Download Introduction to Macroeconomics

Macroeconomics
Macroeconomics vs.
Microeconomics
• Major issues:
– Determination of aggregate production, income, prices,
and employment
– Improving the performance of the macroeconomy
• Long-run: Economic growth and price stability
• Short-run: Reducing fluctuations in output, production and
employment/unemployment
• Circular Flow: A model that demonstrates the
relationships in the macroeconomy.
Figure 1 The Circular Flow
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
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Macroeconomic Variables
• The circular flow diagram demonstrates that
the important variables are
– Output and income: real and nominal gross
domestic product (GDP)
• Important implication from the circular flow
diagram: Value of output=Aggregate expenditures or
demand=Aggregate Income
– Aggregate Prices – Inflation
– Employment/Unemployment
The Measurement of Aggregate
Output and Income
• By definition, aggregate output is equal to
aggregate income. The value of output is
equal to the income (wages, interest, rents
and profits) received by the factors.
• There are Various measures of aggregate
output but we will use the concept of:
– Gross domestic product (GDP)
Gross Domestic Product
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
– Market value – prices, illegal, household
– All – imputed values for rent
– Final goods and services– intermediate goods are not
double counted
– Produced (newly) - products resold, inventory
– Within the country – Excludes US production abroad
includes ROW production with the US
– Given period of time (generally yearly or quarterly)
Components of GDP
• Since aggregate production equals aggregate
income, let’s call GDP = Y
• Y can be broken up into the following parts
– Consumption – HH spending on G&S (except new
housing)
– Investment – Business spending on K but includes HH
of new housing
– Government Purchases of G&S
– Net Exports (= Exports – Imports) Net addition
(subtraction) attributable to purchases by ROW.
Y = C + I + G + NX
BEA
2002
GDP
10,480
C
7,385
Durable
911
12%
Non-Dur
2,086
29%
Services
4,388
58%
I
1,589
Non-Res
1,080
68%
Res
504
32%
Chg Inv
5
0%
G
1,932
F
679
35%
S&L
1,253
65%
NX
-426
-4%
X
1,006
10%
I
1,433
14%
70%
15%
18%
GDP Data
• The US Department of Commerce’s Bureau
of Economic Analysis has data on line:
– http://www.bea.doc.gov/
• Economic Report of the President
– http://w3.access.gpo.gov/eop/
• Graphs and Data
– http://www.econmagic.com
Real GDP
Real Versus Nominal GDP
• Remember from micro:
– Expenditures or Revenue = PxQ
– Total Expenditures or Revenue = Σ PxQ
• Total can increase either because prices go up or
quantities increase
• Nominal GDP is measured in current dollars
• Real GDP corrects for increases in prices and tries
to measure the total quantity of goods
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 Nominal GDP, Real GDP, and the
GDP Deflator
• Converting Nominal GDP to Real GDP
– Nominal GDP is converted to real GDP as
follows:
Nominal GDP
GDP deflator =
 100
Real GDP
Percentage Changes and Growth Rates
• GDP and changes in the GDP deflator
(aggregate prices) are most often presented
as growth rates or percentage changes.
• Growth rate of GDP = %ΔY/Y
= (Ynew-Yold)/ Yold
• Growth rate of Prices (inflation) = %ΔP/P
= (Pnew-Pold)/ Pold
Percentage Changes in Nominal GDP,
Real GDP and the GDP Deflator
Year
1997
1998
1999
2000
2001
2002
GDP
GDP
GDP
%chg
%chg
%chg
Nominal Real
Deflator
Nominal Real
Deflator
8,304.3
8,703.5
95.4
8,747.0
9,066.9
96.5
5.3%
4.2%
1.1%
9,268.4
9,470.3
97.9
6.0%
4.5%
1.4%
9,817.0
9,817.0
100.0
5.9%
3.7%
2.2%
10,100.8
9,866.6
102.4
2.9%
0.5%
2.4%
10,480.8 10,083.0
103.9
3.8%
2.2%
1.5%
Base Year 2000
Source: www.bea.gov
Real GDP Growth 2001-2003III
Tuesday, December 23, 2003
ECONOMIC GROWTH SURGED IN THE THIRD QUARTER
Revised estimates of GDP and profits
Estimates released today by the U.S. Bureau of Economic Analysis confirm that in the JulySeptember period U.S. economic growth surged, profits increased, and inflation was moderate.
