What is macroeconomics about? - gandalf.fee.urv.catgandalf.fee.urv.cat/professors/AntonioQuesada/Curs1314/IntroMacro... · 1 GDP What is macroeconomics about? • Macroeconomics studies

1 GDP

What is macroeconomics about?

• Macroeconomics studies the aggregate effects ofwhat people do.

• Most of what people do has to do with:(i) the production and use (allocation) of goods

(goods means “goods and services”);(ii) the issuance and allocation (resale, trading,

exchange) of financial assets.

• The activities related to (i) give rise to the realsector of an economy. Those related to (ii) give riseto the financial sector.

2 GDP

Wealth

• Wealth refers to, and is measured in terms of,goods. More wealth means having a higher amountof goods (to consume or to produce more goods).

• Aggregate production generated in economy du‐ring a given period of time can be used to mea‐sure the aggregate wealth created in during .

• A common measure of aggregate production is thegross domestic product ( ): (market) value of allthe final goods (= not used to produce other goods)produced in an economy in a given period of time.

3 GDP

and the size of an economyis a crude measure of how rich and how big an

economy is. It excludes black market activities(underground or shadow economy = legal econo‐mic activity that is not taxed) and does not valuegoods that are not exchanged in markets (quality ofeducation, social institutions, leisure time…).

• Nominal values production at current prices.Real ( at constant prices or adjustedfor inflation) values production each period usingthe prices of one period (called “base period”).Changes in nominal are misleading: they mayreflect changes in production and prices.

4 GDP

Size of the shadow economy 2012 (% GDP)Friedrich Schneider, www.econ.jku.at/members/.../ShadEcEurope31.pdf

5 GDP

Shadow economy in Spain(% of GDP)Jordi Sardà: “La economíasumergida pasa factura” (2014)www.gestha.es

6 GDP

“Good” or “bad” for the economy? /1• The outcomes (or the state) of an economy aresubject to assessment: is it “good” or “bad” to havemore (or less) shadow economy?

• There is in general no clear‐cut answer: someoutcomes/states may be favourable to some peopleand, simultaneously, detrimental to other people.

• Shadow economy: favours those taking part (theydo not pay taxes); is detrimental to the rest (unfaircompetition to rival firms and probably a highertax burden for the non‐participants in the shadoweconomy, to compensate tax evasion).

7 GDP

“Good” or “bad” for the economy? /2• A high interest rate is more beneficial to lendersthan a lower one, as they receive more for lendingmoney. Yet, borrowers are worse off with a higherthan with a lower interest rate, since they have topay more for getting a loan of money. Better highor low depends on the importance of each group.

• It is easier for European exporters to export to theUS the lower the exchange rate (expressed in $/€),since the lower the rate, the more euros Americansget from 1 $. But the lower the rate, the fewer thedollars Europeans consumers obtain from 1 €, sothe more costs (in euros) buying American goods.

8 GDP

GDP (US$ trillions) ∙ 7 February 2014http://www.tradingeconomics.com

1.8

15.6USA

1.1

0.47

2.4

2.63.4

2

0.38

0.26

0.018

0.57 1.8

0.8

1.5

5.91.18.2

2

0.7

0.52

2.4

0.240.25

1.34Ranking: 14

9 GDPhttp://www.tradingeconomics.com ∙ 7 February 2014

10 GDP

Computing : an example

(nominal ) at is (monetary units of ).

at is(monetary units of ). From to ,

has increased a .

11 GDP

Computing : an example

(real ) in period at constant pricesof period is

(monetary units of ). So = at thebase period (this always happens).

in at constant prices of period isgiven by (mo‐netary units of ). has fallen a .

• With base period : in isin is

. has fallen a .

12 GDP

Strategic use of data• Economic variables are meaningless withoutspecifying its units of measurement (if any).

• On the other hand, people whose interests areaffected by economic information may have anincentive to disclose information selectively.

