Macroeconomics Review 1

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Macroeconomics Review 1

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Outline

• Overview of Macroeconomics
• National Income Accounting
• Economic Growth (I)

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Overview of Macroeconomics

• About macroeconomics
• Two main themes of macroeconomics
• Economic growth and economic fluctuation
• Macroeconomics versus microeconomics
• Microeconomics is the study of how households and
  firms make decisions and how these decisionmakers
  interact in the marketplace.
• Macroeconomics is the study of the economy as a
  wholeincluding growth in incomes, changes in
  prices, and the rate of unemployment.

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The AS-AD Model
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How Can We Measure Y P?
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National Income Accounting

• GDP
• Other measures of income
• GNP, NNP, NDP, National Income
• Price indexes
• CPI, PPI
• GDP deflator

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GDP Definition

• Gross domestic product (GDP) is the market value
  of all final goods and services produced within a
  country in a given period of time.

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Three Methods to Calculate GDP

• Production approach value added
• Income approach
• Expenditure approach

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Production Approach Example
A farmer grows a bushel of wheat and sells it to
a miller for 1.00. The miller turns the wheat
into flour and then sells the flour to a baker
for 3.00. The baker uses the flour to make bread
and sells the bread to an engineer for 6.00.The
engineer eats the bread. What is the value added
by each person? What is GDP?
the value added by the farmer is 1.00 (1 0
1) The value added by the miller is 2 (3 1
2) The value added by the baker is 3 (6 3
3) GDP is the total value added, or 1 2
3 6.
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Income Approach Expenditure Approach a simple
example
GDP is the total income Wages plus profit
Expenditure()
GDP is the total expenditure Payment to firms
for goods
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Expenditure ApproachA Closed Economy
C (Consumption) the goods and services bought by
households.
I(Investment ) goods bought for future use.
G(Government) purchases are the goods and
services bought
by federal, state, and local governments.
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Expenditure ApproachAn Open Economy
Where stands for consumption of domestic goods
and services stands for investment in domestic
goods and services stands for government
purchases of domestic goods and services
stands for exports of domestic goods and
services.
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Denote consumption of foreign goods and services
as investment in foreign goods and
services as government purchases
of foreign goods and services as
And total consumption total investment total
government purchases
Expenditure on IMPORT
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Other Measures of National Income

• GNP(Gross National Product)
• GNP GDP Factor Payments From Abroad -
  Factor Payments to Abroad
• NDP(Net Domestic Product) NNP(Net National
  Product)
• NDP GDP - Depreciation
• NNP GNP - Depreciation
• Note GDPGNP, NDP NNP
• NI (National Income) NNP - Indirect Business
  Taxes

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Other Measures of National Income (continued)

• PI (Personal Income)National Income- Corporate
  Profits- Social Insurance Contributions- Net
  Interest Dividends Government Transfers to
  Individuals Personal Interest Income
• You are not required to remember this
  formula. We have a simplified version
• PINational Income Government Transfers to
  Individuals(TR)
• Disposable Personal Income Personal Income -
  Personal Tax and Nontax Payments.
• or just this simplified version
• YD( Disposable Income)PI-TA

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Saving Investment
A two-sector economy
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Saving Investment
A Closed Economy
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(No Transcript)
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Saving Investment
A Closed Economy
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An Important Identity(An Open Economy)
Note We have assumed depreciation and indirect
taxes are both zero here!!
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A Complicated Example
Gross domestic product 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchase of goods and services 1100
Government budget surplus 30
Calculate
a) NDP
Depr.Ig In600
NDPGDP Depr.5,400
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A Complicated Example
Gross domestic product 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchase of goods and services 1100
Government budget surplus 30
Calculate
b) Net exports
NXGDP Ig C G100
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A Complicated Example
Gross domestic product 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchase of goods and services 1100
Government budget surplus 30
Calculate
c) Government taxes minus transfers
BS TA TR G ?
TA TRBSG1,130
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A Complicated Example
Gross domestic product 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchase of goods and services 1100
Government budget surplus 30
Calculate
d) Disposable income
YDGDP Depr. TATR4,270
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A Complicated Example
Gross domestic product 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchase of goods and services 1100
Government budget surplus 30
Calculate
e) Personal saving rate
SYD C270
sS/YD6.32
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Be Careful!

• If depreciation and indirect taxes cant be
  neglected, dont apply this formula
• Actually I dont suggest you apply it directly
• More precisely, Solve

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Measures of Price Level

• CPI (Consumer Price Index), PPI (Producer Price
  Index)
• Key A basket of goods
• Nominal GDP vs. Real GDP
• Key Fix price
• The concept of GDP deflator
• CPI vs. GDP Deflator

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Inflation Rate
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Price Level An Example
Consider an economy that produces only apples. In
the following table are data for two different
years.
Year 1 Year 2
Price of red apples 1 2
Price of green apples 2 1
Number of red apples produced 10 0
Number of green apples produced 0 10
Assume the only consumer in the economy Guy
consumes all the apples produced each year.
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Price Level An Example (continued)
a) Compute the nominal GDP for each year. b)
Compute the real GDP for each year. (Use Year 1
as the base year.) c) Whats the GDP deflator for
each year? And compute the inflation rate over
Year 2 measured by GDP deflator. d) Assume year
1 is the base year in which the consumer basket
is fixed. Calculate the CPI for each year, and
the inflation rate over Year 2 measured by
CPI. e) If its indifferent for Guy to consume
red apples and green apples, think of your answer
of c) and d). Whats your comment?
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Now Turn Back to AS-AD Framework
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The Classical Supply Curve
AS
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Shifts in Aggregate Supply Very Long Run
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Economic Growth Mathematical Preparation

• About growth rate
• the growth rate of X can be calculated
  using the following formula
• Actually, let

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Mathematical Preparation(continued)

• Note X is the function of time t.(X is just a
  simplified notation of X(t).) Most of the
  variables we are going to talk about are
  functions of time t. REMEMBER THIS!
• Suppose X or X(t) is derivable (thus is
  continuous).

