Download What is Macroeconomics?

Macroeconomic Theory and
Policy
Lecture 1
What is Macroeconomics ?
1
Macroeconomics is a Science of Analysing an
Economy and Art Of Policy Making
• It is a science that
a. studies how the
economy works in
good, bad and normal
times.
b. studies fluctuations y
of economic variables
around their trends.
• It is art of policy
making to maximise
welfare or minimise
the loss of it from
unwanted fluctuations.
Y(t)
Yn(t)
recovery
Boom
Recession
Time
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An Overview of Players and Shapers of an Economy
Rest of the World
(ROW) –
Trading Partners
Multilateral
Organisation
Treasury –
Allocation of
Public Funds
Revenue –
Tax
Collector
Households
Consumers
Economy:
The Big Market
Firms –
Investors
Producers
Banks –
Central Bank
Commercial Banks
Stock Market
Financial Institutions
Trade Unions
Employer
Unions
Merchants and
Traders
–Wholesalers
–Retailers
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An Example of
Static and Dynamic Macroeconomic Models
Static Model:
C = a0 + a1*(Y-T)
Y = C +I + G +X -M
Dynamic Model:
C(t) = a0 + a1*(Y(t)-T(t))
I(t) =b*(Y(t-2) - Y(t-1))
Y(t) = C(t) +I(t) + G(t) +X(t) -M(t)
An example using a spread sheet
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An Example of a Static Macroeconomic Model
Y=C+I+G
C =200 + 0.8*(Y-T)
T =20 G=20 I =30
Y =200 +0.8*(Y-T) +I +G
Y-0.2Y = 200 -0.8*(20) +30+20
0.2 Y =200-16 +50
Y =234/0.2 = 5*(234) = 1170
MULTIPLIER =5
C = 200+0.8*(1170-20) = 1120
Y =1170 =1120+20+30 = C + I + G
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An Example of Dynamic Macroeconomic Model
Y(t)= C(t) + I(t) + G(t)
C(t) =200 + 0.8*(Y(t-1)-T(t-1))
T(t-1) =20; G(t)=20; I(t) =30; Y(t-1) = 500
Y(t) =200 +0.8*(500-20) +30 +20
Y(t)= 200 +384 +30+20
Y(t) =200+384 +50
Y(t) = 634
Y(t+1) = 200 +0.8*(634-20) +30 +20 = 741
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An Overview of Players and Shapers of an Economy
Firms –
Investors
Producers
Treasury –
Allocation of
Public Funds
Revenue –
Tax Collector
Households
Consumers
Economy:
The Big Market
Rest of the World
(ROW) –
Trading Partners
Multilateral
Organisation
Banks –
Central Bank
Commercial Banks
Stock Market
Financial Institutions
Trade Unions
Employer
Unions
Merchants and
Traders
– Wholesalers
– Retailers
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Micro-Foundation to Macro Variables
General Equilibrium with a representative household and firm
Market p and w such that
Y=C
Wage payment, wL
LD = LS
LS +L = Lbar
Labour supply, L
Households
Max U(C,L)
Firms
Max π(LS)
Economy
Payments for goods
Max U = c φ l 1−φ
l + h =1
s
pc = wh s + π
c ≥ 0; l ≥ 0; h s ≥ 0
Supply of Goods
Max π = py − wh d
( )
y≤ h
d α
y ≥ 0; h ≥ 0
d
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Macroeconomic Policy
• Fiscal Policy
taxes
expenditure
debt
• Monetary Policy
interest rate/ M-supply
exchange rate/trade
stock market
• Growth/supply side 9
Analysis of Macroeconomic Variables
• Quantities:
GDP (GNP) and Its components
Consumption, Investment Government spending
Exports and imports
Employment and Capital Stock
Flows of saving and investment, Stock of Money
• Prices
GDP Deflator and Various price indices
Interest rate, Exchange Rates
• Analysis
Theory and Model: Cause and Effect Relation
Diagrams and system of equations
• Evidence
Charts and tables of levels, Growth rates, variances,
covariance Correlation, regression
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GDP and GDP Components.
What determines each of them?
What makes them fluctuate?