• In the previous example, a government isinterested in informing citizens of only the increasein nominal . The opposition would instead liketo point to the fall in real . And if forced tomention real , the government prefers to takeperiod 2 as the base (smaller reduction of real ).

13 GDP

Nominal variable

• A nominal variable is measured in terms of currentprices.

• Changes of current prices may affect the nominalvariable.

• The typical nominal variable is measured in(current) monetary units.

• Examples: at current prices, money stock,(nominal) interest rate, (nominal) exchange rate,and consumser price index ( ).

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0

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1,1

2012201120102009200820072006200520042003200220012000

GDP‐SPAIN

GDP‐CATALONIA

CONSUMPTION‐CATALONIA

CONSUMPTION‐SPAIN

GDP & consumpion(current prices, EUR trillion)

http://www.idescat.cat/economia/inec?tc=5&id=5107&dt=201200&lang=e

15 GDP

Real variable

• A real variable measures physical quantities. Realvariables are not affected by current prices.

• Some real variables, like total employment or theunemployment rate, need no price to be defined.

• Others are defined by fixing prices, like atconstant prices, which measures production usingthe prices of a base period.

• Still others come from nominal variables by remo‐ving the effects of prices, like the real interest rate.

16 GDP

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REAL GDP

Spain, GDP (billions of pesetas)http://www.ine.es/daco/daco42/daco4214/cntrb86.xls

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REAL GDP

REAL CONSUMPTION

NOMINALCONSUMPTION

Spain, GDP & consumption (billions of pesetas)http://www.ine.es/daco/daco42/daco4214/cntrb86.xls

18 GDP

Spain, GDP (billions of US dollars)http://www.tradingeconomics.com/spain/gdp

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Spain, GDP at constant prices (EUR billion)http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

20 GDP

0100200300400500600700800900100011001200130014001500160017001800190020002100220023002400250026002700

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GDP at constant prices (EUR billion)http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

FRA

GER

SPA

ITA

GRE

21 GDP

Stock variable vs flow variable

• A stock variable is measured in levels rather thanrates of change.

• A flow variable is measured in rates per unit oftime rather than levels.

is a flow variable, as it measures productionduring a period of time (so is production perunit of time).

• Population at a given moment of time is a stockvariable. Wealth is also a stock variable.

22 GDP

Rates• The term “rate” in “ growth rate” refers to arelative (in percentage terms) change in .

• This formula gives the rate of change per one. Toget a percentage, multiply by 100. Ifand , the rate of change is

(per one); that is, %.

• “Rate” in “exchange rate” means “ratio” (relativeprice) and “amount” in “interest (or wage) rate”.

(from period to )

23 GDP

Spain, real GDP annual growth rate (quarterly, % change)http://www.tradingeconomics.com/spain/gdp‐growth‐annual

24 GDP

‐5,5‐5

‐4,5‐4

‐3,5‐3

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‐0,50

0,51

1,52

2,53

3,54

4,55

5,56

6,57

7,58

8,5

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Spain, real GDP growth (quarterly, % change)http://www.ine.es/jaxiBD/tabla.do?per=03&type=db&divi=CNTR&idtab=9#nogohttp://www.ine.es/jaxi/menu.do?type=pcaxis&path=%2Ft35/p009&file=inebase&L=0

25 GDP

‐18

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‐14

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14

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III/201

3II/2013

I/2013

IV/2012

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2II/2012

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0II/2010

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9II/2009

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2II/2002

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III/200

1II/2001

I/2001

CATALONIA

AGRICULTURE

INDUSTRY CONSTRUCTION

SERVICES

SPAIN

Real GDP growth(quarterly, % annual change)http://www.idescat.cat/economia/

inec?tc=5&id=0007&dt=201303

26 GDP

‐18‐17‐16‐15‐14‐13‐12‐11‐10‐9‐8‐7‐6‐5‐4‐3‐2‐1012345678910

III/201

3

I/2013

III/201

2

I/2012

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1

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0

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9

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8

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CATALONIA

INDUSTRYCAT‐SPA

CONSTRUCTIONCAT‐SPA

SERVICESCAT‐SPA

SPAIN

Real GDP growth(quarterly, % annual change)http://www.idescat.cat/economia/inec?tc=5&id=0007&dt=201303

