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Introduction to Applied Macroeconomics

Introduction to Applied Macroeconomics. Course Requirements.

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Introduction to Applied Macroeconomics

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  1. Introduction to Applied Macroeconomics

  2. Course Requirements • Your final grade will be based on a weighted average of grades on one exam, presentations, homework assignments, projects and class participation (attendance). Homework assignments and projects may involve external reading, data collection, computer use and calculations. • There will be class presentations and an exam during the course and a ten-fifteen minutes long oral presentation of your final project due near the end of the semester to allow you the maximum amount of time to work on it. Credit for determining the course grade will be distributed as follows: • Two exams 25% each • Class presentations and final project 25% • Home works, projects, class attendance and participation 25%

  3. Textbook: Macroeconomics by Mankiw • Greg Mankiw • Required Text: Mankiw, N. Gregory - Macroeconomics, 8-9th edition (Worth Publishers)

  4. Paul Krugman

  5. Paul Krugman

  6. Course organization • Week 1: Introduction to Applied Macroeconomic • Week 2: National Product and Prices • Week 3: Consumer Spending and Saving • Week 4: Investment Spending • Week 5: Short-Run fluctuations:The IS-MP model • Week 6: Open Economy: flexible exchange rate • Week 7: Open Economy: fixed exchange rate • Week 8: Aggregate Supply • Week 9: The liquidity trap • Week 10: Credit market disruptions • Week 12: Presentations and discussions

  7. Applied Macroeconomics • Teaches macroeconomics as a tool of factual and interpretive understanding of the economy. Its goal is to make sense of the economy. • Describe the long-term trends and short-term fluctuations in economic growth, unemployment, inflation, and government and international surpluses and deficits • Identify the macroeconomic policy challenges and describe the tools available for meeting them

  8. Macroeconomists do the following • Construct data sets that measure the general performance of the economy • Construct models, that explain the past performance of the economy • Use the same models and data to forecast the future path of the economy and • Address the major policy issues that arise in connection with the broad goals of the nation

  9. Macroeconomic Policy Challenges and Tools • Five widely agreed policy challenges for macroeconomics are to: • Boost economic growth • Keep inflation low • Stabilize the business cycle • Reduce unemployment • Reduce government and international deficits

  10. Economic Growth and Fluctuations • Figure shows the long-term growth trend and cycles.

  11. Economic Fluctuations and Growth • Every business cycle has two phases: • A recession 2. An expansion • and two turning points: • A peak 2. A trough • A recession is a period during which real GDP decreases for at least two successive quarters. • According to NBER,” a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” • An expansion is a period during which real GDP increases.

  12. Eye on the Booms and Busts of the Business Cycle • All of these data peaked between November 2007 and June 2008. • The committee decided that November 2007 was the peak. • But as the figure shows, real GDP didn’t begin a sustained fall until two quarters later.

  13. Business Cycle Dating Committee, NBER • The Committee maintains a chronology of the U.S. business cycle since 1920s. The Chronology identifies the dates of peaks and troughs that frame economic recession or expansion. • Robert Hall, Chair -- Past Director of NBER's Program on Economic Fluctuations and Growth and Professor, Stanford University Martin Feldstein -- President Emeritus of NBER and Professor, Harvard UniverityJeffrey Frankel -- Director of NBER's Program on International Finance and Macroeconomics and Professor, Harvard UniversityRobert J. Gordon -- NBER Research Associate and Professor, Northwestern UniversityJames Poterba -- President of NBER and Professor, M.I.T. Valerie Ramey -- NBER Research Associate and Professor, University of California, San DiegoChristina Romer -- Co-Director of NBER's Program on Monetary Economics and Professor, University of California, BerkeleyDavid Romer-- Co-Director of NBER's Program on Monetary Economics and Professor, University of California, BerkeleyJames Stock -- NBER Research Associate and Professor, Harvard UniversityMark W. Watson -- NBER Research Associate and Professor, Princeton University  • http://www.nber.org/cycles/recessions.html

  14. Measuring Economic Growth • We use real GDP to calculate the economic growth rate. • The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next. • We measure economic growth so we can make: • Economic welfare comparisons • International welfare comparisons • Business cycle forecasts

  15. Why Are Some Nations Rich and Others Poor? • Real GDP per person in East Asian economies has converged toward that in the United States. • These economies are like fast trains running on the same track at similar speeds with roughly constant gaps.

  16. Why Are Some Nations Rich and Others Poor? • Hong Kong and Singapore are the lead trains and run about • 15 years in front of Taiwan, • 20 years in front of South Korea, and • almost 40 years in front of China.

  17. Why Are Some Nations Rich and Others Poor? • Between 1960 and 2010, • Hong Kong and Singapore transformed themselves from poor developing economies to take their places among the world’s richest economies.

  18. Africa's impressive growth

  19. THE GLOBAL ECONOMY • What in the Global Economy? In 2010, global economy produced about $70 trillion of goods and services. Figure shows the shares of global production.

  20. Measuring U.S. GDP • The Department of Commerce first published national income statistics in 1934. The BEA revises and makes adjustments to the National Income and Product Accounts (NIPA). • Revisions: Comprehensive (Benchmark): about every five years, the BEA revision incorporating statistical and methodological improvements. • Seasonal Adjustments: statistical method that estimates the usually variations in the data.

