

3. GDP is the sum of consumption, investment,government purchases, and net exports.

slide 36


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Chapter Summary

4. The overall level of prices can be measured by either the Consumer Price Index (CPI),

the price of a fixed basket of goodspurchased by the typical consumer, or

the GDP deflator,the ratio of nominal to real GDP

They are estimates and we should be aware of lostinformation through aggregation.

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