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‐11‐10‐9‐8‐7‐6‐5‐4‐3‐2‐10123456789

10111213141516

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CHINA

GREECE

SPA

GDP at constant prices (% change)http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

28 GDP

‐5,5‐5

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0,51

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6,57

7,5

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US

SPAINGERMANY


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‐7

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SPAIN

JAPAN


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GDP growth rate (annual, %) ∙ 7 February 2014http://www.tradingeconomics.com

3.74.1

4.4-3-1.8-0.1

0.21.1

4.92.8

2.10.3

1.9

2.7

1.3

12.4Nicaragua 5.1

12.9

5.5

7.6

4.5

7.6

1.8

8.1

-0.6

1

3.5

2.3

5.7

2.43.97.7

4.8

1.2

11.56

3.1

-55.8South Sudan

-5.5

95.5Libya

31 GDP

http://w

ww.tradingecono

mics.com

∙ 7 Feb

ruary 2014

32 GDP

http://w

ww.tradingecono

mics.com

∙ 7 Feb

ruary 2014

33 GDP

Potential GDP and output gap

• Potential (or “natural”) refers to the maximumlevel that an economy can sustain over time.

• The output gap is the difference between potentialand actual . It could be viewed as a

measure of the degree to which an economy isperforming well.

• When is below potential, some productioninputs must lie idle (remain unused). The more it isbelow, the higher unemployment is expected to be.

34 GDP

‐5

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Spain, output gap (% of potential GDP)http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

35 GDP

Average wealth

• Real GDP per capita provides a measure of howdeveloped or “prosperous” an economy is. It canbe interpreted as a measure of the averagestandard of living in the economy.

• Real GDP per capita is defined as the ratio of realGDP to the population of the economy.

• Real GDP per capita is positevely correlated withmany indicadors of economic development and thequality of life: life expectancy, subjective well‐being, education, health care expenditure…

36 GDP

GDP per capita strongly correlatedwith Human Development Indexhttp://en.wikipedia.org/wiki/Human_Development_Index

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US

GDP per capita (current prices & exchange rates, EUR per person)http://www.bde.es/webbde/es/estadis/ccff/csvs/cf0319.csv

EUROPEANUNION

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USAGDP per capita 1870‐2008 (1990 IGK dollars)http://www.ggdc.net/maddison/Historical_Statistics/horizontal‐file_02‐2010.xls

WESTERNEUROPE

SPAIN

WORLD

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GDP per capita 1913‐2008 (1990 IGK dollars)http://www.ggdc.net/maddison/Historical_Statistics/horizontal‐file_02‐2010.xls

SPAIN

CANADA

ARGENTINA

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INDIA

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GDP per capita 1950‐2008 (1990 IGK dollars)http://www.ggdc.net/maddison/Historical_Statistics/horizontal‐file_02‐2010.xls

SPAIN

AFRICAASIA

WORLD

FORMERUSSR

LATIN AMERICA

44 GDP

Short run vs long run

• “Short run” refers to a relative short period of time(a few months to a couple of years). In that periodit is presumed that some factors or variables(technology, population) are essentially constant.

• Short‐run macroeconomics focuses on explainingthe oscillations of real (the business cycle).

• In the long run everything may change. Long‐runmacroeconomics tries to explain the evolution ofreal per capita (long‐run economic growth).

45 GDP

3,000 years of world economic history in one chartGregory Clark (2007): A farewell to alms. A brief economic history of the world, p. 2

Crucial factor:rate of technological advance?

46 GDP

Competing conceptual frameworks• (Neo)Classical economists contend that markets work well by themselves (produce fullemployment without government help) in aworld of rational and perfectly informed agents; money is neutral (more money only meanshigher inflation) and exogenous; only supply matters in the long‐run.

