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l Class Schedule: Friday 12:55am - 15:40am上院 205, Minhang campus
l Office Hours: Friday 12:00am - 12:55am上院 205, Minhang campus
l Contacts: [email protected] 021-52301585
l Class Website: http://www.acem.sjtu.edu.cn/faculty/zhangguoxiong.html
Lecture 1
I. The science of MacroeconomicsØ what macroeconomists study?Ø how economists think?
II. The data of macroeconomics.Ø Measuring the value of economic activityØ Measuring the cost of livingØ Measuring joblessØ From economic statistics to economic models
What Macroeconomists Study
l 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)l Macroeconomic issues affect everyone and therefore play central role in national political debate(tax debate between Obama and Romney) l Macroeconomic issues are also central to world politics (Euro zone debt crisis, Renminbi re-evaluation, QE II & III) l Macroeconomists collect data across time and across countries, and attempt to formulate general theories to explain theml 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 years2. 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 thethree 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
l Economists often study politically charged issues but they always try to be scientific objective (normative vs positive)l 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 demandQ s = quantity that producers supplyP = price of new carsY = aggregate incomePs = price of steel (an input)
Demand Function
( , )dQ D P Y=
Examples:1) ( , ) 60 10 2= = - +dQ D P Y P Y
= =0.32) ( , )d YQ D P YP
A specific functional form shows the precise quantitative relationship
A general functional notation shows only that thevariables are related:
Demand and Supply Function
( , )dQ D P Y=
Examples:1) ( , ) 60 10 2= = - +dQ D P Y P Y
= =0.32) ( , )d YQ D P YP
A specific functional form shows the precise quantitative relationship
A general functional notation for the demand of cars
supply equation: ( , )=s sQ S P P
A general function notation for the demand of cars
Market Equilibrium
QQuantity of cars
P Price
of cars S
D
equilibriumprice
equilibriumquantity
The Effects of an Increase in Income
D2
QQuantity 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.
QQuantity 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 ü its assumptionsü which of its variables are endogenous and which are exogenousü the questions it can help us understandü and those it cannot
• For macroeconomics, it is important to differentiate long run and short run ( flexible price vs sticky price, neoclassicalvs 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)l Two definitions:
1. Total expenditure on domestically-produced final goods and services
2. Total income earned by domestically-located factors of production
l total expenditure ≡ total income as in every economic transaction the expenditure of the buyer equal the income of the seller
Income ($)
Labor
Goods (bread)
Expenditure ($)
Households 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 + NXThis is called the national income accounts identity
Consumption
Consumption: The value of all goods and services bought by household.
• durable goodse.g. cars, TV
• non-durable goodse.g. food, clothing
• servicese.g. haircut, doctor visits
US 2007 billion $ % ofGDP
Consumption 9710 70.3
Durables 1083 7.8
Non-durables 2833 20.5
Services 5794 42.0
Investment
US 2007 billion $ % ofGDP
Investment 2130 15.4
Business fixed 1504 10.9
Residential fixed 630 4.6
Inventoryinvestment
-4 ≈0
Investment: Spending on goods and services for future use.
§ business fixed investmentspending on plant and equipment that firms will use to produce other goods and services
§ residential fixed investmentspending on new housing by households and landlords
§ inventory investmentthe change in the value of all firms’ inventories
Government Spending
US 2007 billion $ % ofGDP
Government Spending
2675 19.4
Federal Spending 979 7.1
Defense 317 2.3
Non-defense 662 4.8
State and LocalSpending
1696 12.3
Government Spending: goods and services bought by the government (transfer payments excluded)
§ Federal Spendingdefense, social security,medicare & mediaid,interest payment for national debt
§ State and Local Spendingroads, schools, police service
Net Exports
Net Exports =Exports - Imports (NX = EX - IM)
GDP vs GNP
l Gross National Product (GNP): total income earned by the nation’s factors of production, regardless of where they are located
l Gross Domestic Product (GDP):total income earned by domestically-located factors of production, regardless of nationality
l 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
l Real GDP: measured using a constant price (usually the price in the selected base year)
l Nominal GDP: measured using current year price
l 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 ￥80,0002008 350 ￥50,000 300 ￥120,000 50 ￥95,0002009 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 ln dxd 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 month100Cost 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 changesevery year.
CPI vs GDP Deflator for the US
16
14
12
10
8
6
4
2
0
- 2
Percentagechange
1948 1953 1958 1963 1968 1973Year
1978 1983 1988 1993 1998
CPI
GDPdeflator
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 rateLabor force
= ´
100%
Labor forceLabor force participation rateAdult 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
19511984
1999
2000
1993
1982
1975
Percentage change in unemployment rate
10
-3 -2 -1 0 1 2 43
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
