Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Full employment wikipedia , lookup
Economic growth wikipedia , lookup
Economic democracy wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Okishio's theorem wikipedia , lookup
Nominal rigidity wikipedia , lookup
Non-monetary economy wikipedia , lookup
Economic calculation problem wikipedia , lookup
macro The Data of Macroeconomics Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues: Why does the cost of living keep rising? Why are millions of people unemployed, even when the economy is booming? What causes recessions? Can the government do anything to combat recessions? Should it? Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues: What is the government budget deficit? How does it affect the economy? Why does the U.S. have such a huge trade deficit? Why are so many countries poor? What policies might help them grow out of poverty? U.S. Real GDP per capita (2000 dollars) 40,000 9/11/2001 First oil price shock 30,000 long-run upward trend… 20,000 Great Depression Second oil price shock 10,000 World War II 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 U.S. inflation rate (% per year) 25 20 15 10 5 0 -5 -10 -15 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 U.S. unemployment rate (% of labor force) 30 25 20 15 10 5 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Why learn macroeconomics? 1. The macroeconomy affects society’s wellbeing. Each one-point increase in the unemployment rate is associated with: – 920 more suicides – 650 more homicides – 4000 more people admitted to state mental institutions – 3300 more people sent to state prisons – 37,000 more deaths – increases in domestic violence and homelessness Why learn macroeconomics? change from 12 mos earlier 5 5 4 3 3 1 2 1 -1 0 -3 -1 -5 -2 -3 1965 -7 1970 1975 unemployment rate 1980 1985 1990 1995 2000 2005 inflation-adjusted mean wage (right scale) percent change from 12 mos earlier 2. The macroeconomy affects your well-being. Why learn macroeconomics? 3. The macroeconomy affects politics. Unemployment & inflation in election years year U rate inflation rate elec. outcome 1976 7.7% 5.8% Carter (D) 1980 7.1% 13.5% Reagan (R) 1984 7.5% 4.3% Reagan (R) 1988 5.5% 4.1% Bush I (R) 1992 7.5% 3.0% Clinton (D) 1996 5.4% 3.3% Clinton (D) 2000 4.0% 3.4% Bush II (R) 2004 5.5% 3.3% Bush II (R) A multitude of models So 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 – its assumptions – which variables are endogenous, which are exogenous – the questions it can help us understand, and those it cannot Prices: flexible vs. sticky Market clearing: An assumption that prices are flexible, adjust to equate supply and demand. In the short run, many prices are sticky – adjust sluggishly in response to changes in supply or demand. For example, – many labor contracts fix the nominal wage for a year or longer – many magazine publishers change prices only once every 3-4 years Prices: flexible vs. sticky The economy’s behavior depends partly on whether prices are sticky or flexible: If prices are sticky, then demand won’t always equal supply. This helps explain – unemployment (excess supply of labor) – why firms cannot always sell all the goods they produce Long run: prices flexible, markets clear, economy behaves very differently Outline of this course: Introductory material (Chaps. 1 & 2) and the Classical Theory (Chaps. 3, 4, & 6) How the economy works in the long run, when prices are flexible Business Cycle Theory (Chaps. 9-12) How the economy works in the short run, when prices are sticky Policy debates (Chaps. 13-15) Should the government try to smooth business cycle fluctuations? Is the government’s debt a problem? Growth Theory (Chaps. 