MBA ECONOMICSMACROECONOMICS LECTURER: JACK WU

Macroeconomic Indicators

Examples of Macroeconomic Issues

Sovereign Bond Crisis in EuropeRecession and QE policy in AmericaAmerican Fiscal CliffJapan’s An-Bei Economics

Major Macroeconomic Concerns

National Income: Low Economic Growth Rate

Employment Opportunity: High Unemployment Rate

Cost of Living: High Inflation RateTrade Surplus: Trade Deficit caused by

Appreciation

Major Economic Indicator of Taiwan

YearGDP Per

Capita(US$)

GDP Growth Rate(%)

Average GDP

Growth Rate(10 year,%)

Unemployment Rate(%)

CPI Growth Rate(%)

AverageCPI Growth Rate(%)

Gini coefficien

t

Foreign reserve(billio

n US$)

1970 393 11.40 9.4 1.70 3.60 3.4 0.2941975 978 4.90 - 2.40 5.20 - 0.3121980 2385 7.80 9.8 1.23 19.00 10.4 0.2771985 3290 13.50 - 2.91 -0.20 - 0.290 225.61990 8124 3.80 7.7 1.67 4.10 3.1 0.312 724.41995 12918 6.38 - 1.79 3.70 - 0.317 903.12000 14704 5.80 6.2 2.99 1.30 2.6 0.326 1067.42001 13147 -1.65 - 4.57 -0.01 - 0.350 1222.12002 13404 5.26 - 5.17 -0.20 - 0.345 1616.62003 13773 3.67 - 4.99 -0.28 - 0.343 2066.32004 15012 6.19 - 4.44 1.62 - 0.338 2417.42005 16051 4.70 - 4.13 2.30 - 0.340 2532.92006 16491 5.44 - 3.91 0.60 - 0.339 2661.52007 17154 5.98 - 3.91 1.80 - 0.340 2703.02008 17399 0.73 - 4.14 3.53 - 0.341 2917.12009 16359 -1.87 3.2 5.85 -0.87 0.9 0.345 3482.02010 18503 4.72 - 5.21 -0.96 - 0.342 3820.12011 20006 4.07 - 5.39 1.42 - 0.342 3855.52012 20386 1.32 - 4.24 1.93 - - 4031.7Source: Directorate-General of Budget, Accounting and Statistics, Statistic Abstract of National

Income, Executive Yuan, Taiwan.

How big is Taiwan’s Economy (GDP)?

Ranking Country Ranking Country Ranking Country

1 USA 11 Canada 21 Iran

2 China 12 Australia 22 Sweden

3 Japan 13 Spain 23 Norway

4 Germany 14 Mexico 24 Poland

5 France 15 Korea 25 Belgium

6 UK 16 Indonesia 26 Argentina

7 Brazil 17 Turkey 27 Taiwan

8 Russia 18 Netherland

28 Austria

9 Italy 19 Saudi Arabia

29 South Africa

10 India 20 Switzerland

30 UAE

GDP Per Capita 2012

GDP per capita (nominal)

GDP per capita(Purchasing Power Parity)

Singapore 51162 60410

Japan 46736 36266

Hong Kong 36667 51494

South Korea 23113 32272

Taiwan 20328 38749

Malaysia 10304 16922

China 6076 9162

Thailand 5678 10126

GDP Per Capita (PPP) world ranking

Ranking GDP (PPP) Ranking GDP(PPP)

