Macroeconomics Lecture One (One slide) 2013.pdf

7/29/2019 Macroeconomics Lecture One (One slide) 2013.pdf

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Managerial Macroeconomics

Dr.Benjarong Suwankiri & Dr.Pimnara Hirankasi

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Sovereign Bond Crisis in Europe Recession and QE policy in America

American Fiscal Cliff

Japans Abenomics Cyprus Bank Crisis

Inflation and Soft Landing in China

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National Income: Low Economic Growth Rate Employment Opportunity: High

Unemployment Rates

Cost of Living: High Inflation Rate

Trade Surplus: Low Exchange Rate(Undervalued currencies)

Income disparity: Rich gets richer, poor gets

poorer

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Gross Domestic Product (GDP) Gross National Product (GNP)

GDP (Purchasing Power Parity)

0100,000200,000300,000400,000500,000600,000700,000

2007 2008 2009 2010 2011

USD mn Thailands GDP : 2007-2011 Gross Domestic Product (GDP)Gross National Product (GNP)GDP (Purchasing Power Parity)

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When judging whether the economy isdoing well or poorly, it is natural to look atthe total income that everyone in theeconomy is earning.

For an economy as a whole, income mustequal expenditurebecause: Every transaction has a buyer and a seller.

Every dollar of spending by some buyer is a dollarof income for some seller.

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SpendingGoods andservicesbought

RevenueGoodsand servicessold

Labor, land,and capitalIncome

= Flow of inputsand outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS

Produce and sellgoods and servicesHire and use factorsof production

Buy and consumegoods and servicesOwn and sell factorsof production

HOUSEHOLDS

Households sellFirms buy

MARKETSFOR

FACTORS OF PRODUCTION

Firms sellHouseholds buy

MARKETSFORGOODS AND SERVICES

Copyright 2004 South-Western6


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GDP includes all items produced in theeconomy and sold legallyin markets.

What Is Not Counted in GDP? GDP excludes most items that are produced and

consumed at home and that never enter themarketplace. It excludes items produced and sold illicitly, such as

illegal drugs.

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GDP (Y) is the sum of the following: Consumption (C)

Investment (I)

Government Purchases (G)

Net Exports (NX)

Y = C + I + G + NX

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Consumption(C): The spending by households on goods and

services, with the exception of purchases of newhousing.

Investment(I):

The spending on capital equipment, inventories,and structures, including new housing.

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Government Purchases(G): The spending on goods and services by local,

state, and federal governments.

Does notinclude transfer payments because they

are not made in exchange for currently producedgoods or services.

Net Exports(NX): Exports minus imports.

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Nominal GDPvalues the production of goodsand services at current prices.

Real GDPvalues the production of goods andservices at constant prices.

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,000

India Vietnam Singapore Malaysia Thailand Myanmar*

USD mnNominal Real

*2012 estimate by IMFReal GDP at 2000constant price

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An accurate view of the economy requiresadjusting nominal to real GDP by using theGDP deflator.

The GDP deflatoris a measure of the price

level calculated as the ratio of nominal GDP toreal GDP times 100.

It tells us the rise in nominal GDP that isattributable to a rise in prices rather than a

rise in the quantities produced.

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Converting Nominal GDP to Real GDP Nominal GDP is converted to real GDP as follows:

Real GDPNominal GDP

GDP deflator20XX

20XX

20XX

100

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GDP is the best single measure of theeconomic well-being of a society.

GDP per persontells us the income andexpenditure of the average person in the

economy. Higher GDP per person indicates a higher

standard of living. GDP is not a perfect measure of the

happiness or quality of life, however.

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Some things that contribute to well-beingare not included in GDP. The value of leisure (e.g. Gross National

Happiness).

The value of a clean environment (e.g. HappyPlanet Index).

The value of almost all activity that takes placeoutside of markets, such as the value of the time

parents spend with their children and the value ofvolunteer work.

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Gross Domestic Product (GDP) at PurchasingPower Parity (PPP)

70

52

22

100

58

47

Norway

Switzerland

Australia

source : CIA World Factbook

GDP country Rank

PPPNorminal

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GNP is the total income earned by a nationspermanent residents. It differs from GDP byincluding income that citizens earn abroadand excluding income that foreigners earn

here.

Kazakhstan Nigeria Ireland Iraq Philippines Venezuela Hong Kong

GDP GNP

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Source : http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capitahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

1

2

3

4

5

10

20

24

21

4

8

10

3

5

6

LuxembourgQatar

NorwaySrwitzerland

AustraliaSingapore

BruneiHong Kong

PPP per capitaNorminal per capita

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Green GDP is an index of economic growthwith the environmental consequences of thatgrowth factored in.

Green GDP=Traditional GDP-environmental/ecological costs

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The consumer price index (CPI)is ameasure of the overall cost of the goodsand services bought by a typical consumer.

It is used to monitor changes in the cost of

living over time. When the CPI rises, the typical family has to

spend more dollars to maintain the samestandard of living.

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Fix the Basket Find the Prices

Compute the Baskets Cost

Choose a Base Year and Compute the Index

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Compute the inflation rate: Theinflation rate is the percentage change

in the price index from the precedingperiod.

Inflation Rate in Year 2 = CPI in Year 2 - CPI in Year 1

CPI in Year 1 100

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1 Year ago

100 100

100 100

Today (inflation = ?)

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Economists and policymakers monitor both theGDP deflator and the consumer price index togauge how quickly prices are rising.

There are two important differences between theindexes that can cause them to diverge.

The GDP deflatorreflects the prices of all goodsand services produced domestically, whereas...

the consumer price indexreflects the prices of allgoods and services bought by consumers.

