Download Intermediate Macroeconomics

Intermediate Macroeconomics
Ms. Majella Giblin
2005
22nd September 2005
Course Overview
• One term
• Objectives of the course:
– Undertanding of real world economic
phenomena
– Devise appropriate economic policy
responses to moderate adverse effects to
business fluctuations
Timetable
• Lectures:
– Monday
– Thursday
– Friday
9-10am
2-3pm
1-2pm
Room 941
Room 941
Room 903
1-2pm
11am-12
Room 231A
Room 208
• Tutorials:
– Monday
– Tuesday
Intermediate Macroeconomics:
Overview
• The macroeconomy in the long run:
– Income, Unemplyment, Inflation
• The macroeconomy in the short run:
– Aggregate demand, aggregate supply
• Macroeconomic policy
• Open-economy macroeconomics
Assessment
• Continuous assessment
30%
– Individual written assignment
• Exam
– End of semester written exam
70%
Reading
• Essential reading:
– Mankiw (2000) fourth edition
– Blanchard (2000) second edition
• Supplementary reading:
– Mankiw (2001) second edition
Introduction
• What do macroeconomists study?
– Why some countries have experienced rapid
growth in incomes?
– Why other countries stay in poverty?
– Why some countries have high rates of
inflation?
– Why other coountries maintain stable prices?
– Why all countries have periods of recessions
or depressions
– How can government policy help?
Source: Mankiw (2000)
Introduction: What is
macroeconomics?
• Macroeconomics = the study of the economy as
a whole.
– It attempts to answer these questions
– Studies: growth in incomes, changes in prices and the
rate of unemployment
• Macroeconomic issues play a central role in the
political debate because it deals with the state of
the economy
– It devises policies to improve economic performance
Source: Mankiw (2000)
Macroeconomics and
Microeconomics
• Microeconomics = the study of how
households and firms make decisions and
how these decisionmakers interact in the
marketplace
– Firms and households optimise – doing their
best given scarce resources and constraints
– Choose purchases to maximise their utility
Source: Mankiw (2000)
Macroeconomics and
Microeconomics
• Macroeconomics:
– Studies economy-wide events which
ultimatley arise from the interaction of many
households and many firms
– Therefore, macro- and micro- economics are
inextricably linked
– In macroeconomics we study aggregate
variables = the sum of the variables
describing many individual decisions
Source: Mankiw (2000)
Macroeconomics and
Microeconommics
• Example:
– Total consumer spending = spending by many
individuals within the economy
– Total investment = investment decisions by
many firms in the economy
Source: Mankiw (2000)
Use of models
• To understand the economy, macroeconomists
uses models
– Theories that simplify reality
– Applying assumptions
– illustrates relationships among variables and
dispenses of irrelevant details
– Exogenous variables: determined outside the model,
model does not attempt to explain them
– Endogenous variables: model attempts to explain
these variables
Source: Mankiw (2000)
Use of models
• Macroeconomists study many aspects of
the economy, including, economic growth,
unemployment, inflation
– No single model covers all, so different
models are used to explain different aspects
of the economy
Soource: Mankiw (2000)
The Data of Macroeconomics
•
Overview:
1.
2.
3.
–
Gross Domestic Product (GDP)
Inflation
Unemployment rate
Three economic statistics that economists
and policymakers use
Source: Mankiw (2000)
1. Gross Domestic Product (GDP)
•
•
GDP: tells us the nation’s total income
and expenditure on its output of goods
and services
Considered best measure of how well
the economy is performing
– Gauge of economic performance
•
Viewed in two ways:
a) Total income of everyone in the economy
b) Total expenditure on the economy’s output
Source: Mankiw (2000)
GDP
• Measure of both income and expenditure:
– Two quantities are the same: for the economy
as a whole income must equal expenditure
• GDP = the value of all goods and services
produced domestically in the economy
regardless of the nationality of the owners
of the factors of production
• GDP = output = income = expenditure
Source: Mankiw (2000)
GDP
• Computing GDP:
– Example:
– suppose an economy produces four apples
and three oranges
– Apples market price = 0.50 cents
– Oranges market price = €1
– GDP = (price of apples x quantity of apples) +
(price of oranges x quantity of oranges)
Source: Mankiw (2000)
GDP
• GDP = (€O.50 X 4) + (€1 X 3) = €5.00
• GDP includes the value of currently
produced goods and services, used goods
are not part of GDP
• GDP only includes the value of final goods
not intermediate goods
• Underground economy is not included in
GDP
Source: Mankiw (2000)
GDP
• Real versus nominal GDP:
– Real GDP values goods and services at constant
prices
– Nominal GDP values goods and services at current
