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Economics 302 (Sec. 001)

Intermediate Macroeconomic(1/23/12)

Instructor: Prof. Menzie ChinnUW Madison

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Course website:http://www.ssc.wisc.edu/~mchinn/web302_s12.html

OH: MW 4-5, 7418 Soc Sci Additional Readings: from WWW,

, NYT, FT, WSJ , Economist

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Administrative Issues, ,

Dates:- MT1 on Wed, 2/22

- MT2 on Wed, 4/11- Final on Tue. 5/15, 7:25PM

- . -have a legitimate excuse. No late assignmentsmus e an e n ur ng ec ure

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Context: GDP Growth

.075

.100

Real GDPgrowth

.025

.050

-.025

.000WSJ

f'casts

-.075

-.050

-.10000 01 02 03 04 05 06 07 08 09 10 11 12

(GDP05/GDP05(-1)) 4-1(GDP05WS J _J AN12/GDP05WSJ _J AN12(-1))4-1

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GDP (levels)

15,000

16,000Potential GDP(CBO, Aug.'11)

14,000

12,000

13,000

GDP

J an. '12

10,000

11,000

n .SAAR

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

GDP05GDP05WSJ _J AN12

Source: BEA GDP 2011Q3 3 rd release, CBO (Aug 2011), WSJ (Jan. 2012)

_ _

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GDP (log levels)

9.60

9.65

Potential GDP(CBO, Aug.'11)

9.50

9.55

WSJ J an. '12

9.40

9.45

Log GDP

9.30

9.35 bn Ch.05$SAAR

. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

LOG(GDP05)

Source: BEA GDP 2011Q3 3 rd release, CBO (Aug 2011), WSJ (Jan. 2012)

_ LOG(GDP05_POT_CBOAUG11)

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Employment

138,000

140,000

Nonfarmpayroll

136,000

emp oyment,

000's, SA

132,000

134,000

ex.-temp.Census

128 000

130,000workers

00 01 02 03 04 05 06 07 08 09 10 11 12

PAYEMS_DEC12-CENSUSTAKERSPAYEMS_DEC12

Source: BLS, Employment Situation , Dec. 2011 release

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Unemployment Rate

10

11Unemploymentrate, in %, SA

8

9

6

7WSJ

J an. '12

4

5

31980 1985 1990 1995 2000 2005 2010 2015

UNRATE UNRATE_WSJ _JAN12


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Unemployment Rate

16

20

Unemploymentrates, in %, SA

12

Unemployed &underemployed

8Official

4 Long-term(over 27 weeks)

1980 1985 1990 1995 2000 2005 2010

UNRATEU6RATE


(UNEMP 27OV/CLF16OV)*100

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Inflation

.05

.06

"Headline"CPI

.02

.03

.

.00

.01 CoreCPI

(J an. '12)

-.02

-.01

Inflation ratey/y, in %, SA

-.00 01 02 03 04 05 06 07 08 09 10 11 12 13

(CPIAUCSL/CPIAUCSL(-12))-1CPILFESL/CPILFESL -12 -1

Source: BLS, CPI Dec. 2011 release, WSJ (Jan. 12)

CPIINFLY OY_WSJ _J AN12/100

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Monetary Policy10

Ten year Treasurys

6

Fed funds

4

2

Interestrates, in %

Three month Treasurys

090 92 94 96 98 00 02 04 06 08 10

FEDFUNDS TB3MS GS10

Source: St. Louis Fed FRED II database

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Fed interventions3500000

2500000

3000000 Fed Agency Debt

Mortgage Backed Securities Purch

1500000

2000000L qu ty to Key re t Markets

500000

1000000

Institutions

Lon Term Treasur

0 Purchases

http://www.clevelandfed.org/research/data/credit_easing/index.cfm

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Consumption

11.2

Log householdLogs, in

9.0

9.2 10.8netwo th[right axis]

n. .

8.8

10.0

.

8.4

8.6

9.6Logconsumption

8.21980 1985 1990 1995 2000 2005 2010

www.econbrowser.com

Source: BEA, 2011Q3 2nd release; Fed Flow of Funds

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House Prices

Source: Calculated Risk , 12/27/2011

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Net Exports and the Dollar.3 .04

.1

.

.00

.

-

.0 -.02

.

-.2

-.

-.06

-.

