Macroeconomics (1103)

Lecturer: Catia Batista

Macroeconomics (1103)
Lecturer: Catia Batista, catia.batista@novasbe.pt Lectures: Tuesdays and Wednesdays,15h3017h00, Room A13 Office Hours: Wednesdays 10h0011h00, Office 365 Teaching Assistants: Vasco de Castro Botelho, vcb@novasbe.pt Office Hours: Wednesdays, 11h00, Office 132 Lus Filipe, luiscfilipe@novasbe.pt Office Hours: Thursdays, 18h30, Office 131 Course Webpage: moodle - access at http://elearning.fe.unl.pt/ 2

Main Textbook
The main textbook for the course is: Robert J. Barro, Macroeconomics: A Modern Approach (1st edition), 2008, South-Western, distributed by Cengage. Available at library under call number E.021-096

Additional Readings: Will be provided in lectures and course webpage.

Final Grade
Tutorial Participation 10% Midterm Exam Final Exam 30% 60%

Tutorial Participation: 1) Students answers to the problem sets are due on Monday by 11am in a box left with security at the buildings entrance. 2) For each tutorial, students will be required to discuss problem sets given in advance.

Course Description
 an introduction to macroeconomics: the study of the behavior of the economy as a whole;  focus on aggregate variables: total production, unemployment, credit and savings, money, and inflation;  also focus on dynamic behavior of those aggregate variables: economic growth, business cycles;  approach of the course is based on microeconomic foundations: move from the individual maximization problems to the aggregate or macroeconomic problems that the economy faces as a whole. 5

Course Outline
Section 1: Introduction to Macroeconomics Main Reading: Barro, chapters 1 and 2.

Section 2: Economic Growth Main Reading: Barro, chapters 3, 4 and 5.

Section 3: Economic Fluctuations Main Reading: Barro, chapters 6, 7, 8 and 9.

Course Outline
Section 4: Money, Inflation and Interest Rates Main Reading: Barro, chapters 10, 11, 15 and 16.

Section 5: Fiscal Policy Main Reading: Barro, chapters 12, 13 and 14.

Section 6: (Time permitting) Open Economy Main Reading: Barro, chapters 17 and 18.

Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics; 2. Some Macroeconomic Facts; 3. Measuring Economic Activity: - National Income and Product Accounting (NIPA); - Gross Domestic Product (GDP); - Price Level.

Reading: Barro, Chapters 1 and 2.

1. The Approach to Macroeconomics

 Why do different economies grow at different rates?  Why does the economy fluctuate?  What is the cause of inflation?  How does government policy affect the economy?  How does international trade affect the economy?

1. The Approach to Macroeconomics (Cont.)

Endogenous variables are the ones that we want the model to explain. Exogenous variables are the ones that a model takes as given and does not attempt to explain. 10

1. The Approach to Macroeconomics (Cont.)

 Economic Models and Empirical Testing  New Classical vs. Keynesian Models New Classical Models market clearing price flexibility Keynesian Models disequilibrium situations may occur some prices do not adjust immediately

microeconomic foundations no microeconomic foundations

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2. Some Macroeconomic Facts

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2. Some Macroeconomic Facts

- Growth rate of real GDP for year t 

Yt

Yt

/Y t

[Multiply by 100 to get the growth rate of real GDP in percent per year.]

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2. Some Macroeconomic Facts

Inflation rate for year t 

Pt

Pt

/P t

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3. Measuring Economic Activity: National Income and Product Accounting (NIPA)

Output, or production, in real-world economies is typically measured by real gross domestic product (GDP). Gross Domestic Product: measure of the market value of all the final goods and services newly produced within a specified countrys borders during a specified period of time (usually one year or one quarter). NOTE Flow variable: measures value of goods produced per unit of time, such as a year.

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How good is GDP as a measure of domestic welfare?

