lecture_1_-_08feb2012

Macroeconomics (1103)

Lecturer: Catia Batista

Macroeconomics (1103)

Lecturer:

Catia Batista, catia.batista@novasbe.pt

Lectures: Tuesdays and Wednesdays,15h30–17h00, Room A13

Office Hours: Wednesdays 10h00–11h00, Office 365

Teaching Assistants:

Vasco de Castro Botelho, vcb@novasbe.pt

Office Hours: Wednesdays, 11h00, Office 132

Luís Filipe, luiscfilipe@novasbe.pt

Office Hours: Thursdays, 18h30, Office 131

Course Webpage: moodle - access at http://elearning.fe.unl.pt/

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Main Textbook

The main textbook for the course is:

Robert J. Barro, Macroeconomics: A Modern Approach (1st edition),2008, South-Western, distributed by Cengage.

Available at library under call number E.021-096

Additional Readings: Will be provided in lectures and course webpage.

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Final Grade

Tutorial Participation 10%

Midterm Exam 30%

Final Exam 60%

Tutorial Participation:

1) Students’ answers to the problem sets are due on Monday by 11am in a boxleft with security at the building’s entrance.

2) For each tutorial, students will be required to discuss problem sets given inadvance.

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Course Description

● an introduction to macroeconomics: the study of the behavior of theeconomy as a whole;

● focus on aggregate variables: total production, unemployment, credit andsavings, money, and inflation;

● also focus on dynamic behavior of those aggregate variables: economicgrowth, business cycles;

● approach of the course is based on microeconomic foundations: movefrom the individual maximization problems to the aggregate ormacroeconomic problems that the economy faces as a whole.

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Course Outline

Section 1: Introduction to Macroeconomics

Main Reading: Barro, chapters 1 and 2.

Section 2: Economic Growth

Main Reading: Barro, chapters 3, 4 and 5.

Section 3: Economic Fluctuations

Main Reading: Barro, chapters 6, 7, 8 and 9.

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Course Outline

Section 4: Money, Inflation and Interest Rates

Main Reading: Barro, chapters 10, 11, 15 and 16.

Section 5: Fiscal Policy

Main Reading: Barro, chapters 12, 13 and 14.

Section 6: (Time permitting) Open Economy

Main Reading: Barro, chapters 17 and 18.

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Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics;

2. Some Macroeconomic Facts;

3. Measuring Economic Activity:

- National Income and Product Accounting (NIPA);

- Gross Domestic Product (GDP);

- Price Level.

Reading: Barro, Chapters 1 and 2.

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1. The Approach to Macroeconomics

● Why do different economies grow at different rates?

● Why does the economy fluctuate?

● What is the cause of inflation?

● How does government policy affect the economy?

● How does international trade affect the economy?

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1. The Approach to Macroeconomics (Cont.)

Endogenous variables are the ones that we want the model to explain.Exogenous variables are the ones that a model takes as given and does

not attempt to explain.

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1. The Approach to Macroeconomics (Cont.)

● Economic Models and Empirical Testing

● New Classical vs. Keynesian Models

New Classical Models Keynesian Models

microeconomic foundations no microeconomic foundations

market clearing disequilibrium situations may occur

price flexibility some prices do not adjust immediately

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2. Some Macroeconomic Facts

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2. Some Macroeconomic Facts

- Growth rate of real GDP for year t = Y t − Y t−1/Y t−1 − 1

[Multiply by 100 to get the growth rate of real GDP in percent per year.]

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2. Some Macroeconomic Facts

Inflation rate for year t = Pt − Pt−1/Pt−1 − 1

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3. Measuring Economic Activity:National Income and Product Accounting (NIPA)

Output, or production, in real-world economies is typically measured by real“gross domestic product” (GDP).

Gross Domestic Product:

measure of the market value of all the final goods and services newly

produced within a specified country’s borders during a specified period of

time (usually one year or one quarter).

NOTE

Flow variable:

measures value of goods produced per unit of time, such as a year.

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How good is GDP as a measure of domesticwelfare?

