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
Economic growth wikipedia , lookup
Exchange rate wikipedia , lookup
Fear of floating wikipedia , lookup
Pensions crisis wikipedia , lookup
Gross domestic product wikipedia , lookup
Full employment wikipedia , lookup
Great Recession in Europe wikipedia , lookup
Okishio's theorem wikipedia , lookup
Macroeconomics is divided into two parts • Theory of economic growth – focuses on long run trend of real GDP • the source of improved living standards – the long-run trend is called potential GDP – potential GDP depends on the available supply of labor (L), capital (K), and technology (T) • Theory of economic fluctuations – focuses on short-run ups and downs in the economy (recessions, Asian financial crisis Real GDP, Potential GDP, Unemployment Rate, and the Natural Unemployment Rate 21_01 BILLIONS OF 1992 DOLLARS 7,000 6,500 Real GDP 6,000 5,500 Potential GDP 5,000 4,500 1980 1982 1984 Real GDP is below potential GDP and unemployment rate is above natural rate of unemployment. 1986 1988 1990 Real GDP is near potential GDP and unemployment rate is near natural rate of unemployment. 1992 1994 Real GDP is above potential GDP and unemployment rate is below natural rate of unemployment. PERCENT 12.5 Unemployment rate 10.0 7.5 5.0 6 percent 2.5 0.0 1980 1982 1984 1986 1988 1990 1992 1994 Aggregate production function • Real GDP = F(labor, capital, technology) • Y = F(L,K,T) • Thus to explain the long term growth of real GDP we need to look at L, K, and T • Today we discuss L briefly and focus mainly on K • Will come back to T later Labor (L): Factors determining growth of aggregate hours • • • • • • Aggregate hours = (hours per employee) (employment to population ration) (working age population) L = (L/E) (E/P) (P) Consider an example: the forecast of aggregate hours by the Council of Economic Advisers Example: CEA Forecast of L (aggregate hours) 1973 -1990 Growth 1.7 rate of aggregate hours (L) Growth 1.5 rate of working age population (P) 1990 -1997 1997 -2005 1.5 1.1 1.0 1.0 Two explanations of unemployment • Job rationing explanation – Uses supply and demand model (see diagram) – real wage higher than market equilibrium • minimum wage • insider-outsider theory • efficiency wages • Job search explanation – job destruction and job creation creates flux – role of unemployment benefits Job rationing: real wage is higher than market equilibrium, hence unemployment 21_8 REAL WAGE 1. When the real wage is above the intersection of supply and demand... 3. and there is this much unemployment, or excess supply. Labor supply A Equilibrium wage Labor demand QUANTITY OF LABOR 2. firms hire this many workers... Job search: “flows” in and out of unemployment 21_9 Enter or re-enter labor force Look for work Find job Drop out of labor Leave labor force Not in labor force force Move to new job directly Lose job or quit Find job Become unemployed Unemployed Employed Now let’s move on to capital • First, note that investment increases the amount of capital (see next graph). – Hence, we will focus on what determines investment. • Second, put on your big picture glasses 22_01 Capital at end of this year ($10.5 trillion) Capital at end of last year ($10 trillion) Gross investment during this year ($1.5 trillion) Net investment ($.5 trillion) Depreciation ($1 trillion) Look again at basic spending equation Y = C + I + G+ X • Divide by Y to convert to shares of GDP: • 1 = (C/Y) + (I/Y) + (G/Y) + (X/Y) • for example, – if G/Y goes down, – then (C/Y + I/Y + X/Y) must go up • But how? What is the incentive? What transmits the information? In other words what is the price? Answer: the interest rate. Shares in recent U.S. history 22_02 PERCENT 90 C Y 80 70 60 50 G Y 40 30 20 I Y 10 X Y 0 –10 1930 1940 1950 1960 1970 1980 1990 22_03 People tend to lower consumption when the interest rate rises INTEREST RATE (R) (PERCENT) 7.5 A higher interest rate... 5.0 2.5 C Y 0.0 62.5 65.0 ...lowers the amount of consumption. 67.5 70.0 CONSUMPTION AS A SHARE OF GDP (PERCENT) 22_04 Firms tend to lower investment when the interest rate rises INTEREST RATE (R) (PERCENT) 7.5 A higher interest rate... 5.0 2.5 I Y 0.0 12.5 ...lowers the amount of investment. 15.0 17.5 20.0 INVESTMENT AS A SHARE OF GDP (PERCENT) 22_05 Three episodes in this part of the story: (1) interest rate exchange rate (2) exchange rate (exports-imports = net exports) (3) combine: interest rate net exports INTEREST RATE (R) (PERCENT) 7.5 A higher interest rate... 5.0 2.5 X Y 0.0 - 4.0 - 2.5 ...lowers the amount of net exports. 0.0 2.5 5.0 NET EXPORTS AS A SHARE OF GDP (PERCENT) 22_06 Sum up: “non-government” share R R 7.5 7.5 5.0 5.0 2.5 0.0 62.5 65.0 I Y 2.5 C Y 0.0 67.5 12.5 15.0 PERCENT PERCENT (a) Consumption Share (b) Investment Share R R 7.5 7.5 5.0 5.0 2.5 0.0 X Y -2.5 0.0 2.5 PERCENT (c) Net Exports Share 17.5 NG Y 2.5 0.0 75 80 85 PERCENT (d) Nongovernment Share Finding the equilibrium interest rate 22_ 07 3. Investment and the remaining shares are then determined from the interest rate. 2. The intersection of these two lines determines the equilibrium interest rate, which can then be shown in all the diagrams. 1. First mark the share of spending available for nongovernmental uses; in this case 78 because the government purchases share is assumed to be 22 percent. R R R R 7.5 7.5 7.5 7.5 5.0 5.0 5.0 5.0 2.5 62.5 65.0 2.5 X Y Y 0.0 I 2.5 C 0.0 67.5 PERCENT (a) Consumption Share Y 0.0 12.5 15.0 17.5 PERCENT (b) Investment Share -2.5 0.0 2.5 2.5 NG Y 0.0 75 80 85 PERCENT PERCENT (c) Net Exports Share (d) Nongovernment Share End of Lecture