Lecture 1 1

Macroeconomic Analysis 2003

Approaches to Macroeconomics

Lecture 1 2

Measurement• Nominal GDP• Real GDP• GDP deflator• GDP Index• Growth rate• Technological Index• Review of AS-AD Framework in various Schools• Exercise

Lecture 1 3

Nominal and Real GDPN o m i n a l G D P i n 2 0 0 1 :

bQbPoQoPaQaPYP0101010101010101

N o m i n a l G D P i n 2 0 0 2 :

bQbPoQoPaQaPYP0202020202020202

2 0 0 2 G D P i n c o n s t a n t p r i c e s o f 2 0 0 1 :

bQbPoQoPaQaPYP 0201020102010201

Lecture 1 4

Final Demand Structure in the UK 2000 (GTAP)

1 cons51%

2 inv13%

3 gov15%

4 exp21%

Aggregate Demand

Lecture 1 5

GDP and GDP Components -UK (Seasonally adjusted and in constant prices)

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Years

In m

illion

£s

C

I

G

X

M

GDP

Linear (GDP)

Lecture 1 6

Growth Rates in the UK Economy

-6

-4

-2

0

2

4

6

8

10

12

1970

Q2

1971

Q2

1972

Q2

1973

Q2

1974

Q2

1975

Q2

1976

Q2

1977

Q2

1978

Q2

1979

Q2

1980

Q2

1981

Q2

1982

Q2

1983

Q2

1984

Q2

1985

Q2

1986

Q2

1987

Q2

1988

Q2

1989

Q2

1990

Q2

1991

Q2

1992

Q2

1993

Q2

1994

Q2

1995

Q2

1996

Q2

1997

Q2

1998

Q2

1999

Q2

GGDP

Linear (GGDP)

Lecture 1 7

YM

YX

YG

YI

YC

YT

YS

YC 1

KFLOWTBALYM

YX

YG

YT

YI

YS

1

If

6.0Y

C ; 2.0Y

I ; 15.0Y

S 2.0Y

G ; 15.0Y

T ; 15.0Y

X ; 25.0Y

M

What is the net trade balance or the inflow or outflow of capital?

National Income Identity

Lecture 1 8

Production Factor Composition in the UK in 2000

1 Land0%

2 UnSkLab39%

3 SkLab26%

4 Capital35%

5 NatRes0%

Supply Side of GDP

Lecture 1 9

Structure of Production in the UK 2000

1 Agri7%

2 Mininng1%

3 Mnfcs26%

4 Electricity2%

5 Construction8%6 Distribution

14%

7 Transport8%

8 FinServ12%

9 Education9%

10 Other13%

Lecture 1 10

GDP Perhead in Hull and the UK 1998

12,548 12,84511,759 11,850

10,051

13,402

18,566

12,117

9,754 10,063

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Un

ited

Kin

gd

om

En

gla

nd

Ea

st R

idin

ga

nd

No

rth

Lin

coln

shir

e

K

ing

sto

nU

po

n H

ull,

City

of

E

ast

Rid

ing

of

Yo

rksh

ire

N

ort

h a

nd

No

rth

Ea

stL

inco

lnsh

ire

L

on

do

n

S

cotla

nd

N

ort

he

rnIr

ela

nd

5

W

ale

s

Lecture 1 11

UK and Global GDP, 2000 (GTAP Data set)

1 EU23%

2 UK4%

3 SEASIA24%

4 NAFTA30%

5 ROW19%

Lecture 1 12

Output Gap in Major Industrail Countries (IMF)

-10

-8

-6

-4

-2

0

2

4

6

1979

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Per

cent

of

GD

P

FRANCE

GERMANY

JAPAN

UNITED KINGDOM

UNITED STATES

Lecture 1 13

Macroeconomic Policy

• Fiscal Policytaxesexpenditure debt

• Monetary Policy

interest rate/ M-supply

exchange rate/trade

stock market• Growth/supply side

Lecture 1 14

Impact of increase in money supply on Output and Prices in the Classical,Keynesian and New Keynesian Models

ASCL ASNK Pc

Pnk

Pk ASK

AD2

AD1

o Yc Ynk Yk

Aggregate Demand and Aggregate Supply and Prices

Lecture 1 15

Ideas of Adam Smith (1776), Ricardo (1817), J. B. Say

Malthus (1842) Mill (1873), Marshall (1925) Invisible hand sets prices to equate demand and

supply. No excess demand or no excess supply can persist. No glut or shortages in goods market. No unemployment or labour pressure in the labour

market. Money is neutral (quantity theory of money). Prices proportional to money supply. It is long run view. Balance budget recommended. Laisser faire: minimum government is the best

government. Downward sloping aggregate demand and vertical

supply curve

Classical view

Lecture 1 16

Automatic equilibrium is not guaranteed. Animal spirits

not the rational choices dominate the economy.

Unemployment may persist for a long period if the

deficiency in demand continues.

Active policy can play a very positive role, because of

rigidity in the markets, particularly in the labour market

(minimum wage laws, unions, and efficiency wages).

Also because of the monopolistic powers of the firms.

Active policy can fine tune the economy and correct the

market failure.

Keynesian Economist’s view on Economic Policy

Lecture 1 17

Exercises

• GDP deflator

• Technological index

• Growth rate of per capita income and GDP

• Production function

• Capital share

• Labour share

• Review of– the IS-LM

– AS-AD

• Problems 1-3

Lecture 1 18

Economic Growth In the UK and Ireland from 1980-2000

Does Good Economic Policy Matter?

Saving and Investment ratios

Population Growth

Fiscal and monetary policy

Real interest rate

Real Exchange Rate

Inflation rates

Trade Ratios

Lecture 1 19

Growth Rates in the UK and Ireland

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Ireland

United Kingdom

Lecture 1 20

Saving Ratios in the UK and the Ireland

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

IrelandUnited Kingdom

Lecture 1 21

Investment Ratio in the UK and Ireland

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Ireland

United Kingdom

Lecture 1 22

Real Interest Rate in the UK and Ireland

Iceland

United Kingdom

Lecture 1 23

Real Effective Exchange Rates in the UK and Ireland (1995=100)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Ireland

United Kingdom

Lecture 1 24

Trade Ratio in the UK and Ireland

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

IrelandUnited Kingdom

Lecture 1 25

Inflation Rates in the UK and Ireland

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Ireland

United Kingdom