34
Economics 215 Intermediate Macroeconomics Introduction

Economics 215 Intermediate Macroeconomics Introduction

  • View
    249

  • Download
    2

Embed Size (px)

Citation preview

Page 1: Economics 215 Intermediate Macroeconomics Introduction

Economics 215Intermediate Macroeconomics

Introduction

Page 2: Economics 215 Intermediate Macroeconomics Introduction

What is Macroeconomics

Studies of economies at aggregate level: world, nation, region, etc.

Economic decision makers are representatives of a broader class (consumers, banks, firms, etc.)

Page 3: Economics 215 Intermediate Macroeconomics Introduction

Why study aggregate economy?

Classes of agents similar in important ways. Their behavior generates aggregate movements.

Aggregate markets important to explain, foreign exchange, credit, energy.

Single national policy-makers: central bank, treasury.

Feedback when large number of agents act together.

Page 4: Economics 215 Intermediate Macroeconomics Introduction

How is Intermediate Different from Principles Main subjects

Long-term Growth Productivity Capital Accumulation vs. Technology driven growth

Exchange Rates Long-term exchange rate fundamentals Business cycles in small open economy

Macroeconomic Dynamics Savings and Investment Trade and Budget Deficits

Page 5: Economics 215 Intermediate Macroeconomics Introduction

Concepts you should know

GDP, Nominal and Real Price level and Inflation Interest Rates, Nominal and Real

Variables are often studied in the form of time series: A set of observations indexed by time.

Page 6: Economics 215 Intermediate Macroeconomics Introduction

GDP: Output

Nominal GDP (PYt) – the total value of goods produced in a given period measured in current prices.

Real GDP (Yt) – the total value of goods produced in a given period measured in the prices prevailing in some base year.

Page 7: Economics 215 Intermediate Macroeconomics Introduction

Expenditure Categories in Hong Kong: 2001

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

% of GDP

HouseholdConsumption

Government Consumption

Investment Exports Imports

Page 8: Economics 215 Intermediate Macroeconomics Introduction

Income Distribution

Household Income

0

2

4

6

8

10

12

14

16

18

20

China Hong Kong, China Korea, Rep. Sweden United States

Ratio of 10% Highest to 10% Lowest

Page 9: Economics 215 Intermediate Macroeconomics Introduction

GDP Expenditure Shares

Consumption Investment Government Net Exports

Page 10: Economics 215 Intermediate Macroeconomics Introduction

AF

F

Min

ing

Man

ufac

turin

g

Util

ities

Con

stru

ctio

n

Tra

de

Tra

nspo

rt

FIR

E

Ser

vice

s

Land

lord

1980

0

0.05

0.1

0.15

0.2

0.25

% of GDP

Production Account

1980

2001

Production Sectors of Hong Kong

Page 11: Economics 215 Intermediate Macroeconomics Introduction

P: Price level

Deflator (Pt) ratio of nominal GDP to real GDP (weighted average of the prices of goods produced using current expenditures as weights).

CPI (CPIt) cost of a fixed market basket of consumer goods relative to the cost in a base year (weighted average of the prices of goods consumed using fixed expenditures as weights).

Inflation: Growth rate of price level1

1

t tt

t

P P

P

Page 12: Economics 215 Intermediate Macroeconomics Introduction

Inflation: HK GDP Deflator

Inflation

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Page 13: Economics 215 Intermediate Macroeconomics Introduction

Interest Rates

Nominal Interest Rate (1+it): Number of $ a borrower will pay you in one year if they borrow $1 today.

Real Interest Rate (1+rt): Number of goods a borrower will pay you in one year if they borrow 1 good today. Gross Nominal interest at the time of a loan divided

by gross inflation over course of a loan. Net real interest rate approximated by net nominal

rate minus net inflation rate.

Page 14: Economics 215 Intermediate Macroeconomics Introduction

HK Real Interest Rate

Real Interest Rate

-5

0

5

10

15

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Page 15: Economics 215 Intermediate Macroeconomics Introduction

Time Series

Million HK $

GDP

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Page 16: Economics 215 Intermediate Macroeconomics Introduction

Growth

Real GDP tends to grow over time. Growth Rate

Growth compounds across time

11

1

1Y Yt tt t t t

t

Y Yg Y g Y

Y

2

1 2 1 2

3

3 2

1 , 1 , 1 1 1

1 1

1

t t t t t t t

t t t

j

tt j

Y g Y Y g Y Y g g Y g Y

Y g Y g Y

Y g Y

Page 17: Economics 215 Intermediate Macroeconomics Introduction

Series with Exponential Growth

0

20

40

60

80

100

120

140

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49

time

GDP

Page 18: Economics 215 Intermediate Macroeconomics Introduction

Natural Log

Empirical economists often study (natural) logarithms of series

Study yt = ln Yt

Natural log is a logarithm with Euler’s constant, e as base.