Log realvalue of USD Net

-.3 -.081975 1980 1985 1990 1995 2000 2005 2010

e a x sGDP

Source: Federal Reserve Board, and BEA, 2011Q3 GDP 2nd release

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Current Account, Net Debt

.01

.

.15

.

-.01

.

.05

.

Current Account

-.03

-.

-.0

.to GDP ratio[left axis]

-

-.05

-.

-

-.1

-.Net InternationalInvestment Positionto GDP ratio

-.07

.

-.2

.

1970 1975 1980 1985 1990 1995 2000 2005 2010

CA/GDP NIIPEOP/(GDP*1000)

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Oil Prices

4.5

5.0

Log price of oil($/bbl, WTI)

4.0

Real

3.0

3.5

2.5Nominal

2.0 90 92 94 96 98 00 02 04 06 08 10

LOG(OILPRICE)

Source: St. Louis FRED II. Relative price is deflated by Core CPI, 2010=0

.

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Long Term Log GDP

9\

2001 recession --------Log GDPCh.2000$

8

WWII

\1982recession

1990-91

recession

7

WWI\

"Roaring'20's"

__Great

6 1920-21 recession

"GreatDepression"

90 00 10 20 30 40 50 60 70 80 90 00 10

LOG(GDP00)

Source: Historical Statistics , and BEA, 2011Q3 GDP 2 nd release, rebased to Ch.00$

.

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2-1 Aggregate Output

National income and product accounts are an accountingsystem used to measure aggregate economic activity.

GDP: Production and Income

The measure of aggregate output in the

product, or GDP.

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There are three wa s of definin GDP:

: ro ucton an ncome

1. GDP is the value of the final goods and services produced in.

A final good is a good that is destined for finalconsumption.

production of another good.

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: ro ucton an ncome

2. GDP is the sum of value added in theeconomy during a given period.

a ue a e equa s e va ue o a rmsproduction minus the value of theintermediate goods it uses in production.

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: ro ucton an ncome

3. GDP is the sum of incomes in the economyduring a given period.

Table 2-1 The Composition of GDP by Type of Income, 1960 and 20061960 2006

Labor income 66% 64%

Capital income 26% 29%

Indirect taxes 8% 7%

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Nominal GDP is thesumof the uantitiesof final oods

omna an ea

produced multiplied by their current price.

The production of most goods increases over time.

The prices of most goods also increase over time.

Real GDP is constructed as the sum of the quantities of finalgoods multiplied by constant (rather than current ) prices.

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Quantity Price Nominal Real GDP

omna an ea

ear o ars o cars GDP (in 2000 dollars)

1999 10 $20,000 $200,000 $240,0002000 12 $24,000 $288,000 $288,000

2001 13 $26,000 $338,000 $312,000

,year by a common price. Suppose we use the price of the carin 2000 as the common price. This approach gives us, in

, .

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omna an ea

Nominal and Real U.S.GDP, Since 1960

gure -

,GDP increased by a factor of 25. Real GDP increased by a

factor of about 4.5.

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The terms nominal GDP and real GDP each have many synonyms:

omna an ea

Nominal GDP is also called dollar GDP or GDP in currentdollars .

Real GDP is also called GDP in terms of goods , GDP inconstant dollars , GDP adjusted for inflation , or GDP in 2000dollars .

GDP will refer to real GDP, and Yt will denote real GDP in yeart.

Nominal GDP and variables measured in current dollars will be

denoted by a dollar sign in front of themfor example, $Yt. fornominal GDP in year t.

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Real GDP per capita is the ratio of real GDP to the

: eve ersus rowt ate

popu at on o t e country.

GDP growth equals:

1

1

t Y

Periods of positive GDP growth are calledex ansions.

Periods of ne ative GDP rowth are called

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recessions.

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: eve ersus rowt ate

Growth Rate of U.S. GDPSince 1960

gure -

, . .has gone through a series of expansions, interrupted by

short recessions.

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2-2 The Other Major MacroeconomicVariables

Because it is a measure of aggregate activity, GDP is

e nemp oyment ate

obviously the most important macroeconomic variable. Buttwo other variables tell us about other important aspects of how an economic is performing:

Unemployment

Inflation

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Employment is the number of people who have a job.

e nemp oyment ate

Unemployment is the number of people who do not have a job but are looking for one.