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Continuous Case of Growth Rate

• We have got
• Let

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Continuous Case of Growth Rate (continued)

• Notes
• 1)
• So you can either calculate growth rate by
  differentiating the natural logarithm or estimate
  the growth rate through the difference of the
  natural logarithm

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Continuous Case of Growth Rate (continued)

• 2) If is constant from t0 on, i.e.
• for
• then we have (by solving the differential
  equation or just doing some integrals)

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Continuous Case of Growth Rate (continued)

• 3) The average growth rate
• or
• The 70 rule If
  then

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Continuous Case of Growth Rate (continued)

• 4) The linkage of discrete cases
• Average growth rate (discrete) (compound
  interest)
• Linkage think of Taylors formula

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Continuous Case of Growth Rate (continued)

• 5) Be accustomed to the natural logarithm form of
  the variables. In a graph, if the variable of the
  horizontal axis is time, we usually use the
  natural logarithm form of the variable in
  vertical axis. Its easy to prove that the slope
  of the tangent is the growth rate at that given
  point. BE AWARE OF THIS WHEN YOU ARE PREPARING
  YOUR PRESENTATION!

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Mathematical Techniques Some Examples

• 1)If then
• 2)If then
• 3)If then
• Optional approach total differential

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About Economic Models
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Neoclassical Model Solow Model

• Production function
• To simplify our discussion, ignore the
  technological progress. Let .
• The production function becomes
• Note Time doesnt enter the production function
  directly, but only through K and L. That is,
  output changes over time only if the inputs to
  production change.

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Assumptions Concerning the Production Function

• 1) Constant Return to Scale
• 2) Positive and diminishing returns to single
  input

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Consider Cobb-Douglas Production Function

• 1)
• You can prove that C-D production function well
  satisfies all the assumption we have just talked
  about. Finish it as an exercise.
• 2) We may concern more about output per capita.
• where y is output per capita and k is capital per
  capita.

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More Assumptions

• 1) No government and no international trade
• 2) Saving rate is exogenous
• 3) Constant growth rate of labor (population)

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Capital Accumulation Equation

• 1) The concept of stock and flow
• 2) The (total) capital accumulation equation

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The Key Equation of Solow Model

• 1) Equilibrium of saving and investment
• 2) Deriving the per capita capital accumulation
  equation
• Optional approach use the logarithm techniques.

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Solow Diagram and Steady State
Break-even investment
Investment per labor
Actual investment
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Solve the Steady State Equilibrium

• Solve
• We get
• and
• At steady state

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Solow Model Comparative Statics
Investment per labor
A permanent increase in growth rate of labor
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Solow Model Comparative Statics
Investment per labor
A permanent increase in saving rate
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Adjustment Dynamic Process
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Convergence Some Data
Convergence across OECD countries
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Convergence Some Data
Convergence across U.S states
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Convergence Some Data
However.
Hence, absolute convergence does not apply for
abroad cross section of Countries.
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Convergence Two Concepts

• Absolute Convergence There only exist the
  differences of initial endowments between two
  distinct economies, then they will reach to the
  same steady state.
• Conditional Convergence Besides the initial
  endowments, there exist other differences between
  two distinct economies, then they will reach
  distinct steady states.

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Some Challenging Problems

• 1) Suppose theres a permanent increase in saving
  rate just as we have just discussed and we have
  already got a description of the adjustment
  dynamic process a y-t graph and a ?Y/Y-t graph.
  Can you sketch a graph to explain the adjustment
  of Investment ?
• (Sketch a Per Capita Investment-Time graph.)

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Some Challenging Problems (continued)

• 2)Consider an economy with only depreciation but
  without population growth and its at the steady
  state. Now suppose theres a one-time jump in the
  numbers of workers. At the time of jump, what
  happens to output per capita? Once the economy
  has again reached the steady state, is output per
  capita higher, lower or the same as it was before
  the new workers appeared? Sketch an appropriate
  graph to describe this.

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Some Challenging Problems (continued)

• 3) Look back to our example of the adjustment
  dynamic process.
• Why is the curve concave nearby t1?
• Study the shape of the ?Y/Y-t graph or other
  cases of adjustment dynamic process if you are
  interested.

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Reference

• ?????,Rudiger Dornbusch, Stanley Fischer and
  Richard Startz, Macroeconomics , Tenth Edition
  (?????????,2008)
• N. Gregory Mankiw, Macroeconomics, Fifth Edition
  (Worth Publishers,2003)
• David Romer, Advanced Macroeconomics, Second
  Edition (McGraw-Hill, 2001)
• ?????,???????,???(?????????,2008)

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THANK YOU!!