Natural logarithm is a mathematical function that takes a straight line and turns it into a concave

Most importantly, natural logarithm takes an exponential growth function and turns it into a straight line.

Page 19: Economics 215 Intermediate Macroeconomics Introduction

Natural Log of a Straight Line

-2

0

2

4

6

8

10

0.25

0.75

1.25

1.75

2.25

2.75

3.25

3.75

4.25

4.75

5.25

5.75

6.25

6.75

7.25

7.75

X

ln X

Page 20: Economics 215 Intermediate Macroeconomics Introduction

Exponential to straight line

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Y

lnY

Page 21: Economics 215 Intermediate Macroeconomics Introduction

Properties of Natural Logarithm

1. If

2. If

3. If

ln ln lnt t t t t tX Y Z X Y Z

ln ln lntt t t t

t

XY Y X ZZ

ln lnat t t tY X Y a X

(1 ) ln ln (1 ) ln ln (1 )

ln ln(1 )

j j jt j t t j t tY g Y Y g Y Y g

tY g j

Log of exponential growth function is linear function of time

Page 22: Economics 215 Intermediate Macroeconomics Introduction

GDP vs. Log GDP

GDP

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

ln(GDP)

0

2

4

6

8

10

12

14

16

Page 23: Economics 215 Intermediate Macroeconomics Introduction

Small changes in X imply % changes in ln(X) If x = ln(X) and X changes by a small

amount dX, then x changes by

Growth Rates: Between two periods of time Y changes by an amount ΔY = Yt – Yt-1. Then

dX

X

11

1

ln ln Yt tt t t t

t

Y YYY Y g

Y Y

Page 24: Economics 215 Intermediate Macroeconomics Introduction

Continuous vs. Discrete Growth

-0.1

-0.05

0

0.05

0.1

0.15

0.2

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

#

g

μ

Page 25: Economics 215 Intermediate Macroeconomics Introduction

GDP Growth

GDP displays exponential, but uneven, growth.

Macroeconomists split GDP into two parts: 1) trend; and 2) cycle

1. Trend – smooth, expositional growth

2. Cycle – Deviations of Actual GDP from Trend

Page 26: Economics 215 Intermediate Macroeconomics Introduction

Calculating Trend

Developed Economies: Ln(GDP) is a linear function of time. Estimate linear regression of ln(GDP) on constant and time.

Emerging Markets: Tend to experience slowing growth. Estimate linear regression of ln(GDP) on constant, trend, trend2.

Page 27: Economics 215 Intermediate Macroeconomics Introduction

Log Trend & Log Cycle

0

2

4

6

8

10

12

14

16

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

ln(GDP)

TREND

Page 28: Economics 215 Intermediate Macroeconomics Introduction

HK GDP – Trend and Cycle

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

trend

GDP

Page 29: Economics 215 Intermediate Macroeconomics Introduction

Calculating Cycles

Gap (output gap) between actual ln(GDP) and trend ln(GDP).

Small difference between two natural logs can be interpreted as a % difference. Output gap is the % deviation of GDP from trend.

Output gap is variable and persistent but does not permanently grow or shrink over time.

Page 30: Economics 215 Intermediate Macroeconomics Introduction

Output GapOutput Gap

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

%

Page 31: Economics 215 Intermediate Macroeconomics Introduction

Output Gap & Unemployment

-8

-6

-4

-2

0

2

4

6

8

10

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Unemployment

Output Gap

Page 32: Economics 215 Intermediate Macroeconomics Introduction

Statistics

Standard deviation of the output gap to measure the volatility of the output gap.

Correlation to measure the movement of one stationary time series with one another.

Auto-correlation measures the persistence of stationary time series.

Page 33: Economics 215 Intermediate Macroeconomics Introduction

Point Elasticities

Elasticity: The % change in one variable caused by % change in another variable.

Given x = ln(X), y = ln(Y) and y = δ x(dy/dx) = δdy = (dY/Y), dx = (dX/X)So δ can be interpreted as the elasticity of X

with respect to Y

Page 34: Economics 215 Intermediate Macroeconomics Introduction

Main Sources of Hong Kong Statistics There are two main sources of macroeconomic statistics. 1. Census and Statistics Department:

National Income Accounts, CPI, Interest Rates, Employment, etc. See Frequently Requested Statistics

http://www.info.gov.hk/censtatd/eng/hkstat/index1.html

2. Hong Kong Monetary Authority:Money and Banking StatisticsSee Monthly Statistical Bulletinhttp://www.info.gov.hk/hkma/eng/statistics/msb/index.htm