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Macroeconomics precourse – Part 1Academic Year 2013-2014
Course PresentationThis course aims to prepare students for the Macroeconomics course of the MSc in BA. It provides the essential background in macroeconomics
PAOLO PAESANI Office: Room B6, 3RD floor, Building B Telephone: 06-72595701 E-mail: [email protected] hours: to be agreed
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Macro
MACROECONOMICS
Macroeconomics is a branch of economic theory that studies the functioning of the economic system of a nation as a whole and its connections with other economic systems.
Economic system = Households + Non financial Companies + Financial Intermediaries + Government (including the central bank)
Orthodox approach: Microeconomics (study of single elements) as the basis of macroeconomics (study of the whole)
Heterdox approach: I’ll tell you about it next time !
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Macro
SOCIO-ECONOMIC CONTEXT• Well-defined property rights over available resources;• Freedom to put available resources to the best (most profitable) use as
judged by the owner (resource allocation);• Property rights protection;• Freedom to transfer property rights in a regulated and organised way
(Voluntary exchange);• Price-based resource allocation;• Capitalist economy;• Open economy;• Government as a relevant macroeconomic actor• Money as medium of exchange, means of payment, unit of account and
store of value.
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Macro
THE ECONOMIC SYSTEM
Mankiw (2010)
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Macro
Government as a part of the economic system 1. Purchases goods and services from the
private sector (linkage with the market for goods and services);
2. Hires workers and rents capital goods from the private sector which it uses in combination with intermediate goods and services to produce public goods (linkage with the market for factors of production);
3. Taxes houselds and firms (direct taxation, indirect taxation, excises and fees) (TAX)
4. Transfers money to houselds and firms (pensions, unemployment benefits, subsidies)
GOVERNMENT AS A PART OF THE ECONOMIC SYSTEM
Mankiw (2011)
GOVERNMENT
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Macro
Financial system (institutions and markets related to the circulation of money and credit) :
1. Central bank; 2. Monetary financial institutions (normal
banks);3. Non monetary financial intermediaries
(investment and pension funds, insurance companies, rating agencies, investement banks ….)
4. Money markets (Short-term financial assets)
5. Financial markets (bonds, shares, derivatives, forex, commodities)
FINANCIAL SYSTEM AS A PART OF THE ECONOMIC SYSTEM
GOVERNMENT
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Macro
Every economic system is linked to the others through multiple channels:
1. International trade of goods and services (Exports and Imports);
2. International mobility of factors of production (migration, foreign direct investment);
3. Private international financial flows (portfolio investment, forex transactions)
4. Public international financial flows (management of official forex reserves, interntional aid, international transfers)
THE GLOBAL ECONOMIC SYSTEM
GOVERNMENT
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Macro
GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP, Y) is the nominal value of all the final goods and services produced within a country over a given period of time evaluated at market prices.
1. nominal value = measured in terms of money2. Final goods and services = goos and services produced over a given
period of time and NOT USED to produce other goods and services during the same period of time.
3. Produced = Trading of second hand goods is not part of GDP4. Within a country = National dimension5. Given period of time = Usually One year (flow variable)6. Market prices = Only final goods and services regularly bought and
sold in a market contribute to GDP.
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Macro
GROSS DOMESTIC PRODUCT
Primary sectorAGRICULTURE
Secondary sectorINDUSTRY
Tertiary sectorSERVICES
Consumers
Wheat Raw Bread
Packaged bread
50EUR
100EUR
150EUR
Total value of goods and services = 300 EURValue of intermediate goods and services = 150 EURGDP = 150 EURGross National Income = 50 + (100-50) + (150 – 100) = 150 EUR
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Macro
GROSS NATIONAL PRODUCT
Gross National Product (GNP) is the nominal market value of all the final goods and services produced within a country or a abroad over a given period of time by national factors of production.
GNP = GDP + NFI
NFI = NET FOREIGN INCOMES = (Income of domestic labour and capital employed abroad) – (Income of foreign labour and capital employed in the country)
Nationality + Residence matter
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Macro
NATIONAL INCOME
Gross National Income (GNI) is equal to Gross National Income minus Indirect Taxation (ex. VAT)
GNI = GNP - VAT
Hint: When you buy anything (eg. a book) , 20% of the price you pay is VAT and is trasferred to the State, the rest compensates factors of production employed to produce it.
