Class Schedule:
Friday 12:55am - 15:40am
中院 305, Minhang campus
Office Hours:
Friday 12:00am - 12:55am
中院 305, Minhang campus
Contacts:
[email protected] 021-52301585
Class Website: http://www.acem.sjtu.edu.cn/faculty/zhangguoxiong.html
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
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)
Figure 1 US Real GDP 1900-2000
1. Long-term upward trend. Income more than doubled over last 30 years
2. Short-run disruptions in the trend: recessions.
Figure 2 US Unemployment 1900-2000
1. 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)
Figure 3 US Inflation 1900-2000
1. 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)
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
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
Ps = price of steel (an input)
Demand Function
( , )dQ D P Y
Examples:
1) ( , ) 60 10 2 dQ D P Y P Y
0.3
2) ( , )d YQ D P Y
P
A specific functional form shows the precise quantitative
relationship
A general functional notation shows only that the
variables are related:
Demand and Supply Function
( , )dQ D P Y
Examples:
1) ( , ) 60 10 2 dQ D P Y P Y
0.3
2) ( , )d YQ D P Y
P
A specific functional form shows the precise quantitative relationship
A general functional notation for the demand of cars
supply equation:
( , )ssQ S P P
A general function notation for the demand of cars
Market Equilibrium
Q
Quantity of cars
P Price
of cars S
D
equilibrium price
equilibrium quantity
The Effects of an Increase in Income
D2
Q
Quantity of cars
P Price
of cars S
D1
Q1
P1
P2
Q2
An increase in income
increases the quantity
of cars consumers demand
at each price… (demand
shock)
…which increases the
equilibrium price and
quantity.
The Effects of an Decrease in Steel Price
An increase in Ps reduces
the quantity of cars
producers supply at each
price… (supply shock)
…which increases the
equilibrium price and
reduces the equilibrium
quantity.
Q
Quantity of cars
P Price
of cars S1
D
Q1
P1
P2
Q2
S2
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)
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
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
Inco me ($)
La bo r
Goo ds (br ead)
Expen diture ($)
Hou seho lds Firms
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)
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
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 9710 70.3
Durables 1083 7.8
Non-durables 2833 20.5
Services 5794 42.0
Investment
US 2007 billion $ % of GDP
Investment 2130 15.4
Business fixed 1504 10.9
Residential fixed 630 4.6
Inventory
investment
-4 ≈0
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
Government Spending
US 2007 billion $ % of GDP
Government
Spending
2675 19.4
Federal Spending 979 7.1
Defense 317 2.3
Non-defense 662 4.8
State and Local
Spending
1696 12.3
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
Net Exports
Net Exports =Exports - Imports (NX = EX - IM)
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)
Cross Country Comparison of GNP/GDP
60
70
80
90
100
110
120
130
140
150
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
GNP/GDP
China
USA
Singapore
Kuwait
Chile
How can we explain why these countries have difference patterns on
GNP/GDP?
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
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 2007 200 ¥45,000 150 ¥95,000 20 ¥80,000 2008 350 ¥50,000 300 ¥120,000 50 ¥95,000 2009 500 ¥75,000 200 ¥145,000 90 ¥99,000 1. 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.
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: (percentage change) and
lndx
d xx
ln(XY) lnX lnY
ln(X/ Y) lnX lnY
Consumer Price Index (CPI)
CPI : The price of a basket of goods relative to the price of the
same basket in some base year.
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
How is CPI determined:
Cost of basket in that month100
Cost of basket in base period
CPI vs. GDP deflator
Both CPI and GDP deflator are measures of overall price level.
But they are NOT identical
CPI GDP Deflator
Usually published monthly Usually published quarterly or annually
Goods and services purchased by
consumers.
Goods and services purchased by
consumers, firms, and government
Both domestic and imported goods and
services.
Only domestically produced goods and
services.
Both newly produced and previously
produced goods and services. Only newly produced goods and services.
The basket of goods and services is
(relatively) fixed
The basket of goods and services changes
every year.
CPI vs GDP Deflator for the US
16
14
12
10
8
6
4
2
0
- 2
Percentage change
1948 1953 1958 1963 1968 1973 Year
1978 1983 1988 1993 1998
CPI
GDP deflator
Categories of the Population
Entire Population
Adult Population
Labor Force
Unemployed
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)
Labor Force = Employed + Unemployed
Categories of the Population, Cont’d
US Population Composition in 2008 100%
Number unemployedUnemployment rate
Labor force
100%
Labor forceLabor force participation rate
Adult population
Discouraged worker: wants a job but
has given up looking for, NOT
included in the labor force.
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.
Exercise
1951
1984
1999
2000
1993
1982
1975
Percentage change in
unemployment rate
10
-3 -2 -1 0 1 2 4 3
8
6
4
2
0
-2
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
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