Introduction to Macroeconomics - UNT College of Arts and ...kim1/teaching/Macro_1/01_Intro_MACRO.pdf · Introduction to Macroeconomics Intermediate Macroeconomic Theory Macroeconomic

Introduction to Macroeconomics

Intermediate Macroeconomic TheoryMacroeconomic Analysis

University of North Texas

ECON 3560 / 5040 Introduction to Macroeconomics

Outline

1 What Macroeconomists Study

2 The Data of MacroeconomicsMeasuring the Value of Aggregate Economic ActivityMeasuring the Cost of LivingMeasuring Joblessness

3 How Economists Think


Outline





What Macroeconomists Study

Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:

1 Economic growth

2 Inflation

3 Unemployment

Microeconomics: the study of the economy in the small(individual firm, industry, or consumer)




1 Economic growth

2 Inflation

3 Unemployment





1 Economic growth

2 Inflation

3 Unemployment





1 Economic growth

2 Inflation

3 Unemployment





1 Economic growth

2 Inflation

3 Unemployment



Outline





The Data of Macroeconomics

1 Economic growth rate: g = %∆ value of aggregate economicactivity (Y)

2 Inflation rate: π = %∆ cost of living (P)

3 Unemployment rate: u = # of unemployedlabor force × 100












Measuring the Value of Aggregate Economic Activity

Gross Domestic Product (GDP)

1 Sum of money (market) values of

2 all final goods and services

3 produced within a country

4 in a given period of time (usually a calendar year)





































Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP

Nominal GDP (P× Y): the value of goods and servicesmeasured at current prices

Changes in nominal GDP can be due to

1 changes in prices

2 changes in quantities of output produced

⇒ Not a good measure of economic well-being

Real GDP (Y): the value of goods and services measured atconstant prices

Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices





1 changes in prices









1 changes in prices









1 changes in prices









1 changes in prices









1 changes in prices









1 changes in prices









1 changes in prices







The Bureau of Economic Analysis (http://www.bea.doc.gov)

U.S. Real & Nominal GDP, 1967-2001

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,000

1965 1970 1975 1980 1985 1990 1995 2000

(bill

ions

of U

.S. d

olla

rs)

NGDP (billions of $) RGDP (billions of 1996 $)


Measuring the Value of Aggregate Economic ActivityRGDP per person

Real GDP per person (y = YN ): income of the average person in

the economy

U.S. real GDP per person in 1996 dollars

Stylized Facts1 Long-run upward trend2 Short-run fluctuations




the economy


Stylized Facts

1 Long-run upward trend

2 Short-run fluctuations




the economy


Stylized Facts






the economy


Stylized Facts




Measuring the Cost of Living

1 Consumer Price Index (CPI)

2 Producer Price Index (PPI)

3 GDP Deflator





3 GDP Deflator





3 GDP Deflator





3 GDP Deflator


Measuring the Cost of LivingCPI

CPI is measured by pricing the items on a list representative ofa typical urban household budget

CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)

How the BLS constructs the CPI

most price indexes, like CPI, are computed by pricing astandard market basket of goods in subsequent periods
















CPI is calculated and announced each month by the Bureau ofLabor Statistics (BLS, http://www.bls.gov)How the BLS constructs the CPI

1 Survey consumers to determine composition of the typicalconsumer’s basket of goods

2 Every month, collect data on prices of all items in the basket;compute cost of basket

3 CPI in any month equalscost of basket in that monthcost of basket in base period

× 100










The composition of the U.S. CPI’s basket

16.2%

40.0%

4.5%

17.6%5.8% 5.9%

2.8%

2.5%

4.8%

Food and bev.

Housing

Apparel

Transportation

Medical care

Recreation

Education

Communication

Other goods andservices


Measuring the Cost of LivingCPI Inflation

Inflation rate (π = %∆P): the percentage change in the averagelevel of prices from the year before


Measuring the Cost of LivingDeflating

Deflating: the process of finding the real value of somemonetary magnitude by dividing by some appropriate priceindex

A price index (P) can be used to

1 measure inflation

2 deflate nominal values to adjust for inflation

real wage in 2000 =money wage in 2000

CPI of 2000× 100





1 measure inflation



CPI of 2000× 100





1 measure inflation



CPI of 2000× 100





1 measure inflation



CPI of 2000× 100





1 measure inflation



CPI of 2000× 100


Measuring the Cost of LivingGDP Deflator

GDP Deflator: price index used to deflate GDP

real GDP =nominal GDPGDP deflator

× 100

The GDP deflator includes the price of airplanes, governmentservice, other goods purchased by business

Different price indexes, such as the CPI and the GDP deflator,will show different measures of inflation because they usedifferent market basket

However, the discrepancy is usually minor





× 100








× 100








× 100








× 100








× 100





Measuring the Cost of LivingCPI versus GDP Deflator

Two measures of inflation

16

14

12

10

8

6

4

2

0

- 2

Percentagechange

1948 1953 1958 1963 1968 1973Year

1978 1983 1988 1993 1998

CPI

GDP deflator


Measuring JoblessnessUnemployment Rate

Unemployment: the macroeconomic problem that affectspeople most directly and severely

How well an economy uses its resources

Unemployment rate is calculated and announced each monthby the BLS (http://www.bls.gov)

u =# of unemployed

labor force× 100






u =# of unemployed

labor force× 100






u =# of unemployed

labor force× 100






u =# of unemployed

labor force× 100



U.S. unemployment rate

Stylized Facts1 There is always some unemployment (even in the LR)2 Short-run fluctuations




Stylized Facts

1 There is always some unemployment (even in the LR)





Stylized Facts






Stylized Facts




Okun’s Law

Employed workers help produce GDP, while unemployedworkers do not

So one would expect a negative relationship betweenunemployment and real GDP

This relationship is clear in the data


Okun’s Law





Okun’s Law





Okun’s Law





Okun’s Law

19511984

1999

2000

1993

1982

1975

Change in unemployment rate

10

-3 -2 -1 0 1 2 43

8

6

4

2

0

-2

Percentage change in real GDP

Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP

Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP


Outline





How Economists Think

Economists use “model” to illustrates the essence of the realeconomy and to help explain economic variables

Economic variables

1 Endogenous variables: those that the model explains

2 Exogenous variables: those that come from outside the model

An economic model can show how the exogenous variablesaffect the endogenous variables

1 The model of supply and demand

2 The circular flow of dollars through the economy




Economic variables









Economic variables









Economic variables









Economic variables









Economic variables









Economic variables







Documents

Introduction to Macroeconomics - UNT College of Arts and ...kim1/teaching/Macro_1/01_Intro_MACRO.pdf · Introduction to Macroeconomics Intermediate Macroeconomic Theory Macroeconomic