sgpe summer school: macroeconomics lecture 1 · 2016. 6. 28. · lecture 1 1. logistics o textbook:...

SGPE Summer School:

Macroeconomics

Lecture 1

1

Logistics

o Textbook: Macroeconomics by Gottfries

o Lectures & TUTORIALS

o Ch1-10

2

Ibrahim Inal

vahabibrahim@gmail.com

Introduction (Chapter 1)

• Issues in macro

• Economic models

• Short repetition of mathematics

• National accounts

3

Issues in macroeconomics

In macro we study the entire economy:

• Why are some countries richer than others?

• Why is there high inflation in some countries?

• Why does unemployment exist and what influences it?

• What causes booms and recessions? (Partially)

• Can fiscal and monetary policies stabilise the economy?

• When are government finances sustainable?(Not in this

course)

4

Issues in macroeconomics

• What are the consequences of having a floating or a

fixed rate of exchange? (Not in this course)

• What are the pros and cons of having a monetary

union? (Partially)

• What are the effects of having an independent central

bank? (Partially)

5

Issues in macroeconomics

Macro is hard:

There is a very large number of individuals and firms, all different from each other

We have to study everything at the same time, since everything is connected:

– Production, income and income distribution

– Consumption and investments

– Export, import and current account balance

– Budget deficit and national debt

– Unemployment and inflation

– Interest and exchange rates

6

Issues in macroeconomics

What to do about it?

Make a model!

• a simplified description of the world

• ‘a toy model’ – Mickey mouse version of reality

7

Economic models

Simplifications:

• We assume that all consumers (firms) are alike, that is, we study a typical consumer (firm)

• We assume that consumers (firms) act rationally and have simple objective functions. They maximize utility(profit)

• We describe economic relations using simple mathematical functions, such as utility functions and production functions

8

Economic models

Markets:

• a labour market

• a goods market

• a credit market (money market)

Decision-makers:

• The typical firm

• The typical household

• Policymakers (government and central bank)

9

Economic models

Decisions: Actors:

• Price-setting

• Wage-setting Firms

• Investments

• Consumption Consumers

• Taxes and government expenditure Government

• Interest rate/money supply Central bank

• Imports and exports Consumers

• Loans in domestic and foreign currencies Consumers

10

11

Economic models

FIRM

HOUSEHOLD

GOVERNMENT

& CENTRAL

BANK

LABOUR

MARKET FINANCIAL

MARKET

GOODS

MARKET

Interest,

dividend

s

Taxes

Goods and services

for investment

Government

purchases

Loans

Labour

Goods and services

for consumption

Wage

payments

Transfers

Payment for

goods and

services

Economic models

• We don’t try to explain everything

Exogenous variables: not explained in the model

Endogenous variables: explained in the model

• Use different variants of model for different questions

12

Y

C I

i

G

A

Economic models

When using a model, you should ask yourself:

• What assumptions are made?

• Which variables are exogenous, which are endogenous?

• What questions is the model meant to answer and what

questions is it unable to answer?

• Does the model provide intuitively reasonable answers?

• Does it capture what is important for the question?

• How well do the implications/predictions agree with

the data?

13

Economic models

Other issues we need to deal with:

• Many choices have a time dimension, that is, they are

intertemporal decisions. Examples: saving and consumption

• Expectations for the future are important.

Example: if unions think inflation is going to be high, they

will want large wage increases.

• The effects of one specific shock may differ in the long run

and the short run.

Example: in the short run prices and wages are sluggish, but

in the long run they are flexible.

14

Maths repetition: Functions and derivatives

A variable designates an economic quantity (price).

A function shows how variables are related.

General functional form: T=T(Y)

‘Tax, T, depends on income, Y.”

Specific functional form:

T=0 if Y < 10 000

T=0.30∙(Y-10 000) if Y ≥ 10 000

The tax is zero for incomes up to 10,000 and then 30% of

the income above 10,000.

15

Maths repetition: Functions and derivatives

The derivative shows the change in the dependent variable

per unit change of the value of the independent variable.

In graphics, it is the slope of the function.

Example: Tax (T) increases with income (Y). The

marginal tax is positive. We express this as

or T’(Y)>0.

16

0dT

dY

Maths repetition: Functions and derivatives

Sometimes a function has more than one independent variable

The production function Y=F(K,N) says that production depends on the inputs of capital and labour

Y production (number of units)

K amount of capital (number of units/‘machines’)

N amount of labour (number of individuals)

17

Maths repetition: Functions and derivatives

Partial derivatives

Sometimes we would like to know what happens to the

dependent variable when we change one of the

independent variables but keep the other constants

Example:

Y=F(K,N) has two partial derivatives:

dY/dK marginal production of capital

dY/dN marginal production of labour

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Maths repetition: A useful rule of thumb

Let Z=XY.

