session 1.pptx - faculty

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Macroeconomics in the Global Economy Antonio Fatás

Macroeconomics in the Global Economy Course Overview

v Scope and objectives of the course

v Readings, assignments and web site v Exam, grades, class norms


Global Trends Growth 2011 2012

World 3.9% 3.5%

Advanced 1.6% 1.4%

Emerging 6.2% 5.7%

China and India still growing fast (9.2%

and 7.2%).

Recovery? When will unemployment return to normal levels? (US)

1.32$/€

Sovereign default? Additional defaults

in Europe?

Restoring growth in

Japan?

South America returning growth? (4.2%)

Revalue the Yuan?

Sub-Saharan Africa growing at 5%

2


Introduction (Session 1)

Basic Markets

Markets for Goods and Services

(Sessions 2 and 3)

Money and Central Banks

(Sessions 5)

The Aggregate Models of the Economy

Business Cycles (Session 7)

The “Model” (Sessions 8, 9, 10 and 11)

Inflation (Session 12)

Current Macroeconomic Issues

Monetary policy and financial markets (Session 13)

Exchange Rates (Session 14)

Monetary Policy Regimes (Session 15)

Growth (Session 4)

Long-Term

Labor Market (Session 7)

Course Structure


Preparing for class

v  Required readings (Web site)

v  Data collection (Web site)

v  Questions to guide you through readings and data (Web site)

v  Forum for questions and debate (Web site)

v  Textbook

3


Data Assignment

v  Find data for a country (assigned to your group)

v  Data collection can be done individually or by group

v  Group report to be produced by Session 8

v  Data available from links posted on the course web site


Data Assignment

4


Grade

v Class Participation (15%) v Group Assignment (15%) v Final Exam (70%)

v  + self-graded quiz in Session 6


Class Norms

v Attend every session with your section even if at 8:30am (requests for exceptions to this rule must be done by email well in advance of the session – with a valid reason, please).

v All sessions are 90 minutes.

v Name tags to be displayed every session (MBA office will print a new name tag if you do not have one).

v Respect seating arrangement.

v No plagiarism (including from my slides), no free riding for the group report.

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Session 1. Macroeconomic Variables. National Accounting.

v  What is Gross Domestic Product (GDP)?

v  Comparing GDP across countries

v  Comparing GDP over time (Real vs. Nominal GDP)

v  Price indices (e.g. CPI) and inflation

v  Interest rates


The market value of final goods and services newly produced within a nation during a fixed period of time.

GDP (output) = PA x QA + PB x QB + …

Two ways to calculate GDP:

1. Production of final goods.

2. Sum of Value Added for all industries. Value added is defined as revenues minus the cost of intermediate inputs

Measuring Output (Gross Domestic Product)

6


Two alternative ways to measure (or interpret) GDP

v  Expenditure: total spending on final goods and services.

GDP = Consumption + Investment + Government Spending + Net Exports

v  Income: sum of incomes received by workers (wages), companies (profits) and government (taxes).

Measuring Output (Gross Domestic Product)


Gross Domestic Product (GDP): Based on activity within national borders.

Gross National Income (GNI): Based on nationality (previously known as GNP)

-30

-20

-10

0

10

20

Kuwait USA China Japan France Singapore Ireland Chad

% Difference between GNI and GDP (2008)

GNI = GDP + Net Factor Payments (NFP)

Gross Domestic Product vs. Gross National Income

Net Factor Payments: Income received from factors of production abroad – Income paid to foreign factors of productions

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Is GDP a good measure of economic well being, quality of life or happiness?


Comparing GDP across Countries

US: GDPUS = PUSDA

x QUSA + PUSD

B x QUSB + ...

France: GDPFRA = PEURA

x QFRAA + PEUR

B x QFRAB + ...

