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Macroeconomics IIA ECON20401
Paul Middleditch
Course Text: MACROECONOMICS, G.MANKIW 8thEd.
@DrMiddleditch #20401
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Welcome to Macro IIA
The course web site is on Blackboard 9:
Please visit regularly and read the course outline.
Course text:Mankiw Macroeconomics Chpt. 1,2,3,6,10,11,12,13,14 - 8thEd
Chpt. 1,2,3,5,9,10,11,12,13 - 7thEd
Homework and Feedback SessionsQuestions marked H) in the tutorial sheets are homework.
If you take your completed homework to your GTA in their feedback sessions you
will get written and verbal feedback from your GTA.
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Welcometo Macro IIA
Communication
Primarily through course twitter account
#20401
Office hours
Arthur Lewis Building - Room 3.009
Wednesdays 11.00am - 1.00pm Open Surgery (No Need to Book)
Office hours are held during
30th September7th December 2013 (Sem. 1)
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Employability Skills
Vocation related learning outcome (VRLO):
1) To understand and explain to a non economist the causes ofthe recent global financial crisis.
2) To understand and explain to a non economist whygovernments have been unable to intervene to end this crisis.
@ManUniCareers
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Turning Point Responseware Running in Wks 1,3,5,7,9
Bring along any web-enabled phones, laptops, iPods etc.
Mobile Device Users
Use web-enabled phones, laptops, iPods etc.
1. Connect to the web via UoM wifi or use your phones/laptops/igear)
2. visit www.rwpoll.com
3. Session ID: manc
4. Dont enter details, just click Continue
5. Leave anonymous feedback at anytime during the session
6. Come and see me afterwards if you will not have a device for this course
Interaction Lectures
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ECON20401 Macroeconomics 11A
The Data of Macroeconomics
Paul Middleditch
MACROECONOMICS (Mankiw Chpt. 1 & 2)
@DrMiddleditch #20401
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In this lecture, you will learn
The Data of Macroeconomics:
Macroeconomic ConcernsModelling the Macroeconomy
Gross Domestic Product (GDP)
The Consumer Price Index (CPI)
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Defining Macroeconomics
Macroeconomics attempts to answer questions like:
Why some countries grow faster than others?
Why some countries experience high inflation while
others keep prices stable?
Why all countries experience recessions - periods of
falling incomes and rising unemployment?
Macroeconomics is the study of the economy as a whole.
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Macroeconomic Concerns
The data that we see published in the media
Unemployment Rate
The percentage of the work force who are out of work.
Quarterly Change in Output
Output is the production of all goods and services.
Rate of Inflation The rate at which prices are changing in the economy.
are all concerns to our policy makers.
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Economic Modelling
Economists use models to understand the world (like youngchildren use toys).
A model is a set of equations or a diagram to help explainmacroeconomic variables.
An economic model is a representation of the economy
Models have two kinds of variables:
Exogenous variables: what the model takes as given(inputs of the model)
Endogenous variables: what the model is trying to explain
(output of the model)
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Stocks vs. Flows
A flowis a quantity measured per unit of time.
E.g., U.S. investment was $2.5 trillion during 2006.
InvestmentCapitalA stockis a
quantity measured
at a point in time.
E.g.,The U.S. capital stock was
$26 trillion on January 1,
2006.?
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The Importance of The Circular Flow
Households Firms
Goods (Output)
Labour
Expenditure
Income
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GDP: Expenditure = Income
Two definitions:
Expenditure: Total expenditure on domestically-produced
final goods and services.
Income: Total income earned by domestically-locatedfactors of production.
Expenditure equals income becauseevery pound spent by a buyer
becomes income to the seller.
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Final goods, value added, and GDP
A firmsvalue addedis the value of its output minus thevalue of the intermediate goods the firm used inproduction.
GDP = value of all final goods produced
or
= sum of value added at all stagesof production.
Including intermediate and final goods in GDP would be
double-counting.
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The expenditure components of GDP
1. Consumption
2. Investment
3. Government Spending
4. Net Exports
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Consumption (C)
Includes:
durable goodslast a long timeex: cars, home
appliances nondurable goods
last a short timeex: food, clothing
services
work done forconsumersex: dry cleaning,air travel.
Def: The value of all goods and
services bought by households
C
Y T
C(YT)
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Government spending (G) and NX
Gincludes all government spending on goodsand services.
Gexcludes transfer payments(e.g., unemployment benefits), because theydo not represent spending on goods andservices.
Net Exports: The value of total exports, Xminus the value of total imports, Z.
NX=X-Z
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Aggregate Demand Identity
Y = C + I + G
aggregateexpenditurevalue of
total output
Given this identity, we can also define GDPas (the value of) aggregate output, not just
spending on output.
