Download Macroeconomics - Licence 1 Economie Gestion mention

I. Introduction to Macroeconomics
II. Main aggregates in national accounting
Macroeconomics - Licence 1 Economie
Gestion mention européenne
Chapter 1: Introduction
Rémi Bazillier 1
1
[email protected]
http://remi.bazillier.free.fr
Université d’Orléans
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
General outline of the course
1
Introduction: economic aggregates
2
Consumption
3
Investment and public spending
4
Keynesian macroeconomic equilibrium (short run): IS
curve
5
Keynesian macroeconomic equilibrium (short run): LM
curve / Money and financing of the economy
6
Macroeconomic policies
7
Keynesian macroeconomic equilibrium (medium run):
flexible prices and trade-off inflation - unemployment
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
Textbooks and websites
In French:
Macroéconomie (Blanchard et Cohen, Editions Pearson)
Quizz, Glossaries, Flashcards: http://goo.gl/3E1ZK
(Pearson website)
In English
Macroeconomics (Blanchard, Editions Pearson)
Website of the course:
http://remi.bazillier.free.fr/macro.html and Celene
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
Organization of the course
4 hours a week
You need to prepare exercices at home
1 mid-semester exam 50% / 1 final exam (Partiel) 50 %
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
Plan
1
I. Introduction to Macroeconomics
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
2
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
I. Introduction to Macroeconomics
Goal of economics: study how scarce resources are
allocated in order to fulfill human needs
Differences between microeconomics and
macroeconomics
Microeconomics: study individual behaviors on specific
markets
Macroeconomics: study global economy / Analyze
evolutions of national income / unemployment rate / Inflation
Macroeconomic issues:
How can we foster economic growth?
Why and how moderate inflation?
How reducing unemployment? Inequalities?
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
A. Goals of macroeconomics
Determine variables explaining individuals’ behavior
Study relationships between variables in order to identify
stable relationships or laws between these variables
Study how an equilibrium between different economic
aggregates can appear
Analyze main economic unbalances between aggregates
and explain these
Study economic policies and tools to use in order to reach
common goals decided by the society
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
B. Methods in macroeconomics
1
Positive and Normative approaches
2
Hypothesis, deduction and modelling
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
1. Positive and Normative approaches
Positive approach: describe, analyze and explain facts and
economic behaviors. Can be used to explain and forecast
Normative approach: define what it should be. Can be
used to define an optimal economic policy
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
2. Hypothesis, deduction and modelling
Economics is a social science
Theoretical representation of the reality
Then evaluation of the explanatory power of this theoretical
representation
The theoretical representation: the model
Formalization
Studied objects are quantitative
Identification of causality links and quantification
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
Modelling
Variables:
Aggregates, indexes, prices...
Flows and stocks
Flow: total value of transactions (sales or purchases,
incomes or expenditures) during an accounting period.
Changes of stock over time.
Stock: the value of an asset at a balance date (or point in
time). Some entity that is accumulated over time by inflows
and/or depleted by outflows. Stocks can only be changed via
flows.
Stock variation between t and t+1 = flow in t
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
Modelling
Exogeneous variables → Causal relations → Endogeneous
variables
Example: We may know deflation (fall of prices) in France
because of consumption’s fall explained by economic
recession (fall of GDP)
π = f (gconsumption )
gconsumption = h(gy )
Endogeneous variables: π,gconsumption
Exogeneous variables: gy
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
C. Some statistics
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
C. Some Statistics
Source: INSEE (2014)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Goals of macroeconomics
B. Methods in macroeconomics
C. Some statistics
C. Some Statistics
Unemployment rate
Source: INSEE (2013)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
A. Economic agents and markets
1
Economic agents
firms, households, government, financial firms and rest of
the World (foreign)
2
Markets
Markets of goods and services, labour market, capital
market
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
1. Economic agents
Firms: production of goods and services
Households: supply labor (production factor) to firms and
get an income used to consume and save
Government (public administration, State, Social security,
local authorities) non-profit service providers
Financial firms: financial intermediate and insurance
Rest of the World: all economic agents located outside the
country
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
2. Markets
Markets of goods and services: determine national
production, consumption goods’ demand and level of
prices
Labour market: determine wages, employment level and
unemployment
Financial markets: determine interest rates and prices of
monetary and financial assets
Currency markets: determine currency rate
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Which equilibrium
Short-term equilibrium:
Labour market is exogeneous
Equilibrium on markets of goods and services and on
financial markets
Prices are fixed
→ Simple version of IS/LM model
Mid-term equilibrium:
Interactions between 3 markets: goods and services,
financial market and labour markets
Flexible prices
Long-term equilibrium:
Economic growth
Open and closed economy: relation or not with the rest of
the World. Here: study of a closed economy (no currency
market)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
B. GDP
Gross Domestic Product (GDP), value-added and income
1
2
3
GDP is the value (in , $...) of final goods and services
produced in an economy during a specific period
(Production approach)
GDP is the sum of created added-values during a specific
period (Value-added approach)
GDP is the sum of income distributed in the economy
during a specific period (income approach)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Differences between GDP (gross domestic product) and GNI
(gross national Income)
The difference is that GDP defines its scope according to
location, while GNP defines its scope according to
ownership.
GDP is product produced within a country’s borders; GNP
is product produced by enterprises owned by a country’s
citizens.
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
The production approach
Definition
GDP is the value (in e, $...) of final goods and services
produced in an economy during a specific period
An example: two firms
Firm 1 produces steel. She sells e100 to firm 2 which
produces cars. Firm 1 use workers and machines. Workers
are paid 80 e. Profit is e20.
Firm 2 buys steel (e100) and use it to produce cars. Cars
are sold for e210. Workers are paid e70. Profit is e40.