7 & 8) The standard of living and its growth rate over the very long run Metaphors for the Economy Human Body Machine macro The Data of Macroeconomics Do you remember… …the meaning and measurement of the most important macroeconomic statistics? – Gross Domestic Product (GDP) – The Consumer Price Index (CPI) – The unemployment rate Gross Domestic Product: Expenditure and Income Two definitions: – Total expenditure on domestically-produced final goods and services. – Total income earned by domestically-located factors of production. Expenditure equals income because every dollar spent by a buyer becomes income to the seller. The Circular Flow Income ($) Labor Firms Households Goods Expenditure ($) The expenditure components of GDP consumption investment government spending net exports Consumption (C) definition: The value of all goods and services bought by households. Includes: – durable goods last a long time ex: cars, home appliances – nondurable goods last a short time ex: food, clothing – services work done for consumers ex: dry cleaning, air travel. U.S. consumption, 2007 (Q3) $ billions Consumption % of GDP $9,785.7 70.0% Durables 1,081.6 7.7 Nondurables 2,846.3 20.4 Services 5,857.8 41.9 Investment (I) Definition 1: Spending on [the factor of production] capital. Definition 2: Spending on goods bought for future use Includes: – business fixed investment Spending on plant and equipment that firms will use to produce other goods & services. – residential fixed investment Spending on housing units by consumers and landlords. – inventory investment The change in the value of all firms’ inventories. U.S. investment, 2007 (Q3) $ billions Investment Business fixed $2,162.9 % of GDP 15.5% 1,500.2 10.7 Residential 627.3 4.5 Inventory 35.4 0.3 Investment vs. Capital Note: Investment is spending on new capital. Example (assumes no depreciation): – 1/1/2007: economy has $31,818b worth of capital – during 2007: investment = $2,163b – 1/1/2008: economy will have $33,981b worth of capital Government spending (G) G includes all government spending on goods and services.. G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services. U.S. government spending, 2007 (Q3) $ billions Govt spending Federal $2,716.5 % of GDP 19.5% 990.3 7.1 Non-defense 316.8 2.3 Defense 673.5 4.8 1,762.2 12.4 State & local Net exports, 2007 (Q3) NX = EX – IM $ billions % of GDP - $694.7 - 5.0% Exports 1,685.7 12.0 Imports 2,380.4 17.0 Net Exports An important identity Y = C + I + G + NX value of total output aggregate expenditure A question for you: Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. Does this violate the expenditure = output identity? Why output = expenditure Unsold output goes into inventory, and is counted as “inventory investment”… …whether or not the inventory buildup was intentional. In effect, we are assuming that firms purchase their unsold output. GDP: An important and versatile concept We have now seen that GDP measures – total income – total output – total expenditure GNP vs. GDP Gross National Product (GNP): Total income earned by the nation’s factors of production, regardless of where located. Gross Domestic Product (GDP): Total income earned by domestically-located factors of production, regardless of nationality. Discussion question: In your country, which would you want to be bigger, GDP, or GNP? Why? (GNP – GDP) as a percentage of GDP selected countries, 2002 U.S.A. Angola Brazil Canada Hong Kong Kazakhstan Kuwait Mexico Philippines U.K. 1.0% -13.6 -4.0 -1.9 2.2 -4.2 9.5 -1.9 6.7 1.6 Real vs. nominal GDP GDP is the value of all final goods and services produced. nominal GDP measures these values using current prices. real GDP measure these values using the prices of a base year. Practice problem, part 1 2006 2007 2008 P Q P Q P Q good A $30 900 $31 1,000 $36 1,050 good B $100 192 $102 200 $100 205 Compute nominal GDP in each year. Compute real GDP in each year using 2006 as the base year. Answers to practice problem, part 1 nominal 2006: 2007: 2008: GDP multiply Ps & Qs from same year $46,200 = $30 900 + $100 192 $51,400 $58,300 real GDP multiply each year’s Qs by 2006 Ps 2006: $46,200 2007: $50,000 2008: $52,000 = $30 1050 + $100 205 Real GDP controls for inflation Changes in nominal GDP can be due to: – changes in prices. – changes in quantities of output produced. Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices. U.S. Nominal and Real GDP, 1950–2006 14,000 12,000 (billions) 10,000 8,000 6,000 Real GDP (in 2000 dollars) 4,000 Nominal GDP 2,000 0 1950 1960 1970 1980 1990 2000 GDP Deflator The inflation rate is the percentage increase in the overall level of prices. One measure of the price level is the GDP deflator, defined as Nominal GDP GDP deflator = 100 Real GDP Practice problem, part 2 Nom. GDP Real GDP 2006 $46,200 $46,200 2007 51,400 50,000 2008 58,300 52,000 GDP deflator Inflation rate n.a. Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2006 to 2007, and from 2007 to 2008. Answers to practice problem, part 2 Nominal GDP Real GDP GDP deflator Inflation rate 2006 $46,200 $46,200 100.0 n.a. 2007 51,400 50,000 102.8 2.8% 2008 58,300 52,000 112.1 9.1% Consumer Price Index (CPI) A measure of the overall level of prices Published by the Bureau of Labor Statistics (BLS) Uses: – tracks changes in the typical household’s cost of living – adjusts many contracts for inflation (“COLAs”) – allows comparisons of dollar amounts over time How the BLS constructs the CPI 1. Survey consumers to determine composition of the typical consumer’s “basket” of goods. 2. Every month, collect data on prices of all items in the basket; compute cost of basket 3. CPI in any month equals Cost of basket in that month 100 Cost of basket in base period Exercise: Compute the CPI Basket contains 20 pizzas and 10 compact discs. prices: 2004 2005 2006 2007 pizza $10 $11 $12 $13 CDs $15 $15 $16 $15 For each year, compute the cost of the basket the CPI (use 2004 as the base year) the inflation rate from the preceding year Answers: Cost of basket CPI Inflation rate 2004 $350 100.0 n.a. 2005 370 105.7 5.7% 2006 400 114.3 8.1% 2007 410 117.1 2.5% The composition of the CPI’s “basket” Food and bev. 17.4% Housing Apparel 6.2% 5.6% 3.0% 3.1% 3.8% 3.5% Transportation Medical care Recreation 15.1% Education Communication Other goods and services 42.4% Reasons why the CPI may overstate inflation Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen. Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights. Unmeasured changes in quality: Quality improvements increase the value of the dollar, but are often not fully measured. The size of the CPI’s bias In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year. Now, the CPI’s bias is probably under 1% per year. CPI vs. GDP Deflator prices of capital goods – included in GDP deflator (if produced domestically) – excluded from CPI prices of imported consumer goods – included in CPI – excluded from GDP deflator the basket of goods – CPI: fixed – GDP deflator: changes every year Two measures of inflation in the U.S. Percentage change from 12 months earlier 15% 12% 9% 6% 3% 0% -3% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 GDP deflator CPI Labor Market Data Household survey (60,000 HH) Employer survey (160,000 B+GA) Categories of the population employed working at a paid job unemployed not employed but looking for a job labor force the amount of labor available for producing goods and services; all employed plus unemployed persons not in the labor force not employed, not looking for work Two important labor force concepts unemployment rate percentage of the labor force that is unemployed labor force participation rate the fraction of the adult population that “participates” in the labor force Exercise: Compute labor force statistics U.S. adult population by group, December 2007 Number employed = 146.2 million Number unemployed = 7.7 million Adult population = 233.2 million Use the above data to calculate – the labor force – the number of people not in the labor force – the labor force participation rate – the unemployment rate Answers: data: E = 146.2, U = 7.7, POP = 233.2 labor force L = E +U = 146.2 + 7.7 = 153.9 not in labor force NILF = POP – L = 233.2 – 153.9 = 79.3 unemployment rate U/L x 100% = (7.7/153.9) x 100% = 5.0% labor force participation rate L/POP x 100% = (153.9/233.2) x 100% = 66.0% Two measures of employment growth Percentage change from 12 months earlier 8% 6% 4% 2% 0% -2% -4% 1960 1965 1970 1975 1980 1985 Establishment survey 1990 1995 2000 Household survey 2005 macro A Long Run Model: Where Income Comes From and Where it Goes Outline of model A closed economy, market-clearing model Supply side – factor markets (supply, demand, price) – determination of output/income Demand side – determinants of C, I, and G Equilibrium – goods market – loanable funds market The production function denoted Y = F (K, L) – shows how much output (Y ) the economy can produce from K units of capital and L units of labor reflects the economy’s level of technology exhibits constant returns to scale Returns to scale Initially Y1 = F (K1 , L1 ) Scale all inputs by the same factor z: K2 = zK1 and L2 = zL1 (e.g., if z = 1.25, then all inputs are increased by 25%) What happens to