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Macro
Mankiw (2011)
OTHER MEASURES OF INCOME
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Macro
GDP PER CAPITA
Dividing GDP by the country’s population (POP) we obtain GDP per-capita. GDP per capita can be taken as a rough measure of the economic welfare of a country’s residents.
GDP per capita = GDP / POP
GDP per capita is an average that tells us nothing about distribution. Economists and statisticians have developed specific indicators for that (e.g. Lorenz Curve, Gini coefficient, …)
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Macro
GDP PER CAPITA
Source: BNP_perhoofd_2012_%281%29.PNG
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Macro
GDP = AGGREGATE DEMAND
Y = C + I + G + X – M
Mankiw (2011)
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Macro
AGGREGATE DEMAND: CONSUMPTION
Aggregate consumption depends on:
1. Current disposable income (Ydisp = Y – TAX + TRA) dC/dYdisp > 02. Expected disposable income dC/dYexp > 03. Inflation (?), Real interest rate < 0 (?)4. Wealth = Financial assets + Real assets > 05. Income distribution , Consumer credit ….
Ydisp – C(t) = S(t) = Private Savings
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Macro
AGGREGATE DEMAND: PRIVATE INVESTMENT
Aggregate investment depends on:
1. Expected profits + attitude towards risk 2. Expected aggregate demand3. Inflation (?), Real interest rate < 0 4. Credit + financial factors
K(t+1) – K(t) = I(t) – dK(t) = Net investementK(t) = Aggregate Stock of capital , 0< d <1 depreciation rate
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Macro
AGGREGATE DEMAND: GOVERNMENT PURCHASES
Government purchases depend on:
1. Size of the public sector2. Fiscal policy decisions
G(t) + TRA(t) – TAX(t) = Government budget deficitGBD = change in public debt + monetary financing of BD
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Macro
AGGREGATE DEMAND: NEXT EXPORTS
Net Exports depend on:1. Nominal exchange rate E (amount of foreign currency per unit of domestic
currency) dNX / dE < 02. Domestic price level P dNX / dP < 03. Foreign price level P* dNX / dP* > 04. Domestic GDP Y dNX / dY < 05. Foreign GDP Y* dNX / dY* > 06. Barriers to international trade7. Quality, National specificities …
NX (t) + NFI(t) + NFTRA(t) + FDI(t) + PRMK(t) + dRES (t) + EO(t) = 0Balance of payments
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Macro
DECOMPOSING GDP
Y = PQ where Y = Nominal GDP, P = GDP deflator, Q = real GDP
Mankiw (2011)
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Macro
INFLATION
Inflation rate = Rate of change of the GDP deflator over time
Π = [P(t) – P(t-1)] / P(t-1)
1. Π > 0 = Moderate Inflation2. Π = 0 (approx.) = Stable prices3. Π < 0 = Deflation4. Π >> 0 = High Inflation5. Π >>>>>> … 0 = Hyper-inflation
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Macro
INFLATION AND THE PURCHASING POWER OF MONEY
1/P can be taken as an indicator of the purchasing power of money (amount of goods which can be purchased spending 1 euro)
1. M/P = Real Money balances2. W/P = Real wage
Inflation erodes the purchasing power of money. As such creditors and people on fixed income fear it while debtors and people on floating income do not (if their income move at the place of inflation).
Interesting link on the effects of inflation:http://203.200.22.249:8080/jspui/bitstream
/123456789/2209/1/A_tract_on_monetary_reform.pdf
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Macro
Mankiw (2011)
MEASURING INFLATION
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Macro
GROWTH
Inflation rate = Rate of change of the real GDP over time
Γ = [Q(t) – Q(t-1)] / Q(t-1)
1. Π > 0 = Growth2. Π = 0 (approx.) = Stagnation3. Π < 0 = Recession
Growth theory is one of the main branches of macroeconomics
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Macro
Mankiw (2011)
REAL GDP AND GROWTH
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Macro
Mankiw (2011)
REAL GDP AND GROWTH
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Macro
REFERENCE
Mankiw, G.N. (2010) Brief Principles of Macroeconomics, 6° ed.,