When comparing macroeconomic variables across countries we need to convert prices (values) that are denominated in different currencies into a common currency. There are two options:

1. Use current (market) exchange rate – The right thing to do if you want to know the amount of foreign goods you can buy with your national income. 2. Use an exchange rate that takes into consideration differences in price levels across countries (“1 dollar does not buy the same amount of goods in all countries”). This exchange rate is called Purchasing Power Parity adjusted exchange rate. We can think of GDP at purchasing power parity as a calculation in which we use international prices (PINT) to value domestic production.

US: GDPUS (PPP) = PINTA

x QUSA + PINT

B x QUSB + ...

France: GDPFRA (PPP) = PINTA

x QFRAA + PINT

B x QFRAB + ...

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Total Value of Output

US 21.7%

China 10.5%

Japan 8.4%

India 2.4%

Germany 5.1%

Russia 2.7%

Brazil 3.6%

UK 3.5%

France 4.0%

Italy 3.2%

Rest 35.0%

Production (GDP). Measured in current (2011) USD. World = USD 69.7 Trillion


Market Size: US states as countries

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Measuring GDP Across Countries

US 19.1%

China 14.3%

Japan 5.6%

India 5.7%

Germany 3.9% Russia

3.0%

Brazil 2.9%

UK 2.9%

France 2.8%

Italy 2.3%

Rest 37.4%

Production (GDP, 2011). Measured in USD (PPP)


Total World Population (2011): 7 Billion

Total GDP = Population x GDP per capita

US 4.5%

China 19.3%

Japan 1.8%

India 17.2%

Germany 1.2%

Russia 2.0%

Brazil 2.8%

UK 0.9%

France 0.9%

Italy 0.9%

Rest 48.6%

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GDP Per Capita (USD, PPP). 2011.

Total GDP = Population x GDP per capita

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

USA China Japan India EU Russia Latin America

Sub-Saharan Africa

World


Assignment

1132

2088

48

1577

5927

219

2560

301

1727

5459

39

1036

127

209

364

851

2185

105

1333

10170

501

2214

321

4195

4299

59

1652

129

294

528

0 2000 4000 6000 8000 10000 12000

Australia Brazil

Bulgaria Canada

China Egypt

France Greece

India Japan

Lebanon Mexico

New Zealand Singapore

South Africa

GDP (Billions USD)

PPP

Current US$

2010

11


Assignment

22 195

8 34

1338 81

65 11

1225 127

4 113

4 5

50

0 200 400 600 800 1000 1200 1400 1600

Australia Brazil

Bulgaria Canada

China Egypt

France Greece

India Japan

Lebanon Mexico


South Africa

Population (Millions)

2010


Assignment

50748

10710

6333

46212

4428

2698

39448

26607

1410

42831

9228

9133

29352

41120

7280

38160

11210

13931

39050

7599

6180

34123

28408

3425

33733

14069

14564

29535

57932

10565

0 10000 20000 30000 40000 50000 60000 70000

Australia Brazil

Bulgaria Canada

China Egypt

France Greece

India Japan

Lebanon Mexico


South Africa

GDP per capita (USD)

PPP

Current US$

2010

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Nominal GDP = Sum of production of goods and services valued at current prices:

Nominal GDP (2010) = PA2010 x QA

2010 + PB2010 x QB

2010 +...

If nominal GDP goes up from 2010 to 2011, what do we learn? We want to understand separately the evolution of quantities and prices. To look at quantities we calculate Real GDP, which eliminates the effect of inflation by fixing prices in a base year (this is the equivalent of using PPP when comparing across countries)

Real GDP = Sum of production of goods and services valued at constant prices (prices of a base year):

Real GDP (2010) “in 2000 dollars” = PA2000 x QA

2010 + PB2000 x QB

2010 +...

Real GDP (2011) “in 2000 dollars” = PA2000 x QA

2011 + PB2000 x QB

2011 +...

Comparing GDP over time: Real and Nominal Gross Domestic Product


Real and Nominal GDP in the UK (in billions of pounds)

0

200

400

600

800

1000

1200

1400

1600

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Real GDP Nominal GDP

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From Nominal Values to Real Values. Price indices.

In a “one-good” world, the ratio of nominal to real GDP is the ratio of the price in the current year relative to the base year.

