economics 302 (sec. 001) intermediate macroeconomic theory...
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Economics 302 (Sec. 001)Intermediate Macroeconomic
Theory and PolicyTheory and Policy(1/23/12)
Instructor: Prof. Menzie ChinnUW MadisonSpring 2012Spring 2012
Administrative IssuesAdministrative Issues
• Course website: http://www.ssc.wisc.edu/~mchinn/web302_s12.html
• OH: MW 4-5, 7418 Soc Sci• Textbook: Blanchard, MacroeconomicsTextbook: Blanchard, Macroeconomics• Additional Readings: from WWW,
Econbrowser CBOEconbrowser, CBO• NYT, FT, WSJ, Economist
Administrative Issues• Grading: 20% PS 50% 2×MTs 30% Final• Grading: 20% PS, 50% 2×MTs, 30% Final• Dates:
- MT1 on Wed, 2/22- MT2 on Wed, 4/11,- Final on Tue. 5/15, 7:25PM
• Make ups: None Points are re allocated if you• Make-ups: None. Points are re-allocated if you have a legitimate excuse. No late assignments accepted ( t b h d d i d i l t )accepted (must be handed in during lecture)
Context: GDP Growth
.075
.100
Real GDPgrowth
.025
.050
-.025
.000WSJf'casts
-.075
-.050
-.10000 01 02 03 04 05 06 07 08 09 10 11 12
(G /G ( ))^(GDP05/GDP05(-1))^4-1(GDP05WSJ_JAN12/GDP05WSJ_JAN12(-1))^4-1
GDP (levels)
15,000
16,000Potential GDP(CBO, Aug.'11)
14,000
WSJ
12,000
13,000
GDPbn Ch 05$
WSJJan. '12
10,000
11,000bn Ch.05$SAAR
,00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
GDP05GDP05WSJ_JAN12GDP05 POT CBOAUG11
Source: BEA GDP 2011Q3 3rd release, CBO (Aug 2011), WSJ (Jan. 2012)
GDP05_POT_CBOAUG11
GDP (log levels)
9.60
9.65
Potential GDP(CBO, Aug.'11)
9.50
9.55
WSJJan. '12
9.40
9.45
Log GDP$
9 25
9.30
9.35 bn Ch.05$SAAR
9.2500 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
LOG(GDP05)LOG(GDP05WSJ JAN12)
Source: BEA GDP 2011Q3 3rd release, CBO (Aug 2011), WSJ (Jan. 2012)
LOG(GDP05WSJ_JAN12)LOG(GDP05_POT_CBOAUG11)
Employment
138,000
140,000
Nonfarmpayroll
l
136,000
,employment,000's, SA
132,000
134,000
ex.-temp.Census
128,000
130,000workers
8,00000 01 02 03 04 05 06 07 08 09 10 11 12
PAYEMS_DEC12-CENSUSTAKERSPAYEMS_DEC12
Source: BLS, Employment Situation, Dec. 2011 release
Unemployment Rate
10
11Unemploymentrate, in %, SA
8
9
6
7WSJJan. '12
4
5
31980 1985 1990 1995 2000 2005 2010 2015
UNRATE UNRATE_WSJ_JAN12
Source: BLS, Employment Situation, Dec. 2010 release
Unemployment Rate
16
20
Unemploymentrates, in %, SA
12
16
Unemployed &underemployed
8Official
0
4 Long-term(over 27 weeks)
01980 1985 1990 1995 2000 2005 2010
UNRATEU6RATE
Source: BLS, Employment Situation, Dec. 2010 release
(UNEMP27OV/CLF16OV)*100
Inflation
04
.05
.06
"Headline"CPI
.02
.03
.04
WSJ
.00
.01 CoreCPI
WSJ(Jan. '12)
03
-.02
-.01
Inflation ratey/y, in %, SA
-.0300 01 02 03 04 05 06 07 08 09 10 11 12 13
(CPIAUCSL/CPIAUCSL(-12))-1(CPILFESL/CPILFESL(-12))-1
Source: BLS, CPI Dec. 2011 release, WSJ (Jan. ’12)
( ( ))CPIINFLYOY_WSJ_JAN12/100
Monetary Policy
8
10
Ten yearTreasurys
6
8
Fed funds
4
2
Interestrates, in %
Three monthTreasurys
090 92 94 96 98 00 02 04 06 08 10
FEDFUNDS TB3MS GS10
y
Source: St. Louis Fed FRED II database
Fed interventions3500000
2500000
3000000 Fed Agency Debt Mortgage‐Backed Securities Purch
Li idi K C di
1500000
2000000Liquidity to Key Credit Markets
Lending to Financial
500000
1000000Lending to Financial Institutions
Long Term Treasury
0
g yPurchases
http://www.clevelandfed.org/research/data/credit_easing/index.cfm
Consumption
11.2Log householdLogs, in
b Ch 05$
9.0