• Post[‐]Keynesians hold the opposite: crucial role ofuncertainty; need to regulate markets (they areunstable); endogeneity of money; demand alwaysmatters; importance of the distribution of wealth.

47 GDP

On “economic reality”• Physicists face the problem that the act of knowingreality changes reality: “seeing” a particle requiresinteracting with it, and the interaction alters the(characteristics of the) particle.

• The understanding economic reality presumes aconceptual framework that guides our interactionwith reality and within which reality is interpreted.

• The same reality may be interpreted differently inalternative frameworks. What is “actually” thechange in real on slide 10? What is “actually”depicted on the next three slides?

48 GDP

Old woman or young lady?Steven Mark Cohn (2006) Reintroducing macroeconomics, p. 5

49 GDP

The Necker cubeDaniel Reisberg (2009)Exploring the science of mind, p. 62

50 GDP

The vase/profiles figureDaniel Reisberg (2009) Exploring the science of mind, p. 63

51 GDP

Hidden figure: is it “really” there or are we making it up?(Does the answer depend on whether you know English?)

Daniel Reisberg (2009) Exploring the science of mind, p. 64

52 GDP

Price indices

• A price index is a measure of the general price levelof an economy. This level can be thought of as aweighted average of the prices of all the goods.

• By assuming the fiction that there is a unique goodin the economy (the domestic product), if

measures the quantity of the good, then theprice level would represent the price of the good.

• As distinguished from , price indices have nounits and the value by itself means nothing. It isthe rate of change of the index that is informative.

53 GDP

The (implicit price) deflator

• The deflator is a price index defined as

• It measures the changes in prices in all the goodsproduced in an economy between the base periodused in the real and the current period.

• If andthen

and indicating ageneral price increase.

.

54 GDP

Consumer price index

• The is a measure on the cost of purchasing afixed basket of goods of a consumer consideredrepresentative.

• The in period is defined as

• For the index to have base , just multiply theright‐hand side by .

.

55 GDP

Differences between and deflator

• The generally includes imported goods.

• The deflator does not: it only includes thegoods produced in the economy, not abroad.

• The basket of goods in the deflator may varyfrom period to period.

• The basket in the generally does not.

• Despite all that, both indices are strongly correlatedand tend to move in parallel.

56 GDP

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CPI

GDP DEFLATOR

Spain, CPI and GDP deflatorhttp://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

57 GDP

Computing a : an example

• The basket is given by

• Taking as the base period,; ;

; and .

5

5

58 GDP

Inflation rate

• The inflation rate associated with the price indexis the rate of change of the price index :

where is the price index in the current period andis the one in the immediately preceding period.

• To express the inflation rate as a percentage,multiply by the right‐hand side. For instance, if

and , then: the price index has been pushed up a .

59 GDP

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2014

2015

2016

2017

2018

CPI INFLATION RATE

GDP DEFLATOR INFLATION RATE

Spain, CPI inflation rate and GDP deflator inflation ratehttp://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx

60 GDP

Spain, CPI inflation rate(% anual change)

Spain, CPI (index)

http://w

ww.tradingecono

mics.com/spain/con

sumer‐price‐index‐cp

http://w

ww.tradingecono

mics.com/spain/in

flatio

n‐cp

61 GDP

Inflation rate: an example• Let be the inflation rate associated with theof the previous example (slide ). In this case: is not defined (since there is no )

.

. .

.

• If is calculated, for instance, from to ,then → = .

.

62 GDP

Inflation rate ∙ 7 February 2014http://www.tradingeconomics.com

1.2

1.5

4

10.9

5.9

56.1Venezuela

3.1 2

2

0.1

0.70.2

0.4 49.5

2.7

8.22

1.61.12.5

12.5

6.1

35.5

29.411.7

15.331.3

6.1

1.8

5.25

8

-1.77.750.7

-8.8Sudan del Sud

63 GDPhttp://w

ww.tradingecono

mics.com

∙ 7 Feb

ruary 2014

64 GDPhttp://w

ww.tradingecono

mics.com

∙ 7 Feb

ruary 2014

65 GDP

Inflation concepts

• As an economic phenomenon, inflation refers tothe sustained increase of the . It occurs forperiods during which the inflation rate is positive.