output, Y2 = F (K2, L2 )? If constant returns to scale, Y2 = zY1 If increasing returns to scale, Y2 > zY1 If decreasing returns to scale, Y2 < zY1 Returns to scale: Example 1 F (K , L) KL F (zK , zL) (zK )(zL) z 2KL z 2 KL z KL z F (K , L) constant returns to scale for any z > 0 Returns to scale: Example 2 F (K , L) K L F (zK , zL) zK zL z K z L z K L z F (K , L) decreasing returns to scale for any z > 1 Returns to scale: Example 3 F (K , L) K 2 L2 F (zK , zL) (zK )2 (zL)2 z 2 K 2 L2 2 z F (K , L) increasing returns to scale for any z>1 NOW YOU TRY: Returns to Scale Determine whether each of these production functions has constant, decreasing, or increasing returns to scale: K2 (a) F (K , L) L (b) F (K , L) K L NOW YOU TRY: Answers, part (a) K2 F (K , L) L (zK )2 z 2K 2 K2 F (zK , zL) z zL zL L z F (K , L) constant returns to scale for any z > 0 Assumptions of the model 1. Technology is fixed. 2. The economy’s supplies of capital and labor are fixed at K K and LL Determining GDP Output is determined by the fixed factor supplies and the fixed state of technology: Y F (K , L) The distribution of national income determined by factor prices, the prices per unit firms pay for the factors of production – wage = price of L – rental rate = price of K Notation W = nominal wage R = nominal rental rate P = price of output W /P = real wage (measured in units of output) R /P = real rental rate How factor prices are determined Factor prices are determined by supply and demand in factor markets. Recall: Supply of each factor is fixed. What about demand? Demand for labor Assume markets are competitive: each firm takes W, R, and P as given. Basic idea: A firm hires each unit of labor if the cost does not exceed the benefit. – cost = real wage – benefit = marginal product of labor Marginal product of labor (MPL) definition: The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL = F (K, L +1) – F (K, L) NOW YOU TRY: Compute & graph MPL a. Determine MPL at each value of L. b. Graph the production function. c. Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis. L 0 1 2 3 4 5 6 7 8 9 10 Y 0 10 19 27 34 40 45 49 52 54 55 MPL n.a. ? ? 8 ? ? ? ? ? ? ? NOW YOU TRY: Answers MPL (units of output) Marginal Product of Labor 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 9 10 Labor (L) MPL and the production function Y output F (K , L ) 1 MPL MPL As more labor is added, MPL 1 MPL 1 Slope of the production function equals MPL L labor Diminishing marginal returns As a factor input is increased, its marginal product falls (ceteris paribus). Intuition: Suppose L while holding K fixed fewer machines per worker lower worker productivity NOW YOU TRY: Identifying Diminishing Marginal Returns Which of these production functions have diminishing marginal returns to labor? a) F (K , L) 2K 15L b) F (K , L) KL c) F (K , L) 2 K 15 L NOW YOU TRY: MPL and labor demand Suppose W/P = 6. If L = 3, should firm hire more or less labor? Why? If L = 7, should firm hire more or less labor? Why? L 0 1 2 3 4 5 6 7 8 9 10 Y MPL 0 n.a. 10 10 19 9 27 8 34 7 40 6 45 5 49 4 52 3 54 2 55 1 MPL and the demand for labor Units of output Each firm hires labor up to the point where MPL = W/P. Real wage MPL, Labor demand Units of labor, L Quantity of labor demanded The equilibrium real wage Units of output Labor supply equilibrium real wage L The real wage adjusts to equate labor demand with supply. MPL, Labor demand Units of labor, L Determining the rental rate We have just seen that MPL = W/P. The same logic shows that MPK = R/P : – diminishing returns to capital: MPK as K – The MPK curve is the firm’s demand curve for renting capital. – Firms maximize profits by choosing K such that MPK = R/P . The equilibrium real rental rate Units of output Supply of capital equilibrium R/P K The real rental rate adjusts to equate demand for capital with supply. MPK, demand for capital Units of capital, K The Neoclassical Theory of Distribution states that each factor input is paid its marginal product a good starting point for thinking about income distribution How income is distributed to L and K total labor income = ________ = _________ total capital income = _______ = __________ If production function has constant returns to scale, then Y MPL L MPK K national income labor income capital income The ratio of labor income to total income in the U.S., 1960-2007 Labor’s 1.0 share of total 0.8 income 0.6 0.4 0.2 Labor’s share of income is approximately constant over time. (Thus, capital’s share is, too.) 0.