1. No Consideration of Changes in Income Distribution; 2. Non-Market Goods (except for Government Services) are excluded from GDP: household production, underground economic activity, etc; 3. No Value Assigned to Leisure Time; 4. Quality Changes in Goods are Not Accounted For; 5. Quality of Living Aspects (such as Environmental Quality, Political Freedom or Social Justice) are Omitted.

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How Do We Measure GDP in Reality?

The starting point of macroeconomic measurement is the so-called fundamental identity:

Total Production  Total Expenditure  Total Income

1. Production/Value-Added Approach: look at firms production 2. Income Approach: where firms spend their revenues 3. Expenditure Approach: where households spend income

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Expenditure Approach
GDP  C  I  G  X M

C : Personal Consumption Expenditures I : Gross Private Domestic Investment G : Government Purchases of Goods and Services X M : Net Exports (Exports minus Imports)

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Income Approach:
Income Earned by Factors of Production GDP  Labor Income  Interest  Rental Income   Corporate Pofits  Net Taxes  Depreciation

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Relationship between GDP and National Income

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Value-Added Approach

GDP 
all firms

Value

Added

Value

Added  Revenue

Cost of Intermediate Goods

(Excludes Intermediate Goods and Services to Avoid Double Counting Problem)

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Real GDP vs. Nominal GDP

 Calculating Real GDP: Multiply each years quantity of output of each good by the price of the good in a base year.  GDP in constant dollars  Chain-weighted real GDP  Nominal GDP: Y  Q P  Real GDP: Y  Q P 0  The distinction between real and nominal GDP suggests a measure of the price level (P), defined to be the average of the prices of an economys goods and services.

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How do we measure an economys general price level?

 in practice, price level measured by index of average prices;  index number expresses value of some entity (such as price or GDP) at a given period of time in absolute number form but related to a base period set arbitrarily to 100;  what do we actually mean by price?  Implicit GDP Price Deflator  Consumer Price Index (CPI)  Producer Price Index (PPI)

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Implicit GDP Price Deflator

(nominal GDP)/(implicit price level)  real GDP or implicit price level  (nominal GDP)/(real GDP)

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Consumer Price Index: CPI

A price index calculated as the current cost of a fixed basket of consumer goods divided by the cost of the basket in the base period. Calculating the CPI 1. Find cost of CPI basket at base period prices 2. Find cost of CPI basket at current period prices 3. Calculate the CPI for the base period and the current period

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A simplified calculation of CPI

1) Base year: 2008 Oranges: 10 @ $1.00  $10 Haircuts: 5 @ $25.00  $125 Cost of CPI basket in 2008: $135 2) Current year: 2009 Oranges: 10 @ $2.00  $20 Haircuts: 5 @ $30.00  $150 Cost of CPI basket in 2009: $170

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3) CPI Calculation CPI CPI CPI

Cost of CPI Basket in Current Year

Cost of CPI Basket in Base Year in base year (2008)  $135  $135 in current year (2009)  $170 $135

100 100  126

MEANING: 26% price increase from 2008 to 2009

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The Actual CPI Basket - Main Categories

December 2002 Housing Transportation Food and beverages Medical care Recreation Apparel Other goods and services % weight in CPI 41% 17% 16% 6% 6% 4% 4%

Education and communication 6%

Source: US Department of Commerce Bureau of Economic Analysis

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Problems with the CPI:

1. CHANGES IN QUALITY Quality Change Bias 2. NEW GOODS New Goods Bias 3. WHICH GOODS DO YOU PRICE? Commodity Substitution Bias 4. WHICH PRICES ARE RELEVANT? Outlet Substitution Bias

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Inflation Rate
 The measured rate of inflation between any two periods is just the growth rate (in percentage terms) in a price index between those two periods t  Pt Pt Pt
1 1

100

 This definition represents the statistic that is reported when we hear stories about the rate of inflation in the press, or in the news.

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Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics; 2. Some Macroeconomic Facts; 3. Measuring Economic Activity: - National Income and Product Accounting (NIPA); - Gross Domestic Product (GDP); - Price Level.

Reading: Barro, Chapters 1 and 2.

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