prices
– Real GDP – a better measure of economic well-being
– Real GDP rises only when the amount of goods and
services produced in the economy rises
– Nominal GDP can rise because output has increased
or because prices have increased
Source: Mankiw (2000)
GDP
• All ‘real’ variables are adjusted to take into
account inflation
• Real GDP adjusts nominal GDP for
inflation
• GDP deflator = Nominal GDP/Real GDP
– Reflects what’s happening to the overall level
of prices in he economy
Source: Mankiw (2000)
GDP
• Example:
– Consider an economy with one good: bread
– P = price of bread
– Q= quantity sold
– Nominal GDP = total number of euros spent
on bread for that year = P X Q
– Real GDP = number of loaves of bread
produced in that year times the price of bread
in a base year = Pbase X Q
Source: Mankiw (2000)
GDP
• Example:
– Apples and oranges
– We want to compare output in 1998 and 1999
– Choose a base year, such as prices that
prevailed in 1998
• Real GDP for 1998 =
(1998 Papples x 1998 Qapples) +
(1998 Poranges x 1998 Qoranges)
Source: Mankiw (2000)
GDP
• Real GDP in 1999 =
(1998 Papples x 1999 Qapples) +
(1998 Poranges x 1999 Qoranges)
• Real GDP in 2000 =
(1998 Papples x 2000 Qapples) +
(1998 Poranges x 2000 Qoranges)
Source: Mankiw (2000)
GDP
Ireland
2003
2004
%Δ
Nominal
GDP
€139,097
m
€148,556
m
6.8%
Real GDP €139,097
€145,319
4.5%
Source: CSO September 2005
Source: Mankiw (2000)
GDP
• Components of expenditure:
– Consumption (C)
– Investment (I)
– Government purchases (G)
– Net exports (NX): Exports minus imports
GDP (Y) = C + I + G + NX
Source: Mankiw (2000)
GDP
• GDP versus GNP
– GDP measures total income produced
domestically
– GNP measures total income earned by
nationals (residents of a nation)
GNP = GDP + Factor Payments From Abroad
- Factor Payments to Abroad
Source: Mankiw (2000)
GDP
Ireland
2003
2004
Real GDP
€139,097m
€145,319m
Real GNP
€116,374m
€121,032m
Source: CSO September 2005
Source: Mankiw (2000)
2. Inflation
• Inflation: increase in the overall level of
prices
• Rate of inflation: the percentage change in
the overall level of prices from one period
to the next period
• Low inflation: desirable = certainty, stability
and facilitates economic growth
Source: Mankiw (2000)
Inflation
• Measure of the level of prices:
– Consumer Price Index (CPI) = measures the
price of a fixed basket of goods and services
produced by a typical consumer
– The CPI is the price of this basket of goods
and services relative to the price of he same
basket in some base year
– The CSO computes the CPI
Source: Mankiw (2000)
Inflation
• Laspeyres index = a price index with a
fixed basket of goods and services
• Paasche index = a price index with a
changing basket of goods and services
• Which is a better measure of the cost of
living?
• Answer: neither is superior
Source: Mankiw (2000)
Inflation
• When prices of different goods change by
different amounts:
– Laspeyres index (fixed basket) tends to overstate the
increase in cost of living because it does not take into
account that people can substitute more expensive
goods for less expensive goods
– Paasche index (changing basket) tends to understate
the increase in the cost of living because it does not
take into account the reduction in consumer welfare
from having to substitute goods
Source: Mankiw (2000)
Inflation
• Effects of inflation:
– Erodes the value of money
– Reduces international competitiveness
– Menu costs
Inflation
• Consumer Price Index: Ireland
1998
1999
2000
2001
2002
2003
2004
2.4%
1.6%
5.6%
4.9%
4.6%
3.5%
2.2%
Source: CSO, September 2005
3. Unemployment Rate
• Unemployment rate = percentage of
people wanting to work who do not have
jobs
– Measures the fraction of the labour force out
of work
• Labour force: the sum of employed and
unemployed
• A person can be employed (in a paid job)
Source: Mankiw (2000)
Unemployment Rate
• A person can be unemployed (waiting to
start a new job and previously
unemployed, on temporary layoff or is
looking for a job)
• A person not in those two categories is not
in the labour force (e.g. student, retiree)
• Labour force = number of employed +
number of unemployed
Source: Mankiw (2000)
Unemployment rate
• Unemployment rate =
Number of unemployed x 100
Labour force
• Costs of unemployment:
– High current govt expenditure and lower
income tax revenue
– Loss of output and income to economy
– Low self-esteem and stress
– Loss of income to individual
Source: Mankiw (2000)
Source: OECD Economic Outlook, No. 75, June 2004
Civilian Employment, 2001-2003
2000 = 100
108
106
104
102
100
98
96
2000
2002
2001
Australia
Ireland
Total OECD
2003
Source: OECD Economic Outlook, No. 75, June 2004
Average annual GDP growth rate, 2000-2003
6%
5%
4%
3%
2%
1%
0%
Australia
Finland
France
Germany
Ireland
United
Kingdom
United States
Total OECD