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 The Cobb-Douglas Production Function The Cobb-Douglas production function has constant factor shares: = capital’s share of total income: capital income = MPK x K = Y labor income = MPL x L = (1 – )Y The Cobb-Douglas production function is: 1 Y AK L where A represents the level of technology. The Cobb-Douglas Production Function Each factor’s marginal product is proportional to its average product: MPK AK 1 1 L Y K (1 )Y MPL (1 ) AK L L Labor productivity and wages Theory: wages depend on labor productivity U.S. data: period productivity growth real wage growth 1959-2007 2.1% 2.0% 1959-1973 2.8% 2.8% 1973-1995 1.4% 1.2% 1995-2007 2.5% 2.4% Outline of model A closed economy, market-clearing model Supply side DONE factor markets (supply, demand, price) DONE determination of output/income Demand side Next determinants of C, I, and G Equilibrium goods market loanable funds market Demand for goods & services Components of aggregate demand: C = I = G= (closed economy: no NX ) Consumption, C def: ________________ is total income minus total taxes: Y – T. Consumption function: C = C (Y – T ) Shows that (Y – T ) C def: ___________________________ is the increase in C caused by a one-unit increase in disposable income. The consumption function C Y–T Investment, I The investment function is I = I (r ), where r denotes the __________________, the nominal interest rate corrected for inflation. The real interest rate is – ________________________________ – ________________________________. So, r I The investment function r I Government spending, G G = govt spending on goods and services. G excludes _______________________ (e.g., social security benefits, unemployment insurance benefits). Assume government spending and total taxes are exogenous: G G and T T The market for goods & services Aggregate demand: Aggregate supply: Equilibrium: The ___________________ adjusts to equate demand with supply. The loanable funds market A simple supply-demand model of the financial system. One asset: “loanable funds” – demand for funds: _________________ – supply of funds: _________________ – “price” of funds: __________________ Demand for funds: Investment The demand for loanable funds… – _____________________________: Firms borrow to finance spending on plant & equipment, new office buildings, etc. Consumers borrow to buy new houses. – _____________________________, the “price” of loanable funds (cost of borrowing). Loanable funds demand curve r The investment curve is also the demand curve for loanable funds. I Supply of funds: Saving The supply of loanable funds comes from saving: – ________________________________ – ________________________________ Types of saving private saving = public saving = national saving, S = = = EXERCISE: Calculate the change in saving Suppose MPC = 0.8 and MPL = 20. For each of the following, compute S : a. G = 100 b. T = 100 c. Y = 100 d. L = 10 digression: Budget surpluses and deficits If T > G, budget ______ = (T – G ) = public saving. If T < G, budget ______ and public saving is negative. = (G – T ) If T = G , “_______________,” public saving = 0. The U.S. government finances its deficit by ________________________. Loanable funds market equilibrium r S, I The special role of r r adjusts to equilibrate the _______ market and the _______________ market simultaneously: Mastering the loanable funds model Things that shift the saving curve: Things that shift the investment curve CASE STUDY: The Reagan deficits Reagan policies during early 1980s: – ____________________________ – ____________________________ Both policies reduce national saving: CASE STUDY: The Reagan deficits r S, I Are the data consistent with these results? variable 1970s 1980s T–G –2.2 –3.9 S 19.6 17.4 r 1.1 6.3 I 19.9 19.4 T–G, S, and I are expressed as a percent of GDP All figures are averages over the decade shown. An increase in investment demand r S, I Saving and the interest rate Why might saving depend on r ? How would the results of an increase in investment demand be different? – Would r rise as much? – Would the equilibrium value of I change?