Gross domestic product (GDP), the most comprehensive measure of U.S. economic activity, is
estimated to have increased at an inflation-adjusted annual rate of 8.2 percent in the third quarter,
the same rate as was shown in last month’s “preliminary” estimate for the quarter. A modest
upward revision to consumer spending offset a modest downward revision to inventory investment.
• In the third quarter, consumer spending on durable goods, on nondurable goods, and on services
were all stronger than in the second quarter. A jump in real disposable income—largely reflecting
the lower withholding rates and the advance payments of child tax credits associated with this
year’s tax cut—helped finance the
step-up in spending.
• Business investment in equipment and software increased about twice as much as in the second
quarter; investment in structures, however, decreased a little after a small increase.
• Residential investment posted its biggest increase in 11 years. Single-family and multifamily
construction and brokers’ commissions on house sales all were stronger than in the second quarter.
• An improvement in the trade balance reflected a bigger increase in exports than in imports.
• Businesses liquidated inventories at a slightly faster pace than in the second quarter.
• Government spending increased modestly, mainly on the basis of construction spending by states
and localities. Federal defense spending decreased slightly after increasing sharply in the second
quarter.
Corporate profits increased about 10 percent (quarterly rate) in the third quarter; they had posted a
similar increase in the second quarter. Third-quarter profits were 25 percent higher than a year
earlier.
Prices paid by U.S. residents increased 1.8 percent in the third quarter after increasing only 0.4
percent in the second. The step-up partly reflected an upturn in energy prices.
__________________________________________________________________________________
_________________
BEA's data—including GDP, personal income, the balance of payments, foreign direct investment,
the input-output accounts,
and economic data for states and industries—are available on its Web site: <www.bea.gov>.
NOTE: The “advance” estimate of GDP for the fourth quarter of 2003 will be released on January
30, 2004.
Contact: Larry Moran 202-606-9691 Bureau of Economic Analysis
U.S. Department of Commerce
Real GDP growth is measured at seasonally adjusted annual rates.
Source: U.S. Bureau of Economic Analysis
GDP AND ECONOMIC WELL-BEING
• GDP is probably a good measure of the economic wellbeing of a society.
• GDP per capita (or person) =GDP/Populations it shows the
income and expenditure of the average person in an
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.
• 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.
Table 3 GDP, Life Expectancy, and Literacy
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Economic Growth
• Economic growth is something that is very important in
improving the standard of living of a population.
• The Rule of 70 illustrates how small changes in growth
rates can affect the standard of living.
• Doubling Time = 70/(% growth rate)
– Examples: Growth Rate → Doubling time
–
2%
→ 35 years
–
4%
→ 15 years
–
6%
→ 11.5 years
–
10%
→ 7 years
• Now, China has been growing pretty close to 10% for the
last 20 or so years so the GDP has doubled once, doubled
again, and doubled a third time, so it is 2x2x2=8 times
larger than it was 20 years ago!
Figure 2 The Growth in Real
GDP per Person
Determinants of Economic Growth
• Remember our production possibilities curve and the first week!
• Increased number of resources: L, K, NR, E
– Investment
– Growth in Labor Force
• Increased productivity of resources:
–
–
–
–
Work Ethic
Technology
Education
Risk-taking and innovation
• Social system that allows the efficient use of resources and promotes
productivity
– Market system and self-interest
– Laws, property rights, and public order
– Political and economic freedom
Table 1 The Variety of Growth Experiences
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Figure 1a Growth and Investment
Figure 1b Growth and Investment