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The consumer price indexcompares theprice of a fixed basketof goods andservices to the price of the basket in thebase year

whereas the GDP deflatorcompares theprice ofcurrently producedgoods andservices to the price of the same goods and

services in the base year.

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-3.0-2.0-1.00.01.02.03.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Japans Deflator & CPIGDP Deflator 2005p %yoy CPI 2005p %yoy

-1.00.01.02.03.04.05.06.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Indias Deflator & CPIGDP Deflator 2005p %yoy CPI 2005p %yoy

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Price indexes are used to correct forthe effects of inflation whencomparing dollar figures from

different times.

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10 Years ago

Today

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The term business cycle or economic cyclerefers to the fluctuations of economic activity(business fluctuations) around its long-termgrowth trend.

-5.0-4.0-3.0-2.0-1.00.01.02.03.04.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12007 2008 2009 2010 2011 2012 2013

US GDP growth rate

%yoy %qoq

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The cycle involves shifts over time betweenperiods of relatively rapid growth of output(recovery and prosperity), and periods ofrelative stagnation or decline (contraction or

recession).

-6.0-4.0-2.00.02.04.06.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q11996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 013

Eurozones GDP growth rate

%yoy %qoq_sa

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These fluctuations are often measured usingthe real GDP. Despite being termed cycles,these fluctuations in economic growth anddecline do not follow a purely mechanical or

predictable periodic pattern.

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A number of types of business cycles, in thetraditional sense of a fluctuation within aregular period have been proposed. The maintypes of business cycles enumerated by

Joseph Schumpeter.

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In 1860, French economist Clement Juglaridentified the presence of 8 to 11 year cycles.In Business Cycles, Schumpeter suggestedthis cycle be named after Juglar. These cycles

are made up of four stages, each linked tothe variation in prices, production andinterest rates.

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expansion = increase in production andprices , and low interests rates.

crisis = stock exchanges crash andbankruptcies of several companies occur.

recession = decrease in price and in output,high interests rates.

recovery= stocks recover thanks to the fall

in prices and incomes.

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-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2005 2006 2007 2008 2009 2010 2011 2012 2013

%

%yoy %qoq

Expansi

on

Recessi

on

Recover

Crisis

USs GDP growth rate

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A recession is a contraction phase of thebusiness cycle, or "a period of reducedeconomic activity.

-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12007 2008 2009 2010 2011 2012 2013

Japans GDP growth rate

%yoy %qoq_sa

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The U.S. based NBER defines a recessionmore specifically as "a significant decline ineconomic activity spread across the economy,lasting more than a few months. A sustained

recession may become a depression.

-15.0-10.0-5.0

0.05.0

10.015.020.025.0 US GDP in Great Depression (1930s)

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A recession has many attributes that canoccur simultaneously and can includedeclines in coincident measures of overalleconomic activity such as employment,

investment, and corporate profits.

Source: http://www.pnas.org/content/106/41/17290/F1.expansion.html

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Recessions are the result of falling demandand may be associated with falling prices(deflation), or sharply rising prices (inflation)or a combination of rising prices and

stagnant economic growth (stagflation). Asevere or prolonged recession is referred toas an economic depression.

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-8.0-6.0-4.0-2.00.02.04.06.0 Japans GDP growth & Inflation rate

GDP %yoyCPI %yoy

-10.0-5.00.05.0

10.015.020.025.030.035.040.0 Mexicos GDP growth & Inflation rate

GDP %yoyCPI %yoy High Inflation

Deflation

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A significant stock market drop has often

preceded the beginning of a recession. The three-month change in the

unemployment rate.

Index of Leading Indicators

4,146.9

2,319.3

5,188.9

0

1,000

2,000

3,000

4,000

5,000

6,000

January-07 January-08 January-09 January-10 January-11 January-12 January-13

Dow Jones Index: Composite Average

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The Index of Leading Indicators is aneconomic index intended to estimate futureeconomic activity. The index is calculatedbased on ten key variables that havehistorically turned downward before arecession and upward before an expansion.

-6.0-4.0-2.00.02.04.06.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q12000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Real GDP growth %yoyEuro Growth Leading Indicator

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The index of leading indicators can providean early warning system so that policymakerscan shift toward macroeconomic stimuluswhen the index fails.

Such an early warning system is also usefulfor business plans for immediate turns in theeconomy.

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Average number of initial applications for unemploymentinsurance

Number of manufacturers' new orders for consumer goodsand materials

Speed of delivery of new merchandise to vendors from

suppliers Amount of new orders for capital goods unrelated to defense

Amount of new building permits for residential buildings

The S&P 500 stock index

Inflation-adjusted money supply (M2)

Spread between long and short interest rates

Consumer sentiment

Average weekly hours worked by manufacturing workers

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Green light : Very hot Yellow Red light: hot

White light: stable

Orange light: poor/alarmnig

Red Light: very poor/very alarming

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Indicators 2012 2013Q1 Q2 Q3 Q4 Q1 April MayGDP growth (%yoy) 2.4 2.1 2.6 1.7 1.8 - -

Nonfarm payrolls(change from previous

month, th persons)

787 324 456 626 622 149 175

Mfg PMI 53.0 52.3 50.9 50.6 52.9 50.7 49.0

Non-Mfg PMI 55.7 53.5 54.1 55.1 55.2 53.1 53.7

Retail sales (%yoy) 8.1 4.7 4.1 4.2 2.9 3.3 -

Consumer ConfidenceIndex

67.5 65.3 65.0 70.4 62.8 69.0 76.2

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Macroeconomics Lecture One (One slide) 2013.pdf