3. Singapore 60410 19. Taiwan 38749

5. Hong Kong 51494 20. Belgium 37883

6. USA 49922 21. Denmark 37657

8. Switzerland 45418 22. UK 36941

9. Canada 42734 23. Finland 36395

10. Australia 42640 24. Japan 36266

11. Austria 42409 25. France 35548

15. Sweden 41191 26. Israel 32312

18. Germany 39028 27. Korea 32272

Credit Suisse Ranking of Net Wealth of Middle Class

1. Australia 11.Austria 21 Arab Emirates

2. Luxembourg 12.Canada 22. Taiwan

3. Japan 13. France 23. Germany

4. Italy 14.Norway 24.Sweden

5. Belgium 15.Finland 25. Cyprus

6. UK1 16.New Zealand 26. Kuwait

7. UK2 17. Netherland 27. USA

8. Iceland 18.Ireland

9. Singapore 19.Qater

10. Switzerland 20.Spain

Top Export Countries

Ranking Country Ranking Country

1 China 11 Italy

2 USA 12 Canada

3 Germany 13 Spain

4 Japan 14 Singapore

5 France 15 Saudi Arabia

6 Korea 16 Mexico

7 Netherlands 17 UAE

8 Russia 18 India

9 HK 19 Switzerland

10 UK 20 Taiwan

Top Import Countries

Ranking Country Ranking Country

1 USA 11 Netherlands

2 China 12 Italy

3 Germany 13 Thailand

4 Japan 14 Mexico

5 UK 15 Russia

6 France 16 Spain

7 Korea 17 Belgium

8 India 18 Switzerland

9 HK 19 Taiwan

10 Canada 20 Australia

How to Measure National Income?

Gross Domestic Product (GDP)Gross National Product (GNP)GDP (Purchasing Power Parity)

Economy’s Income and Expenditure

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a

dollar of income for some seller.

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,and capital

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sellgoods and services

•Hire and use factorsof production

•Buy and consumegoods and services

•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETSFOR

GOODS AND SERVICES

Copyright © 2004 South-Western

Gross Domestic Product

Gross domestic product (GDP) is a measure of the income and expenditures of an economy.

It is the total “Market value” of “all final” “goods and services” “produced” “within a country” in a “given period of time”.

Components of GDP

GDP includes all items produced in the economy and sold legally in markets.

What Is Not Counted in GDP? GDP excludes most items that are produced and

consumed at home and that never enter the marketplace.

It excludes items produced and sold illicitly, such as illegal drugs.

Formula 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

Components: C and I

Consumption (C): The spending by households on goods and services,

with the exception of purchases of new housing.Investment (I):

The spending on capital equipment, inventories, and structures, including new housing.

Components: G and NX

Government Purchases (G): The spending on goods and services by local,

state, and federal governments. Does not include transfer payments because they

are not made in exchange for currently produced goods or services.

Net Exports (NX): Exports minus imports.

Nominal Versus Real GDP

Nominal GDP values the production of goods and services at current prices.

Real GDP values the production of goods and services at constant prices.

GDP deflator

An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.

The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

The GDP Deflator

Converting Nominal GDP to Real GDP Nominal GDP is converted to real GDP as follows:

R eal G D PN o m in a l G D P

G D P d efla to r2 0 X X2 0 X X

2 0 X X

1 0 0

GDP and Economic Well-Being

GDP is the best single measure of the economic well-being of a society.

GDP per person tells us the income and expenditure of the average person in the economy.

Higher GDP per person indicates a higher standard of living.

GDP is not a perfect measure of the happiness or quality of life, however.

GDP and Economic Well-Being

Some things that contribute to well-being are not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place

outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

GDP(PPP)

Gross Domestic Product (GDP) at Purchasing Power Parity (PPP)

Gross National Product

GNP is the total income earned by a nation’s permanent residents. It differs from GDP by including income that citizens earn abroad and excluding income that foreigners earn here.

Green GDP

Green GDP is an index of economic growth with the environmental consequences of that growth factored in.

Green GDP=Traditional GDP- environmental/ecological costs

Consumer Price Index

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.

It is used to monitor changes in the cost of living over time.

When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

Calculating CPI: steps

Fix the BasketFind the PricesCompute the Basket’s CostChoose a Base Year and Compute the IndexChoose a Base Year and Compute the Index

Calculating Inflation Rate

Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period.

In fla tio n R a te in Y ear 2 =C P I in Y ea r 2 - C P I in Y ea r 1

C P I in Y ea r 1 1 0 0

GDP deflator and CPI

Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising.

There are two important differences between the indexes that can cause them to diverge.

The GDP deflator reflects the prices of all goods and services produced domestically, whereas...

…the consumer price index reflects the prices of all goods and services bought by consumers.

GDP deflator and CPI

The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year

…whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

Correcting Economic Variables for Effects of

Inflation

Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times.