GDP: 310? (sum of productions) or 210? (value of final
products?)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
The production approach (2)
GDP is 210
Steel is an intermediate good, used in the production of the
final good (cars)
Intermediate goods are not included in the calculation of
GDP.
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
The added-value approach
Definition
GDP is the sum of added-values created in the economy during
a specific period
Added-value = Final production - intermediate
consumptions
AV1 = 100
AV2 = 210 − 100
P
GDP = 2i=1 AV = 100 + 110 = 210
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
The income approach
Definition
GDP is the sum of incomes distributed in the economy during a
specific period
Income of a firm:
One part is taxed (indirect taxes)
One other part is used to pay workers
The last part is profit
Added value: sum of indirect taxes, capital income and
labour income
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Income approach (2)
In our example:
No indirect taxes
Labour income: 70+80=150
Capital income: 20+40=60
GDP = 150+40=210
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Share of labour income in France
Source: Cotis (2009)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Real and nominal GDP
French GDP in 2005: e1710 billions
French GDP in 1960: e46 billions
Has the French production been multiplied by 37 between
1960 and 2005?
Answer is no → Difference between real and nominal GDP
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Real and nominal GDP
Nominal GDP:
P
Quantitiest × pricest
Real
P GDP: Prices are constant.
Quantitiest × pricesconstant
An example:
Year
2004
2005
2006
Number of cars
10
12
13
Rémi Bazillier
Price of cars
10000
12000
13000
Nominal GDP
100000
144000
169000
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Real and nominal GDP
Real GDP (prices 2005):
In 2004: 10 × 12000 = 120000
In 2005: 12 × 12000 = 144000 (=nominal GDP)
in 2006: 13 × 12000 = 156000
Growth
Nominal GDP Real GDP
2004-2005
+44%
+20%
2005-2006
+16%
+8%
Difference between nominal GDP growth and real GDP
growth is inflation.
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Difference between nominal and real GDP in France
Real GDP: constant prices 2005
Rémi Bazillier
Chapter 1: Introduction
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
GDP growth
ybt−1,t =
Yt − Yt−1
Yt−1
(1)
Positive growth rate: growth
Negative growth rate: recession (2 semesters of negative
growth)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
The composition of French GDP, 2013
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
GDP composition
Consumption (C): Goods and services purchased by
households (foods, holidays, cars..)
Investment (I): gross fixed capital formation. Two
components: investments by firms (machines, factories...)
and investments by households (Apartments, house)
difference between intermediate goods and investment
Government spendings: purchase of goods and services
by the government (local and national authorities).
Services: provided by public servants. Value of services
(free or cheap for citizens) = cost.
Transfers and interests: not included here. if included:
almost 50% of GDP
Investment in stock (Is ): Stock variation.
If Production > sells → % stocks
If Production < sells → & stocks
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Trade balance
Imports (M): purchase of foreign goods and services by
households, firms and government
Exports (X): purchase by foreigners of goods and services
produced in the country
Difference (X-M): Trade balance or net exports (trade
surplus or trade deficit)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Fundamental GDP decomposition
Y =C+I+G+X −M
Rémi Bazillier
Chapter 1: Introduction
(2)
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Unemployment rate
Unemployment rate: ratio unemployed over active
population
u=
U
L
(3)
Active population: sum of employed workers and
unemployed
L=N +U
Rémi Bazillier
Chapter 1: Introduction
(4)
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Unemployment rate
How to measure unemployment rate:
Number of unemployed registered to the unemployment
office (Pole emploi in France) but problems
Large surveys: Enquête emploi in France (INSEE) or
Current population survey in the US
Only unemployed looking for a job are considered as
unemployed. The others: not included in active population
Problem: when unemployed rates are high, some
unemployed give up looking for a job. High unemployment
rate = low participation rate.
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Unemployment rate and growth
Okun law: high growth → fall of unemployment rate / low
growth → increase of unemployment rate
relatively intuitive: if high growth rate, increase of
production, rise of employment
In the nineties:
some economists consider unemployment rate in the US
was “too low” → claim for a more restrictive monetary policy
Unemployment rate in Europe “too high” because of a too
restrictive monetary policy
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Evolution of unemployment and growth rate in France ,
1961-2005
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Inflation rate
Inflation: increase of the prices’ general level.
Two measures of prices level: GDP deflator and
consumption price index
GDP deflator:
If nominal GDP increases but real GDP remains constant:
increase of nominal GDP = increase of prices
Pt =
nominal GDPt
real GDPt
nominal GDP = Pt Yt
Rémi Bazillier
Chapter 1: Introduction
(5)
(6)
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Inflation rate
Consumption price index (CPI):
Consumers are concerned by the price of products they
buy, not the general level of prices
Differences:
Some goods are not sold to consumers but to firms,
foreigners or governments
Some consumed goods are not produced in the country
(imports)
CPI gives a better approximation of the cost of life, based
on a representative basket of goods
Small differences with GDP deflator (less than 1%) except
for specific period (1974 / 1979-1980)
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Inflation rate measured by CPI and GDP deflator
Source: OECD, economic perspectives, 2006
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Inflation and unemployment
Is there a relation between inflation and the output or the
unemployment?
Very often: a negative correlation between the variation of
inflation rate and unemployment rate
When unemployment rate is low, inflation increases
But important exception: stagflation in the 70’s (high
inflation, low growth)
This negative correlation is called Phillips curve
Rémi Bazillier
Chapter 1: Introduction
I. Introduction to Macroeconomics
II. Main aggregates in national accounting
A. Economic agents and markets
B. GDP
C. GDP composition
D. Other macroeconomic variables
Inflation rate evolution and unemployment, France,
1962-2005
Source: OECD, economic perspectives, 2006
Rémi Bazillier
Chapter 1: Introduction