600000
Components of Aggregate Demand in the UK
500000
C
I
400000
X
Million of pounds
M
G
300000
200000
100000
www.statistics.gov.uk
Years
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
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Components of Aggregate Demand in the
UK in 2000 (WB-CD)
0.385
C
I
0.673
G
X
0.333
M
0.186
0.191
Source: Hull University Network Start/applications/Economics
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Components of Aggregate Demand in India 2000
0.147
C
I
0.121
0.121
G
X
0.638
M
0.237
www.imfstatistics.org
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GDP and its Component in Ethiopea,
2000
1.200
1.000
0.800
0.600
0.400
0.200
0.000
1.000
0.710
0.142
Y
C
I
0.262
G
0.179
X
0.289
M
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Macroeconomics is about Growth Rates
• It studies growth rates over time across countries.
Growth of Real GDP in the UK
0.08
0.06
0.02
Growth Y
99
97
19
95
19
93
19
91
19
89
19
87
19
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
0
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Growth rate
0.04
-0.02
-0.04
Years
15
Macroeconomics Studies Economy Wide Prices
Inflation, interest rate and exchange rates
30
25
Percent
20
IDY
TBR
inflation
ER
15
10
5
0
Ye
ar
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
• It is a study of price
level, exchange rate
and interest rates.
• It is a study of
monetary and fiscal
policy variables
• It is the study of trade
balance and the
France
Germany
exchange rate
Years
Growth rt
S/Y
I/Y
Popg
XM/Y
capgrow
2.05
20.85
20.69
0.447
44.25
2.10
1.84
23.47
21.65
0.249
53.24
1.79
United Kingdom
2.20
17.30
17.83
0.282
52.75
3.13
United States
3.02
17.41
18.46
1.061
20.62
4.43
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Macroeconomics Studies why Growth rates of
Output and Employment Vary across Countries
It is a study about
• why the economic
growth rate is higher China
Hong Kong,
in one country and low China
in another country? Ireland
Korea, Rep.
• Why unemployment Japan
and inflation rates are
Malta
higher in one country Portugal
than in another
Singapore
country?
Thailand
Inflati
o
n
Growt
h
P
Y S/Y
I/Y
Real
(X+M)/
Y
r
t
I
n
t
r
t
8.15
18.40
36.88
31.44
10.14
2.33
4.22
23.01
28.84
245.16
9.95
4.61
4.71
16.77
20.31
120.58
8.49
4.22
5.81
24.47
32.24
67.78
10.97
3.71
2.33
20.43
29.50
20.77
1.17
3.85
4.11
23.47
28.40
178.94
3.30
4.85
2.85
14.03
26.79
67.30
36.77
5.30
5.02
33.56
38.58
360.17
2.34
4.96
4.74
21.07
32.30
73.40
6.03 17 8.49
Calculate the Nominal and Real GDP with given prices and Quantities
Prices (in Euro)
Apples
Pears
Petrol
2000
1.0
2.0
5.0
2001
1.0
3.0
6.0
Year
Quantities
Apples
Pears
Petrol
Year
2000
300
100
50
2001
400
150
40
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Calculation of Nominal and Read GDP
•
•
Nominal GDP 2000
1*300 + 2*100 +5*50
= 300 + 200 + 250
= 750
•
•
Nominal GDP 2001
1*400 + 3*150 +6*40
= 400 + 450 + 240
= 1090
Growth rate{ (1090 - 750)/750}*100
= 45.33 %
Real GDP 2000
• 1*300 + 2*100 +5*50
= 300 + 200 + 250
= 750
GDP of 2001 in 2000 prices
• 1*400 + 2*150 +5*40
= 400 + 300 + 200
= 900
Growth rate {(900 - 750)/750}*100
= 20.00 %
What is the GDP Deflator (price index)?
GDP Deflator
= Nominal GDP/Real GDP
=1090/900 = 1.211
What is wrong here?
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References
•
•
•
•
http://www.statistics.gov.uk
http://Bankofengland.co.uk inflation report
Manual of National Accounts, ONS
Lucas R.E. Jr. (2000) Some macroeconomics for the 21st
century” Journal of Economic Perspectives 14:1:Winter
159-168.
• Solow R.M. (2000) Towards a macroeconomics of
medium run, Journal of Economic Perspective 14:1:Winter
151-158.
• Lucas, Robert Jr. and Sargent, After Keynesian
Macroeconomics, Spring 1979, Federal
Reserve Bank of Monneapolis Quarterly Review.
• B&W 1,2, MS 2 , BL 2, MK 2
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