Example

S ala ry S a la ryP rice lev e l in 2 0 0 1

P rice lev e l in 1 9 3 12 0 0 1 1 9 3 1

$ 8 0 ,.

$ 9 3 1,

0 0 01 7 7

1 5 2

5 7 9

Indexation

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Identifying Unemployment

Categories of Unemployment The problem of unemployment is usually

divided into two categories. The long-run problem and the short-run

problem: The natural rate of unemployment The cyclical rate of unemployment

Nature Rate of Unemployment

Natural Rate of Unemployment The natural rate of unemployment is

unemployment that does not go away on its own even in the long run.

It is the amount of unemployment that the economy normally experiences.

Cyclical Unemployment

Cyclical Unemployment Cyclical unemployment refers to the year-to-

year fluctuations in unemployment around its natural rate.

It is associated with short-term ups and downs of the business cycle.

How Is Unemployment Measured?

The BLS considers a person an adult if he or she is over 16 years old.

A person is considered employed if he or she has spent most of the previous week working at a paid job.

A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job.

A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force.

Unemployment Rate

U n em p lo y m en t ra te =N u m b er u n e m p lo y ed

L ab o r fo rce 1 0 0

Labor Force Participation Rate

L ab o r fo rce p artic ip a tio n ra te

L ab o r fo rce

A d u lt p o p u la tio n 1 0 0

Problems of Unemployment Statistics

It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.

Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.

Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.

Why Are There Always Some People Unemployed?

Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.

Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Structural Unemployment

Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded.

Structural unemployment is often thought to explain longer spells of unemployment.

Why is there Structural Unemployment? Minimum-wage laws Unions Efficiency wages

Business Cycle I

The term business cycle or economic cycle refers to the fluctuations of economic activity (business fluctuations) around its long-term growth trend.

Business Cycle II

The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession).

Business Cycle III

These fluctuations are often measured using the real GDP. Despite being termed cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

Types of Business Cycle

A number of types of business cycles, in the traditional sense of a fluctuation within a regular period have been proposed. The main types of business cycles enumerated by Joseph Schumpeter.

Juglar Cycle

In 1860, French economist Clement Juglar identified the presence of 8 to 11 year cycles. In Business Cycles, Schumpeter suggested this cycle be named after Juglar. These cycles are made up of four stages, each linked to the variation in prices, production and interest rates.

Four stages

expansion = increase in production and prices , and low interests rates.

crisis = stock exchanges crash and bankruptcies of several companies occur.

recession = decrease in price and in output, high interests rates.

recovery= stocks recover thanks to the fall in prices and incomes.

Recession

A recession is a contraction phase of the business cycle, or "a period of reduced economic activity.

Recession and Depression

The U.S. based NBER defines a recession more specifically as "a significant decline in economic activity spread across the economy, lasting more than a few months. A sustained recession may become a depression.

Attributes of Recession

A recession has many attributes that can occur simultaneously and can include declines in coincident measures of overall economic activity such as employment, investment, and corporate profits.

Causes of Recession

Recessions are the result of falling demand and may be associated with falling prices (deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant economic growth (stagflation). A severe or prolonged recession is referred to as an economic depression.

Possible Predictors of Recession

A significant stock market drop has often preceded the beginning of a recession.

The three-month change in the unemployment rate.

Index of Leading Indicators

Index of Leading Indicators

The Index of Leading Indicators is an economic index intended to estimate future economic activity. The index is calculated based on ten key variables that have historically turned downward before a recession and upward before an expansion.

Recession’s Warning System

The index of leading indicators can provide an early warning system so that policymakers can shift toward macroeconomic stimulus when the index fails.

Ten key variables

Average number of initial applications for unemployment insurance

Number of manufacturers' new orders for consumer goods and materials

Speed of delivery of new merchandise to vendors from suppliers

Amount of new orders for capital goods unrelated to defense Amount of new building permits for residential buildings The S&P 500 stock index Inflation-adjusted money supply (M2) Spread between long and short interest rates Consumer sentiment Average weekly hours worked by manufacturing workers

Monitoring Indicators

Red Light: Very hot Yellow Red light: hotGreen light: stableYellow blue light: cool/poorBlue light: very cool/poor