MACROECONOMICS

Guerkan Birer

WS-2011-12

University of Vienna Department of Economics

MACROECONOMICS

Macroeconomics deals with aggregate variables, such as aggregate consumption, the inflation rate, the unemployment rate, the growth rate of an economy,...

Macroeconomics tries to answer such questions:

•What are the effects of fiscal and monetary policy?

•Can the unemployment rate be reduced if a higher inflation is permitted?

•Why are some countries so poor and others so rich?

The Foundation of Macroeconomics

Macroeconomics was created as an academic discipline in response to the Great Depression (1929)

WHAT HAPPENED DURING THE GREAT DERPRESSION?

1. Stock Market Crisis

• People speculated in the stock market during 1920 ‘s • In 1929 news about fraud led to expectations that stock

prices will fall • Investors wanted to sell their stocks which in turn resulted in more decline of the stock prices and no one wanted to buystock and panic spread all over the world.

2. Private Consumption

•Real Consumption declined by more than 23% from 1929 to 1933

•Only a part of this decline can be due to stock market crisis

•Deflation led to increases in the real value of liabilities and postponed consumption

3. Investment

•Gross investment fell dramatically during the great depression.

•Net investment was even negative (depreciated capital was not fully replaced

•Deflation led to higher real interest rates which made investing more expensive

Why did Great Depression Happen?

IS-LM model gives us a tool to analyze both views!

Does history really repeat itself?

PART 1 National Accounting

•Three definitions of GDP

•Nominal vs. Real GDP

•GDP deflator

•CPI

•Inflation rate

•GNI, NDP, NNI, DGNI, NDI, NDP calculated at factor costs, NNI calculated at factor costs…

•Balance of Payments

•CA and KA

Why do we study National Accounting?

National Accounting deals with identities, i.e. the relationships outlined here hold by definition

When analyzing an economy's "performance" it is important to define precisely what we are talking about

National Accounting provides a uniform method of assessing

economic performance and thus allows cross-country comparisons

UN system of National Accounts developed in 1993 (SNA93)

European System of Accounts (ESA95) developed by Eurostat

as a standard for EU members

Before we start make a distinction between stocks and flows of economics

A variable is called a stock variable if it is measured at a particular time. For example the wealth of a person as of 1st of January 2010.

A variable is called a flow variable if it is measured for a period of time. For example the GDP of Austria in year 2010 or the monthly unemployment rate, or inflation rate are all flow variables.

Example: Calculate the GDP of an economy with three firms a steel producer, a car producer and a farmer using the information below. Use all the three approaches that we have learned .

Steel Producer Car Producer Farmer

Sold Quantity 8 tons 12 cars 30 tons of apples

Primary Price $ 10,000/ton $ 20,000 $ 1,000/ton

Wages $ 50,000 $ 80,000 $ 20 000

Intermediate goods used

none 8 ton steel none

Profits $30,000 $ 80,000 $10,000

Example Continues ….

Suppose now that government collects VAT from the three firms with the percentages below. Calculate the GDP once more now with taxes !!!

Steel Producer Car Producer Farmer

Sold Quantity 8 tons 12 cars 30 tons of apples

Primary Price $ 10,000/ton $ 20,000 $ 1,000/ton

Wages $ 50,000 $ 80,000 $ 20 000

Intermediate goods used

none 8 ton steel none

Profits $30,000 $80,000 $10,000

VAT 10% 10% 20%

Example: Given the sales and prices of the final goods A, B, C produced for the years 2008, 2009 and 2010 calculate the nominal and real GDP for 2008, 2009 and 20010.

YEAR SALES OF A

SALES OF B

SALES OF C

PRICE OF A

PRICE OF B

PRICE OF C

2008 1000 500 800 $4 $5 $3

2009 1200 400 600 $3 $5 $5

2010 1100 500 900 $5 $6 $6

Example: Calculate the GDP Deflator for the years 2008, 2009 and 2010.

YEAR SALES OF A

SALES OF B

SALES OF C

PRICE OF A

PRICE OF B

PRICE OF C

2008 1000 500 800 $4 $5 $3

2009 1200 400 600 $3 $5 $5

2010 1100 500 900 $5 $6 $6

Example: Calculate the CPI for the years 2008, 2009 and 2010 taking 2008

as a base year.

YEAR SALES OF A

SALES OF B

SALES OF C

PRICE OF A

PRICE OF B

PRICE OF C

2008 1000 500 800 $4 $5 $3

2009 1200 400 600 $3 $5 $5

2010 1100 500 900 $5 $6 $6

Example: Calculate the Inflation rate using the GDP deflator and CPI for the years 2009 and 2010 ?

YEAR SALES OF A

SALES OF B

SALES OF C

PRICE OF A

PRICE OF B

PRICE OF C

2008 1000 500 800 $4 $5 $3

2009 1200 400 600 $3 $5 $5

2010 1100 500 900 $5 $6 $6

Now assume that A is imported. How would the inflation rate change using GDP deflator? using CPI?

Assume that B is exported. How would the inflation rate change using GDP deflator? using CPI?

IMPORTANT :

BoPI = Balance of Primary Incomes = The primary incomes earned by the residence of the country –primary incomes paid to the non residence

BoPI= - (BoPI to the rest of the world)

BoCT = Balance of Current Transfers= Current transfers received – Current transfers paid

BoCT= - (BoCT to the rest of the rest of the world)

•A country with a positive CA balance is a saving country

•A country with a negative CA balance is a borrowing country