• Deflation is the opposite phenomenon: sustaineddecrease of the (negative inflation rates).

• Disinflation takes place when, during inflation, theinflation rate diminishes (but remains positive).

• Hyperinflation occurs with astronomical inflationrates (montly inflation rates of at least ). Undera hyperinflation, inflation is out of control.

66 GDP

‐2‐101234567891011121314151617181920212223242526272829

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

1977

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1974

1973

1972

1971

1970

1969

1968

1967

1966

1965

1964

1963

1962

Spain, inflation rateJanuary 1962 – December 2013 (% annual change)

http://www.ine.es/jaxiBD/menu.do?L=0&divi=IPC&his=5&type=db

January 2014 : 0.2%

67 GDP

‐1,5

‐1

‐0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

6

6,5

7

7,5

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Spain, inflation rateJanuary 1990 – December 2013 (% annual change)

http://www.ine.es/jaxiBD/menu.do?L=0&divi=IPC&his=5&type=db

68 GDP

‐2

‐1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1979

M01

1980

M01

1981

M01

1982

M01

1983

M01

1984

M01

1985

M01

1986

M01

1987

M01

1988

M01

1989

M01

1990

M01

1991

M01

1992

M01

1993

M01

1994

M01

1995

M01

1996

M01

1997

M01

1998

M01

1999

M01

2000

M01

2001

M01

2002

M01

2003

M01

2004

M01

2005

M01

2006

M01

2007

M01

2008

M01

2009

M01

2010

M01

2011

M01

2012

M01

2013

M01

Spain, Catalonia, inflation rateJanuary 1979 – December 2013 (% annual change)

http://www.ine.es/jaxiBD/tabla.do?per=01&type=db&divi=IPC&idtab=124

CATALONIA

SPAIN

69 GDP

‐1,5

‐1

‐0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

6

1993

M01

1994

M01

1995

M01

1996

M01

1997

M01

1998

M01

1999

M01

2000

M01

2001

M01

2002

M01

2003

M01

2004

M01

2005

M01

2006

M01

2007

M01

2008

M01

2009

M01

2010

M01

2011

M01

2012

M01

2013

M01

Spain, Catalonia, inflation rateJanuary 1993 – December 2013 (% annual change)http://www.ine.es/jaxiBD/tabla.do?per=01&type=db&divi=IPC&idtab=124

SPAIN

CATALONIA

70 GDP

‐1,5

‐1

‐0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

2003

M01

2003

M07

2004

M01

2004

M07

2005

M01

2005

M07

2006

M01

2006

M07

2007

M01

2007

M07

2008

M01

2008

M07

2009

M01

2009

M07

2010

M01

2010

M07

2011

M01

2011

M07

2012

M01

2012

M07

2013

M01

2013

M07

Spain, Catalonia, inflation rateJanuary 2003 – December 2013

(% annual change)

http://www.ine.es/jaxiBD/tabla.do?per=01&type=db&divi=IPC&idtab=124

SPAIN

CATALONIA

71 GDP

Core inflation rate• The core (as opposed to headline) inflation rate iscomputed by excluding the prices of food andenergy prices, which tend to be very volatile.

• It is a measure of underlying long‐term inflation. Itcan also be used as an indicator of future inflation.

http://www.tradingeconomics.com/spain/core‐inflation‐rate

Spain, core inflation rate(% annual change)


72 GDP

Spain, core inflation rate(% annual change)

Spain, CPI inflation rate(% annual change)

http://www.tradingeconomics.com/spain/inflation‐cpi


Documents

What is macroeconomics about? - gandalf.fee.urv.catgandalf.fee.urv.cat/professors/AntonioQuesada/Curs1314/IntroMacro... · 1 GDP What is macroeconomics about? • Macroeconomics studies