The labor force is the sum of employment andunem lo ment:

L = N + U

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The unemployment rate is the ratio of the number of people

e nemp oyment ate

w o are unemp oye to t e num er o peop e n t e a or

force:UL

u =

Unem lo ment rate =

In the United States estimates based on the

Unemployment/Labor force

7.0= =

CPS show that:

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2006 .144.4 7.0+

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The Current Population Survey (CPS) is used to compute the

e nemp oyment ate

unemployment rate.

Onl those lookin for work are counted as unem lo ed. Thosenot working and not looking for work are not in the labor force.

discouraged workers.

=

population of working age

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2 2 h O h j i

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e nemp oyment ate

Figure 2 - 3

Since 1960, the U.S.

U.S. Unemployment Rate

Since 1960

fluctuated between 3% and10%, going down during

expansions and going up.

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2 2 Th O h M j M i

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e nemp oyment ateWhy Do Economists Care About Unemployment?

Economists care about unemployment for two reasons:

Because of its direct effects on the welfare of theunemployed.

using some of its resources efficiently.

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2 2 Th Oth M j M i

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Inflation is a sustained rise in the general level

e n aton ate

of pricesthe price level.

level increases.

,in the price level. It corresponds to a negativeinflation rate.

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2 2 The Other M jor M croeconomic

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e n aton ate The GDP Deflator

The GDP deflator in year t, P t, is definedas the ratio of nominal GDP to real GDPin year t:

$t

Nominal GDPt

t

YP = =

t

t

index numberset equal to 100 in thebase year.

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2 2 The Other Major Macroeconomic

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e n aton ate The GDP Deflator

The rate of change in the GDP deflatorequals the rate of inflation:( )P P

Pt t

t

1

1

Nominal GDP is equal to the GDP

$ Y P Yt t t=

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e n aton ate The Consumer Price Index

The GDP deflator measures the average price of output,while the consumer price index, or CPI , measures the

of living.

The CPI gives the cost in dollars of a specific list of goods and services over time, which attempts torepresent the consumption basket of a typical urbanconsumer.

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The set of goods produced in the economy is notthe same as the set of goods purchased byconsumers, or wo reasons:

government, or to foreigners.

ome o t e goo s are not pro ucedomestically but are imported from abroad.

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2-2 The Other Major Macroeconomic

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U.S. Inflation Rate, Usingthe CPI and the GDP

Figure 2 - 4

The inflation rates, computed

using either the CPI or the

Since 1960

,similar.

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2 2 The Other Major MacroeconomicVariables


Figure 2-4 yields two conclusions:

The CPI and the GDP deflator move togethermost of the time. In most years, the two

There are clear exceptions, however. In

an , t e ncrease n t e wassignificantly larger than the increase in theGDP deflator.

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2 2 The Other Major MacroeconomicVariables

Why Do Economists Care About Inflation?e n aton ate

Economists care about inflation for tworeasons:

During periods of inflation, not all pricesand wages rise proportionately, inflationa ec s ncome s r u on.

Inflation leads to other distortions.

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2-3 The Short Run, the Medium Run, and the

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2 3 The Short Run, the Medium Run, and theLong Run

The level of aggregate output in an economy is

demand in the short run, say, a few years,

the level of technology, the capital stock,

and the labor force in the medium run, say,a decade or so,

, ,saving, and the quality of government inthe long run, say, a half century or more.

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2 4 A T f h B k

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2-4 A Tour of the Book

The Or anization of the

Figure 2 - 5

Book

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2 4 A T f th B k

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2-4 A Tour of the Book

A core which has three parts the short run,e me um run, an e ong run.

Three extensions which explore the role of expectations, closed economies, andexpansion and recessions.

A deeper look at the role of microeconomicpolicy.

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Key Termsnational income and product accountsaggregate outputgross domestic product, (GDP)gross national product, (GNP)

unemploymentlabor forceunemployment rateCurrent Population Survey (CPS)

intermediate good

final goodvalue added

not in the labor force

discouraged workersparticipation rate

real GDPreal GDP in chained (2000) dollarsdollar GDP, GDP in current dollars

inflationprice levelinflation rate

,dollars, GDP adjusted for inflation, GDPin 2000 dollarsreal GDP per capita

GDP deflatorindex numbercost of living

expansionsrecessionshedonic pricing

short runmedium runlong run

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emp oyment base yea

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e302_lecture1_s12