+NX
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In the next slide we will be actually voting:
In preparation, use your mobile phone
visit www.rwpoll.com
Session ID: manc (lower/upper case)
Dont enter details, just click Continue
You should see Polling Closed
Feel free to leave feedback via your mobiledevice during any part of this presentation
Warm Up to Classroom Voting
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A question for you:
Suppose a firm produces $10 million worthof final goods but only sells $9 millionworth.
Does this violate the output/expenditureidentity?
Ans: Unsold output goes into inventory, and is counted asinventory investment whether or not the inventory buildupwas intentional.
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An important concept
We have now seen that GDP measures
total income
total output
total expenditure
the sum of value-added at all stages
in the production of final goods
We see this in the circular Circular Flow!
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GNP vs. GDP
Gross Domestic Product (GDP):Total income earned by domestically-locatedfactors of production, regardless of nationality.
Gross NationalProduct(GNP):Total income earned by the nations factors ofproduction, regardless of where located.
(GNPGDP) = (factor payments from abroad)(factor payments to abroad)
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Real vs. Nominal GDP
GDP is the value of all final goods and servicesproduced.
Nominal GDPmeasures these values using currentprices.
Real GDPmeasure these values using the prices of abase year.
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Practice problem, part 1
Compute nominal GDP in each year.
Compute real GDP in each year using 2006 asthe base year.
2006 2007 2008
P Q P Q P Q
Pearls $30 900 $31 1,000 $36 1,050
Jam $100 192 $102 200 $100 205
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Answers to practice problem, part 1
nominal GDP multiply Ps & Qs from same year
2006: $46,200 = $30 900 + $100 192
2007: $51,400
2008: $58,300
real GDP multiply each years Qs by 2006Ps
2006: $46,200
2007: $50,000
2008: $52,000 = $30 1050 + $100 205
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Real GDP controls for inflation
Changes in nominal GDP can be due to:
changes in prices.
changes in quantities of output produced.
Changes in real GDP can only be due to changes inquantities, because real GDP is constructed using
constant base-year prices.
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GDP Deflator
The inflation rate is the percentageincrease in the overall level of prices.
One measure of the price level isthe GDP deflator, defined as
Nominal GDPGDP deflator = 100
Real GDP
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Practice problem, part 2
Use your previous answers to computethe GDP deflator in each year.
Use GDP deflator to compute the inflation ratefrom 2006 to 2007, and from 2007 to 2008.
Nom. GDP Real GDPGDP
deflator
Inflation
rate
2006 $46,200 $46,200 n.a.
2007 51,400 50,000
2008 58,300 52,000
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Answers to practice problem, part 2
Nominal
GDPReal GDP
GDP
deflator
Inflation
rate
2006 $46,200 $46,200 100.0 n.a.
2007 51,400 50,000 102.8
2008 58,300 52,000 112.1
2.8%
9.1%
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Consumer Price Index (CPI)
A measure of the overall level of prices faced by consumers.
Tracks changes in the typical householdscost of living. It is aggregated across all markets/sectors.
Published by by the Office for National Statistics (ONS) in theUK and the Bureau of labour Statistics (BLS) in the US
@statisticsONS
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How the CPI is constructed
1. Surveys to determine the composition of thetypical consumers basket of goods.
2. Every month, data on prices of all items in thebasket is collected; cost of basket is computed
3. CPI in any month equals:
Cost of basket in that month
Cost of basket in base period100
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Answers:
Cost of Inflationbasket CPI rate
2002 $350 100.0 n.a.
2003 370 105.7 5.7%
2004 400 114.3 8.1%
2005 410 117.1 2.5%
Example: 2004 CPI = 100 x 400/350 = 114.3
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CPI vs. GDP Deflator
prices of capital goods included in GDP deflator (if produced domestically)
excluded from CPI
prices of imported consumer goods included in CPI
excluded from GDP deflator
What is fixed? CPI: basket of goods (quantity)
GDP deflator: base year price (price)
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CPI vs. GDPProblems with Both
The GDP deflator and the CPI index are aggregated series and
therefore affect different parts of society differently. Lets look at thedisaggregated series:
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep-11 Oct-11 Nov-11
CPI (overall index) 01 Food and non-alcoholic beverages
02 Alcoholic beverages and tobacco 04 Housing, water, electricity, gas and other fuels
07 Transport 09 Recreation and culture
UK 2010/11 - CPI by Component
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Chapter Summary
1. Gross Domestic Product (GDP) measures both totalincome and total expenditure on the economys outputof goods & services.
2. Nominal GDP values output at current prices;real GDP values output at constant prices. Changes inoutput affect both measures,but changes in prices only affect nominal GDP.
3. GDP is the sum of consumption, investment,government purchases, and net exports.
slide 36
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Chapter Summary
4. The overall level of prices can be measured by either the Consumer Price Index (CPI),
the price of a fixed basket of goodspurchased by the typical consumer, or
the GDP deflator,the ratio of nominal to real GDP
They are estimates and we should be aware of lostinformation through aggregation.
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