9.2
10 4
10.8net worth[right axis]
bn.Ch.05$
8.810.0
10.4
8.4
8.6
9.6Logconsumption[left axis]
8.21980 1985 1990 1995 2000 2005 2010
[left axis]www.econbrowser.com
Source: BEA, 2011Q3 2nd release; Fed Flow of Funds
House Prices
Source: Calculated Risk, 12/27/2011
Net Exports and the Dollar
2
.3
02
.04
.1
.2
.00
.02
ex -oil
1
.0
04
-.02
ex. oil
-.2
-.1
-.06
-.04
Log realvalue of USD[l ft i ]
Netexports/
-.3 -.081975 1980 1985 1990 1995 2000 2005 2010
[left axis] exports/GDP
Source: Federal Reserve Board, and BEA, 2011Q3 GDP 2nd release
Current Account, Net Debt02 20
00
.01
.02
10
.15
.20
02
-.01
.00
00
.05
.10
Current Account
04
-.03
-.02
10
-.05
.00Cu e t ccou tto GDP ratio[left axis]
- 06
-.05
-.04
- 20
-.15
-.10Net InternationalInvestment Positionto GDP ratio[right scale]
-.07
-.06
-.25
-.20
1970 1975 1980 1985 1990 1995 2000 2005 2010
[right scale]
CA/GDP NIIPEOP/(GDP*1000)
Oil Prices
4.5
5.0
Log price of oil($/bbl, WTI)
4.0
Real
3.0
3.5Real
2.5Nominal
2.090 92 94 96 98 00 02 04 06 08 10
LOG(OILPRICE)LOG(OILPRICE/(CPILFESL/221 3369))
Source: St. Louis FRED II. Relative price is deflated by Core CPI, 2010=0
LOG(OILPRICE/(CPILFESL/221.3369))
Long Term Log GDP
9\
2001 recession --------Log GDPCh.2000$
8WWII
\1982recession
1990-91recession
7
WWI \ \
"Roaring'20's"
__GreatDepression
5
6\1920-21 recession
Depression
"GreatDepression"
590 00 10 20 30 40 50 60 70 80 90 00 10
LOG(GDP00)LOG(GDP05/1 127106466361855)
Source: Historical Statistics, and BEA, 2011Q3 GDP 2nd release, rebased to Ch.00$
LOG(GDP05/1.127106466361855)
2-1 Aggregate Output
•National income and product accounts are an accounting system used to measure aggregate economic activity.
GDP: Production and Income
The measure of aggregate output in the national income accounts is gross domesticnational income accounts is gross domestic product, or GDP.
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GDP P d ti d I
2-1 Aggregate Output
•There are three ways of defining GDP:
GDP: Production and Income
y g
1. GDP is the value of the final goods and services produced in the economy during a given periodthe economy during a given period.
A final good is a good that is destined for final consumption.
An intermediate good is a good used in theAn intermediate good is a good used in the production of another good.
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GDP P d ti d I
2-1 Aggregate Output
There are three ways of defining GDP:
GDP: Production and Income
There are three ways of defining GDP:
2. GDP is the sum of value added in the economy during a given period.
V l dd d l th l f fi ’Value added equals the value of a firm’s production minus the value of the intermediate goods it uses in production.g p
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GDP P d ti d I
2-1 Aggregate Output
There are three ways of defining GDP:
GDP: Production and Income
There are three ways of defining GDP:
3. GDP is the sum of incomes in the economy during a given period.
Table 2-1 The Composition of GDP by Type of Income, 1960 and 2006
1960 2006Labor income 66% 64%Capital income 26% 29%Indirect taxes 8% 7%
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2-1 Aggregate Output
N i l d R l GDP
•Nominal GDP is the sum of the quantities of final goods
Nominal and Real GDP
Nominal GDP is the sum of the quantities of final goods produced multiplied by their current price.