1. No Consideration of Changes in Income Distribution;

2. Non-Market Goods (except for Government Services) are excluded fromGDP: household production, underground economic activity, etc;

3. No Value Assigned to Leisure Time;

4. Quality Changes in Goods are Not Accounted For;

5. Quality of Living Aspects (such as Environmental Quality, PoliticalFreedom or Social Justice) are Omitted.

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How Do We Measure GDP in Reality?

The starting point of macroeconomic measurement is the so-called“fundamental identity”:

Total Production = Total Expenditure = Total Income

1. Production/Value-Added Approach: look at firms’ production

2. Income Approach: where firms spend their revenues

3. Expenditure Approach: where households spend income

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Expenditure Approach

GDP = C + I + G + X − M

C : Personal Consumption Expenditures

I : Gross Private Domestic Investment

G : Government Purchases of Goods and Services

X − M : Net Exports (Exports minus Imports)

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Income Approach:Income Earned by Factors of Production

GDP = Labor Income + Interest + Rental Income +

+ Corporate Pofits + Net Taxes + Depreciation

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Relationship between GDP and National Income

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Value-Added Approach

GDP = ∑all firms

Value − Added

Value − Added = Revenue − Cost of Intermediate Goods

(Excludes Intermediate Goods and Services to Avoid Double CountingProblem)

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Real GDP vs. Nominal GDP

● Calculating Real GDP: Multiply each year’s quantity of output of eachgood by the price of the good in a base year.

● GDP in constant dollars

● Chain-weighted real GDP

● Nominal GDP: Y = Q × P

● Real GDP: Y = Q × P0

=> The distinction between real and nominal GDP suggests a measure ofthe “price level” (P), defined to be the average of the prices of aneconomy’s goods and services.

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How do we measure an economy’s general pricelevel?

● in practice, price level measured by index of average prices;

● index number expresses value of some entity (such as price or GDP) at agiven period of time in absolute number form but related to a base periodset arbitrarily to 100;

● what do we actually mean by “price”?

▪ Implicit GDP Price Deflator

▪ Consumer Price Index (CPI)

▪ Producer Price Index (PPI)

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Implicit GDP Price Deflator

(nominal GDP)/(implicit price level) = real GDP

or

implicit price level = (nominal GDP)/(real GDP)

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Consumer Price Index: CPI

A price index calculated as the current cost of a fixed basket of consumergoods divided by the cost of the basket in the base period.

Calculating the CPI

1. Find cost of CPI basket at base period prices

2. Find cost of CPI basket at current period prices

3. Calculate the CPI for the base period and the current period

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A simplified calculation of CPI

1) Base year: 2008

Oranges: 10 @ $1.00 = $10

Haircuts: 5 @ $25.00 = $125

Cost of CPI basket in 2008: $135

2) Current year: 2009

Oranges: 10 @ $2.00 = $20

Haircuts: 5 @ $30.00 = $150

Cost of CPI basket in 2009: $170

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3) CPI Calculation

CPI=Cost of CPI Basket in Current Year

Cost of CPI Basket in Base Year× 100

CPI in base year (2008) = $135

$135= 100

CPI in current year (2009) = $170

$135= 126

MEANING:

26% price increase from 2008 to 2009

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The Actual CPI Basket - Main Categories

December 2002 % weight in CPI

Housing 41%

Transportation 17%

Food and beverages 16%

Medical care 6%

Recreation 6%

Education and communication 6%

Apparel 4%

Other goods and services 4%

Source: US Department of Commerce Bureau of Economic Analysis

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Problems with the CPI:

1. CHANGES IN QUALITY

Quality Change Bias

2. NEW GOODS

New Goods Bias

3. WHICH GOODS DO YOU PRICE?

Commodity Substitution Bias

4. WHICH PRICES ARE RELEVANT?

Outlet Substitution Bias

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Inflation Rate

● The measured rate of inflation between any two periods is just the growthrate (in percentage terms) in a price index between those two periods

π t =Pt − Pt−1

Pt−1× 100

● This definition represents the statistic that is reported when we hear storiesabout the rate of inflation in the press, or in the news.

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Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics;

2. Some Macroeconomic Facts;

3. Measuring Economic Activity:

- National Income and Product Accounting (NIPA);

- Gross Domestic Product (GDP);

- Price Level.

Reading: Barro, Chapters 1 and 2.

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