ECN 101 – Intermediate Macroeconomic Theory

Tuesdays 6:10-7:00pmSection A04Wellman 229

ECN 101 – Intermediate Macroeconomic Theory

Tuesdays 7:10-8:00pmSection A03Wellman 229

Some Info

• Office SSH 115• Office Hours Wed & Fri 8:50-

9:50am• Midterm February 14th 35%• Final 50% March 22nd 50%

3:30pm• HW 15% 6 Problem Sets

HW Policy

• No late hw• Hand in to your TA during class• Or in the mailbox of your TA or

the Professor BEFORE it is due.• On hw you must include:

• Your name, student id• Your TA’s name

Tips for Success in Class and School

• Attend Class• Ask questions when you don’t

understand• Read the book• Do the homework• Talk to professor(s)!! Go to their

websites to see what research they do!

• Grad school/job recommendation letters!!

Macroeconomics

• Bigger Picture of Countries as a whole• Phillips curve infl and

unemployment

Gross Domestic Product GDP

• Market value of final goods and services produced in an economy over a certain period of time.

• Different approaches to calculating GDP

• Expenditure• Production• Income

– IN THEORY SHOULD BE EQUAL!

Expenditure Approach

• National Income IdentityY = C + I + G + NXC, consumptionI, investmentG, gov’t purchasesNX, net exports (trade balance)

Gov’t purchases rather than gov’t spending. Sometimes when the gov’t spends, they aren’t contributing to GDP.

Income Approach

• $ of product sold = $ income earned–Employee compensation– Indirect business taxes–Net operating surplus of business–Depreciation of fixed capital

Capital: think anything used in the production of a good that is not labor – i.e. buildings, machines, equipmentSome earned income is compensation for depreciation of capital machinery

Production Approach

• Intermediate goods cannot be counted twice• Value added

=revenue – value of intermediate inputs

Issues with GDP

• Many things not counted–Home cooked meals–Health of nation–Environmental resources

Trying to measure economy of a country to compare with others. Is GDP really so good?

GDP measurements

• Nominal GDP = price level x real GDP

• % ∆ N GDP = %∆ price level + % ∆ R GDP

• Change in GDP between 2 years:– Laspeyres index: use initial (base) year prices– Paasche index: use final year prices– Fisher index (chain weighting): take average

of Laspeyres and Paasche

An Example of calculating GDP

• In 2007 Davisland produced 50 road bikes and 1000 thai dinners

• In 2007 a thai dinner costs $5 and a road bike costs 200$

• Calculate the GDP of Davisland• Now calculate the GDP in 2010

dollars, when prices in 2010 were 10$ and 300$ for a thai dinner and bike, respectively

Comparing Across Countries

• 1. First convert to US dollars using exchange rate – this gives you nominal GDP of the foreign country in U.S. dollars

• 2. Foreign R GDPPus = (Pus/Pforeign)x N GDP

Some Exercises

• India GDP 2007 = 47.2 trillion rupees

• US GDP 2007= 13.7 trillion dollars• Exchange rate 2007 = 41.3

rupees/dollar• Pindia/Pus=0.246

• What is real GDP in India in 2007 measured in US Dollars?

To Solve

• 1. Convert to Dollars47.2 trillion rupees x (1/41.3) $/rupee=

1.14 trillion $• 2. Convert to real GDP• 1.14 trillion $ x (1/0.246) = 4.64

trillion $

• 2007 Real GDP of India in $ = 4.64 trillion $

Growth Rates

• Growth rates are essentially percentage changes

• Hidden within the “growth rate” is a unit of time! How much did some variable grow over a certain period?

• Generally g means growth rate per year• Don’t forget to always know the unit of

time!• Growth rate of y from year t to year t+1

g = (yt+1-yt)/yt

Calculating Tips

• See examples from class• UNIT OF TIME IMPORTANT!• Yearly rate, per year, per annum,

annual rate, over the year, for the year, etc.

• 4 Variables: yt, y0, g, t. In any problem you will be given 3 and told to find the 4th. Just use the formula!

Examples

• You have $100 in your bank.• At t= 0, 1, 2, 12, 24, 48, 60 (months)Compute your balance if interest rate is

1%

Balance after t months = $100 x (1+r)t

t=1 $100x(1+0.01) = $101t=2 $101x(1+0.01) = $100x(1+0.01)2 =

$102.01t=24 $100x(1+0.01)24=$126.97

Example

• In 2007 you have 1000$ in your bank account• In 1995 you had 1$• Calculate the yearly growth

rate, assuming growth rate is constant over this period!

Example

• Today Lake Tahoe has 1000 gallons of water.• Over the past ten days, the

rain fall has been increasing the lake at the rate of 5% per day.• How many gallons were in

Lake Tahoe ten days ago?

Concave, Convex graphs and Growth Rates

• Calculus: growth rate = slope=derivative!