•Nominal GDP increases over time because:•Nominal GDP increases over time because:
– The production of most goods increases over time.
– The prices of most goods also increase over time.
•Real GDP is constructed as the sum of the quantities of final goods multiplied by constant (rather than current) prices.
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2-1 Aggregate Output
N i l d R l GDP
YQuantity
f CPrice f
Nominal Real GDP
Nominal and Real GDP
Year of Cars of cars GDP (in 2000 dollars)1999 10 $20,000 $200,000 $240,0002000 12 $24,000 $288,000 $288,000
To construct real GDP multiply the number of cars in each
2001 13 $26,000 $338,000 $312,000
To construct real GDP, multiply the number of cars in each year by a common price. Suppose we use the price of the car in 2000 as the common price. This approach gives us, in effect real GDP in chained (2000) dollarseffect, real GDP in chained (2000) dollars.
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2-1 Aggregate Output
N i l d R l GDPNominal and Real GDP
Fi 2 1
From 1960 to 2006 nominal
Nominal and Real U.S. GDP, Since 1960
Figure 2 - 1
From 1960 to 2006, nominal GDP increased by a factor of 25. Real GDP increased by a factor of about 4.5.
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2-1 Aggregate Output
N i l d R l GDP
The terms nominal GDP and real GDP each have many synonyms:
Nominal and Real GDP
– Nominal GDP is also called dollar GDP or GDP in current dollars.
– Real GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, or GDP in 2000 dollars.
– GDP will refer to real GDP, and Yt will denote real GDP in year t.
– Nominal GDP and variables measured in current dollars will be denoted by a dollar sign in front of them—for example, $Yt. for nominal GDP in year t.
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2-1 Aggregate Output
GDP L l V G th R t
•Real GDP per capita is the ratio of real GDP to the l i f h
GDP: Level Versus Growth Rate
population of the country.
•GDP growth equals: )( −YY
1
1)(
−
−
t
tt
YYY
Periods of positive GDP growth are called expansions.expansions.
Periods of negative GDP growth are called
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g grecessions.
2-1 Aggregate Output
GDP L l V G th R tGDP: Level Versus Growth Rate
Fi 2 2
Since 1960 the U S economy
Growth Rate of U.S. GDP Since 1960
Figure 2 - 2
Since 1960, the U.S. economy has gone through a series of expansions, interrupted by short recessions.
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2-2 The Other Major Macroeconomic Variables
Th U l t R t
•Because it is a measure of aggregate activity, GDP is
The Unemployment Rate
obviously the most important macroeconomic variable. But two other variables tell us about other important aspects of how an economic is performing:
– Unemployment
– Inflation
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2-2 The Other Major Macroeconomic Variables
Th U l t R t
•Employment is the number of people who have a job.
The Unemployment Rate
•Unemployment is the number of people who do not have a job but are looking for one.
•The labor force is the sum of employment and unemployment:p y
•L = N + U•Labor force = Employment + Unemployment•Labor force = Employment + Unemployment
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2-2 The Other Major Macroeconomic Variables
Th U l t R t
•The unemployment rate is the ratio of the number of people h l d h b f l i h l b
The Unemployment Rate
who are unemployed to the number of people in the labor force:
UL
u =
Unemployment rate =
In the United States, estimates based on the
Unemployment rate Unemployment/Labor force
7.0 4 6%u = =
In the United States, estimates based on the CPS show that:
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2006 4.6%144.4 7.0
u = =+
2-2 The Other Major Macroeconomic Variables
Th U l t R t
•The Current Population Survey (CPS) is used to compute the
The Unemployment Rate
unemployment rate.
•Only those looking for work are counted as unemployed. Those y g p ynot working and not looking for work are not in the labor force.
•People without jobs who give up looking for work are known asPeople without jobs who give up looking for work are known as discouraged workers.
•Participation rate labor forceParticipation rate=
labor forcepopulation of working age
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2-2 The Other Major Macroeconomic Variables
Th U l t R tThe Unemployment Rate
Figure 2 - 3
Since 1960, the U.S. unemployment rate has
U.S. Unemployment Rate Since 1960
unemployment rate has fluctuated between 3% and 10%, going down during expansions and going up during recessionsduring recessions.
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2-2 The Other Major Macroeconomic Variables
Th U l t R tThe Unemployment RateWhy Do Economists Care About Unemployment?
