The role of macroeconomics.ppt

1、The Role of Macroeconomics,Macroeconomics in the headlines,Macroeconomics in the headlines,UK inflation rate rises to 3.7%,Chinas economy grew 10.3% in 2010,Brazil raises interest rates to 11.25%,UK unemployment total rises further,Chinese consumer price inflation down to 4.6%,German economic growth

2、 to hit 2.3% in 2011,Euro up despite no sign of rescue fund deal,IPPR think-tank predicts double-dip jobless rise,A selection of headlines from last week:,Some macroeconomic questions,Why are there recessions? Can the government do anything to combat recessions? Should it?,Some macroeconomic questio

3、ns,What determines the rate of unemployment? Why does it vary over time? Why has the unemployment rate in continental Europe been generally higher than in the U.S. or Japan?,Some macroeconomic questions,Why does the cost of living keep rising? Does it matter? What determines the inflation rate? Is d

4、eflation a problem?,Some macroeconomic questions,Why are so many countries poor? What policies might help them grow out of poverty?,Some macroeconomic questions,What is the government budget deficit? How does it affect the economy? Why does the U.S. have such a huge trade deficit? What determines th

5、e exchange rate?,The Role of Macroeconomics,The Aggregate Economy:,Intertemporal comparisons,International comparisons,How should the government intervene in the economy? What are the links between policy instruments and macro variables?,How does the economy work? What are the links between differen

6、t macro variables?,Macroeconomic models,Macroeconomic models, are simplified versions of a more complex reality Simplifying assumptions strip away irrelevant details are used to show the relationships between economic variables explain the economys behaviour devise policies to improve economic perfo

7、rmance can be verbal / graphical / mathematical,e.g: The supply P, Y, Ps exogenous b)P endogenous;Qd, Qs, Y, Ps exogenous c)P, Qd, Qs endogenous;Y, Ps exogenous d)Y, Ps endogenous; P, Qd, Qs exogenous,A Multitude of Models,No one model can address all the issues we care about For example, If we want

8、 to know how a fall in aggregate income affects new car prices, we can use the S/D model for new cars. But if we want to know why aggregate income falls, we need a different model. So we will learn different models for studying different issues (e.g. unemployment, inflation, long-run growth). For ea

9、ch new model, you should keep track of its assumptions, which variables are endogenous and which are exogenous, the questions it can help us understand, and those it cannot.,Macro Variables and Statistics,Gross Domestic Product (GDP),GDP is a measure of economic activity Two definitions: Total expen

10、diture on domestically-produced final goods and services Total income earned by domestically-located factors of production,GDP = Output = Income = Expenditure,Circular flow of income:,Labour and Capital,Goods and Services,Income wages and profits (),Expenditure (),Measuring GDP,Value each good at ma

11、rket price Intermediate goods not a part of GDP Inventories part of GDP (treated as if bought by owners of the firm) Imputed values for non-market output: government services valued at cost housing imputed rent included in GDP Other non-market output should be, but isnt, imputed for intra-household

12、economy is ignored black economy is ignored durable goods initial purchase only included in GDP Used goods not a part of GDP,GDP = value added,GDP = value of final goods produced = sum of value added at all stages of production Value added = value of output minus the value of intermediate goods the

13、firm used to produce that output,GDP = value added,e.g: a farmer grows a bushel of wheat and sells it to a miller for 1 the miller turns the wheat into flour and sells it to a baker for 3 the baker uses the flour to make bread and sells it to an engineer for 6 the engineer eats the bread Compute val

14、ue added at each stage of production GDP What is the value of GDP?,Components of GDP,All expenditure can be split into the following categories: Consumption by households Investment in the capital stock Government spending (not including transfer payments) Net exports Therefore: Y = C + G + I + X -

15、M,Real vs. Nominal GDP,GDP = 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,Real GDP controls for inflation,Real vs. Nominal GDP,What is nominal GDP for 2007?,Real vs. Nominal GDP,Wha

16、t is GDP for 2008 in 2007 prices?,Real vs. Nominal GDP,GDP deflator = 100 x,Nominal GDP,Real GDP,= 138,i.e. Inflation was 38%,Other measures of output,GNP = GDP + factor payments from abroad- factor payments to abroad NNP = GNP depreciation GVA = GDP taxes on products + subsidies on products,CPI inf

17、lation,A measure of the overall level of prices Used to: track changes in the typical households cost of living adjust contracts for inflation allow comparisons of Euro figures taken from different years assess the degree of convergence of inflation rates for Eurozone countries Survey consumers to d

18、etermine composition of the typical consumers “basket” of goods. Every month, collect data on prices of all items in the basket; compute cost of basket,CPI =,The CPI basket in the UK,Compute CPI inflation,CPI =,Inflation = % change in CPI,If the basket contains 20 pizzas and 10 compact discs and pri

19、ces are as follows:,what is CPI inflation for 2008?,CPI vs. RPI vs. GDP deflator,CPI vs. RPI vs. GDP deflator,CPI and RPI are similar. The key difference is that RPI includes housing repair costs and mortgage interest payments prices of capital goods are included in GDP deflator (if produced domesti

20、cally) 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,Inflation,All of these indices may overstate the true increase in the cost of living (inflation) because of: Substitution bias Introdu

21、ction of new goods Unmeasured changes in quality But may well underestimate the increase in the cost of living for some individuals,Labour market statistics,employed = working at a paid job unemployed = not employed but looking for a job labour force = the amount of labour available for producing go

22、ods and services; all employed plus unemployed persons economically inactive = outside the labour force, not employed and not looking for work unemployment rate = % of labour force that is unemployed labour force participation rate = % of the adult population that participates in the labour force,Compute labour force statistics,German adult population by group, 2003 Number employed = 35.8 million Number unemployed = 3.8 million Adult population = 82.5 million,Use the above data to calcu