  21. National Income and Product Account (NIPA) • Revisions • *Comprehensive Revisions (Benchmark). Five years • - Definitions and Classification Changes • - Statistical Changes • - Presentational Changes • * Annual NIPA Revisions • - Advanced estimates. Near the end of the first month • after the end of the quarter • - Preliminary estimates. Near the end of the second • month after the quarter • - Final estimates. End of the third month

  22. Measuring U.S. GDP • The Bureau of Economic Analysis (BEA), U.S. government agency that keeps the national account, uses two approaches to measure GDP • The Expenditure Approach • The expenditure approach measures GDP as the sum of consumption expenditure, investment, government purchases of goods and services, and net exports. • The Income Approach • The income approach measures GDP by summing the incomes that firms pay households for the factors of production they hire.

  23. Gross Domestic Product • GDP Defined • GDP or gross domestic product, is the market value of all final goods and services produced in a country in a given time period. • This definition has four parts: • Market value • Final goods and services • Produced within a country • In a given time period

  24. Gross Domestic Product • The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world

  25. THE COMPONENTS OF GDP = C+I+G+NX • Consumption(C): • The spending by households on goods and services, with the exception of purchases of new housing. • Investment(I): • The spending on capital equipment, inventories, and structures, including new housing. • Government Purchases(G): • The spending on goods and services by local, state, and federal governments. • Does not include transfer payments because they are not made in exchange for currently produced goods or services. • Net Exports(NX): • Exports minus imports.

  26. Real GDP growth rate • Consumption growth rate • Average growth rate Growth rates of real GDP, consumption • Percent change from 4 quarters earlier

  27. Real GDP growth rate • Investment growth rate • Consumption growth rate Growth rates of real GDP, consump., investment • Percent change from 4 quarters earlier

  28. WHAT, HOW, AND FOR WHOM? • The figure shows the relative magnitudes of the goods and services produced in the United States in 2011: Consumption 61% Capital goods 11% Export goods 11% Government 17%

  29. Goods and ServicesWHAT, HOW, AND FOR WHOM? • The figure shows the largest six types of services produced in the United States in 2011 … and the largest four types of goods produced.

  30. Distribution of Income WHAT, HOW, AND FOR WHOM? • Figure shows the functional distribution of income in 2010: Wages 69% Rent, interest, and profit 31%

  31. Distribution of Income WHAT, HOW, AND FOR WHOM? • Figure shows the personal distribution of income in 2010: The poorest 20% earned only 3% of total income. The richest 20% earned 51% of total income.

  32. A declining labor share in GDP

  33. Macroeconomics Variables • Economists have made progress in understanding how the economy works by dividing the variables that describe macroeconomic performance into two lists: • Real variables • Nominal variables • Real variables like real GDP, employment, and the real wage rate describe what is happening to living standards • Nominal variables like the price level and nominal wage rate tell us how dollar values and the value of money are changing.

  34. U.S. Nominal and Real GDP,1960-2009 (billions) • Real GDP(in 2000 dollars) • Nominal GDP

  35. Real GDP and the Price Level • Calculating the Price Level • The average level of prices is called the price level. • One measure of the price level is the GDP deflator, which is an average of the prices of the goods in GDP in the current year expressed as a percentage of the base year price.

  36. Inflation • Inflation is a process of rising prices. • We measure the inflation rate as the percentage change in the average level of prices or the price level. • The Consumer Price Index—the CPI—is a common measure of the price level.

  37. U.S. inflation and nominal interest rates, 1960-2009 • nominal interest rate • inflation rate

  38. Unemployment Rate = Number of Unemployed • Labor Force •  100 Three Labor Market Indicators • Theunemployment rateis the percentage of the labor force that is unemployed.

  39. Employment and Unemployment • Alternative measures • U-1: Those unemployed for 15 or more weeks • U-2: Unemployed job losers • U-3: The official unemployment rate • U-4: U-3 + Discouraged workers • U-5: U-4 + Marginally attached workers • U-6: U-4 + Part-time workers who want full-time jobs • All measures increase together in recession.

  40. Employment to population ratio = Number employed • Adult Population • Labor-Force Participation Rate = Labor Force • Adult Population •  100 •  100 Three Labor Market Indicators • The labor force participation rate is the percentage of the working-age population that is in the labor force. • The employment-to-population ratio is the percentage of working-age people who have jobs.

  41. Three Labor Market Indicators

  42. Employment and Unemployment • Figure shows the labor force participation rate and employment-to-population ratio both trend upward before 2000 and downward after 2000.

  43. Measuring Economic Growth • We use real GDP to calculate the economic growth rate. • The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next. • We measure economic growth so we can make: • Economic welfare comparisons • International welfare comparisons • Business cycle forecasts

  44. Economic Welfare Comparisons • Economic welfare measures the nation’s overall state of economic well-being. • Real GDP is not a perfect measure of economic welfare for seven reasons: • Quality improvements tend to be neglected in calculating real GDP so the inflation rate is overstated and real GDP understated. • Real GDP does not include household production, that is, productive activities done in and around the house by members of the household.

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