Percent change:

Let

Percent change:

If X increases by 5 percent then Z will increase by 5

percent but if Q increases by 3 percent then Z will

decrease by about 3 percent.

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Z X Y

Z X Y

Z X Y Q

Z X Y Q

XYZ

Q

National accounts

National accounts (NA) show the flows of

• production

• income

• consumption

• saving and investments

• exports and imports

during a certain time period (year, quarter)

20

NA: Issues

NA gives us answers to:

• What is the value of all goods and services produced in a country? How much do the different sectors contribute to total production?

• How large is the total income in a country and how is it distributed between capital and labour?

• What fractions of production is used for consumption, investments and exports? How much is used by the private and the public sector?

• What share of income is saved and invested?

21

NA: Key definitions

Concept Difference

Production vs. added value Inputs

Market vs. basic price Taxes & subsidies

Gross vs. net Consumption of capital(depreciation)

Production vs. income Primary incomes from the rest of the world

Income vs. disposable income Taxes & transfers (secondaryincomes from the rest of the world)

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NA: Production side

Gross value added by activity, percent of GDP, 2007

23

Agriculture, hunting and forestry; fishing

Industry, includingenergy

Construction Wholesale and retail trade, repairs; hotels and restaurants; transport

Financial inter-mediation; real estate, renting and business activities

Other service activities

United Kingdom

1 17 6 21 32 23

United States 1 17 5 19 33 25

Euro area 2 20 6 21 28 22

NA: Income side

Gross domestic product, gross value added at basic prices,

and the distribution of income, 2008, in national

currencies, billions. (One billion=1000 million.)

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Gross domestic product

Taxes less subsidies on

products

Value

Taxes less subsidies on

products

Percent

of GDP

Gross value added at

basic prices

Compe-

sation of

employe

es Value

Compen-sation of

employees Percent of gross value

added at basic price

United Kingdom

1446 150 10 1296 769 59

United States

14369 994 7 13376 8068 60

European Union

12494 1314 11 11180 6070 54

NA: User side

Sources and uses, USA 2008, % of GDP

GDP 100

Imports 18

=

Private consumption 70

Government consumption 17

Private investment (incl. stock) 15

Government investment 3

Exports 13

25

NA: User side: Consumption, investment and net

exports, percent of GDP, 2008

Private consumption

Government consumption

Private investment

Government investment

Exports Imports Net exports

Denmark49 27 19 2 55 52 3

Sweden47 26 17 3 53 46 7

Netherlands45 26 17 3 77 68 8

Finland52 23 19 2 47 43 4

France57 23 19 3 27 29 -2

United Kingdom 64 22 14 2 29 32 -3Norway

39 20 19 3 49 30 19

Spain57 20 25 4 26 32 -6

Germany57 18 17 1 47 41 6

Japan58 18 19 4 18 17 0

United States 70 17 15 3 13 18 -5

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NA: Table 1.4 Income, saving, investment, and

net lending, percent of GDP 2008.

27

GDP Net primary income

from the rest of the

world

Gross national

income at market prices

Net current

transfers from the

rest of the world

Gross national

dis-posableincome

Final con-sumptionexpenditu

res

Saving, gross

Gross invest-ment

Net lending

=current account(approx)

Japan100 3 103 0 103 76 25 24 3

Norway100 0 100 -1 99 59 40 22 18

UK100 2 102 -1 101 86 15 17 -1

US100 1 100 -1 99 87 12 18 -6

NA: Consumption, investments, net exports

USA 1950-2011

28

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

private consumption us government consumption us private investment us

government investment us net exports us

NA: Consumption, investments, net exports

UK 1950-2011

29

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

private consumption uk government consumption uk private investment uk

government investment uk net exports uk

NA: Consumption, investments, net exports

Netherlands 1950-2011

30

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

private consumption nl government consumption nl private investment nl

government investment nl net exports nl

NA: Consumption, investments, net exports

Sweden 1950-2011

31

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

private consumption se government consumption se private investment se

government investment se net exports se

GDP per capita in different countries

How to compare incomes in different countries?

• Different currencies

• Different price levels

Purchasing power parity (PPP):

A currency’s value is determined by its purchasing power.

32

OECD countries

33

Comparing GDP per capita

34

GDP per capita in OECD=100 based on PPP,

2008

35

Luxembourg 264 Canada 114

Norway 178 Finland 111

United States 138 Germany 109

Switzerland 134 Belgium 108

Netherlands 126 United Kingdom 108

Ireland 125 France 101

Austria 117 Japan 100

Denmark 116 Italy 98

Sweden 116 Spain 98

Australia 115 Greece 88

Iceland 115 New Zealand 86

Nominal/real GDP and inflation

• Nominal GDP: Value of production

• Real GDP: Value of production at fixed prices

• Measures of inflation : CPI and the GDP deflator

• Inflation according to CPI: How much more do we have to pay to consume the same basket of goods as last year?

• GDP deflator: Nominal GDP/Real GDP

36