•Economists care about unemployment for two reasons:
– Because of its direct effects on the welfare of the unemployed.
– Because it provides a signal that the economy may not beBecause it provides a signal that the economy may not be using some of its resources efficiently.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R t
Inflation is a sustained rise in the general level
The Inflation Rate
of prices—the price level.
The inflation rate is the rate at which the priceThe inflation rate is the rate at which the price level increases.
Symmetrically deflation is a sustained declineSymmetrically, deflation is a sustained decline in the price level. It corresponds to a negative inflation rate.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe GDP Deflator
The GDP deflator in year t, Pt, is defined as the ratio of nominal GDP to real GDP in year t:
$t
Nominal GDPReal GDP
t
t
YP
Y= =
The GDP deflator is what is called an
tReal GDP
tY
The GDP deflator is what is called an index number—set equal to 100 in the base year.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe GDP Deflator
The rate of change in the GDP deflator equals the rate of inflation:
( )P PP
t t
t
− −
−
1
1
Nominal GDP is equal to the GDP deflator multiplied by real GDP:
$Y PYt t t=
deflator multiplied by real GDP:
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe Consumer Price Index
•The GDP deflator measures the average price of output, while the consumer price index, or CPI, measures the average price of consumption, or equivalently, the costaverage price of consumption, or equivalently, the cost of living.
•The CPI gives the cost in dollars of a specific list of g pgoods and services over time, which attempts to represent the consumption basket of a typical urban consumer.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe Consumer Price Index
The set of goods produced in the economy is not the same as the set of goods purchased by
f tconsumers, for two reasons:
Some of the goods are sold to firms, to theSome of the goods are sold to firms, to the government, or to foreigners.
S f th d t d dSome of the goods are not produced domestically but are imported from abroad.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe Consumer Price Index
U.S. Inflation Rate, Using the CPI and the GDP Deflator
Figure 2 - 4
The inflation rates, computed using either the CPI or the GDP deflator are largely
Deflator Since 1960
GDP deflator, are largely similar.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tThe Inflation RateThe Consumer Price Index
Figure 2-4 yields two conclusions:
The CPI and the GDP deflator move together most of the time. In most years, the two inflation rates differ by less than 1%.inflation rates differ by less than 1%.
There are clear exceptions, however. In 1979 d 1980 th i i th CPI1979 and 1980, the increase in the CPI was significantly larger than the increase in the GDP deflator.
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2-2 The Other Major Macroeconomic Variables
Th I fl ti R tWhy Do Economists Care About Inflation?
The Inflation Rate
Economists care about inflation for two reasons:
During periods of inflation, not all prices and wages rise proportionately, inflation affects income distrib tionaffects income distribution.
Inflation leads to other distortions.
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2-3 The Short Run, the Medium Run, and the Long Run
The level of aggregate output in an economy is determined by:determined by:
demand in the short run, say, a few years,
the level of technology, the capital stock, and the labor force in the medium run, say, a decade or so,
factors such as education researchfactors such as education, research, saving, and the quality of government in the long run, say, a half century or more.
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2-4 A Tour of the Book
The Organization of the
Figure 2 - 5
The Organization of the Book
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2-4 A Tour of the Book
The book is organized into three parts:The book is organized into three parts:
A core which has three parts – the short run, th di d th lthe medium run, and the long run.
Three extensions which explore the role of expectations, closed economies, and expansion and recessions.
A deeper look at the role of microeconomic policy.
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Key Termsnational income and product accountsaggregate outputgross domestic product, (GDP)gross national product, (GNP)
unemploymentlabor forceunemployment rateCurrent Population Survey (CPS)g p , ( )
intermediate goodfinal goodvalue addednominal GDP
p y ( )not in the labor forcediscouraged workersparticipation rateunderground economynominal GDP
real GDPreal GDP in chained (2000) dollarsdollar GDP, GDP in current dollarsGDP in terms of goods GDP in constant
underground economyinflationprice levelinflation ratedeflationGDP in terms of goods, GDP in constant
dollars, GDP adjusted for inflation, GDP in 2000 dollars real GDP per capitaGDP growth
deflationGDP deflatorindex numbercost of livingconsumer price index (CPI)GDP growth
expansionsrecessionshedonic pricing
l
consumer price index (CPI)short runmedium runlong run
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employment base year