Nominal GDP (2010) P2010 x Q2010 P2010

-------------------------------------------- = -------------------------- = -------------- Real GDP (2010) “in 2000 dollars” P2000 x Q2010 P2000

If this ratio is equal to 1.25, it means that prices rose 25% from 2000 to 2010.

In a world with many goods, what we get is the ratio of an “average” price level in the current year (2010) relative to the base year (2000) where the average is calculated using weights that correspond to the GDP share of each of the goods. This price index is called the GDP deflator. Nominal GDP (2010) PA

2010 x QA2010 + PB

2010 x QB2010 + …

GDP Deflator = -------------------------------------------- = ------------------------------------------------- Real GDP (2010) “in 2000 dollars” PA

2000 x QA2010 + PB

2000 x QB2010 + …

Another popular price index is CPI (consumer price index). The CPI monitors prices of goods that enter a typical consumption basket (weights are a function of what consumers buy).


Inflation is the growth rate of the price index. Inflation can be calculated from different price indices (GDP deflator, Consumer Price Index, Producer Price Index) The relationship between inflation and GDP growth rates can be expressed as:

nominal GDP growth = real GDP growth + inflation

Notice that this expression is exact if you are using logarithms to calculate growth rates but only an approximation if you use standard growth rates (see appendix for details).

Inflation

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%

-5

0

5

10

15

20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Nominal GDP Growth Real GDP Growth Inflation

1996. Nominal Growth (17.9%) is equal to real growth (2.1%) plus

inflation (15.8%).

2011. Nominal Growth (15.2%) is equal to real growth (7.3%) plus

inflation (7.9%).

Nominal, Real Growth Rates and Inflation


What is the real interest rate?

All nominal variables can be transformed into real ones by removing the effect of inflation. For example, for interest rates we have:

real interest rate = nominal interest rate - inflation

The nominal interest rate gives the return of your investment in terms of money. The real interest rate shows your return in terms of goods. If the real interest rate is positive, then you can buy more goods at the end of your investment period.

%

-4

-2

0

2

4

6

8

10

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Japan

Nominal Interest Rate Inflation Real Interest Rate

1980. Real Interest Rate (0.32%) is equal to Nominal Interest Rate (5.5%) minus

inflation (5.18%).

2005. Real Interest Rate (1.38%) is equal to Nominal Interest Rate (0.08%) minus

inflation (-1.3%).

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Session 1. Summary

v Gross domestic product is the market value of final goods and services produced within a country over a fixed period of time.

v Comparison of living standards across countries requires that GDP figures be adjusted for differences in prices. This adjustment is called purchasing power parity adjustment.

v Real variables reflect quantities and returns in terms of goods, while nominal variables reflect values in money terms.

v Inflation is the growth rate of a price index.

v The real interest rate shows the return in terms of goods (not money).


GDP in 2009 was 100. GDP in 2010 was 110. What was the growth rate of GDP?

Standard calculation

Growth = 10%.

But what if you calculate the growth rate after 6 months and compound it during the second half of the year?

GDP2010 = GDP2009 * (1+g)2

6-month growth is equal to 4.88%, which means an annual growth rate of 9.76%.

What if you calculate a three-month compounded growth rate? What about one-month? What about one-day?...

Growth = GDP 2010 - GDP2009

GDP2009

*100

Appendix: Calculating Growth Rates

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If you make the time horizon over which you calculate and compound growth rates as small as possible you end up with an alternative way to calculate growth rates, one that assumes a continuously-compounded growth rate. The formula is

Growth = 100 x [ln (GDP2010) – ln (GDP2009)]

Advantages of this formula:

1.  It does not depend on the reference year for the calculation.

Example:

2. Useful shortcuts:

growth of (XY) = growth of X + growth of Y

growth of (X/Y) = growth of X - growth of Y

Appendix: Calculating Growth Rates

2000 2010 Standard Change

Logarithmic Change

USD/EUR 1 1.30 +30% +26%

EUR/USD 1 0.77 -23% -26%

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