Macroeconomics 1st Year Basic Concept.ppt

Basic Macroeconomics Concept

1. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #1
Chapter Topics
Aggregate Output
The Other Major Macroeconomic
Variables
A Road Map

2. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #2
Aggregate Output
Gross Domestic Product (GDP)
The valueof the finalgoods and services
produced in an economy during a given
period
Aggregate Output (national income
and product accounts, or NIPA)

3. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #3
Aggregate Output
1) Final good
2) Value added
3) Income
Defining GDP: Three Approaches

4. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #4
Aggregate Output
Firm 1: Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
Firm 2: Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
What is GDP?
$310 or $210
GDP: The final goods approach

5. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #5
Aggregate Output
Answer: $210
If both firms are summed ($100 + $210)
the $100 in steel is counted twice
Counting only the finalgood (cars) includes
the intermediategood (steel)
Defining GDP

6. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #6
Aggregate Output
What would GDP be if the firms
merged?
Question for Discussion

7. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #7
Aggregate Output
2) Value Added Approach
Value added
= value of production -value of intermediate goods
Defining GDP: Three Approaches

8. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #8
Aggregate Output
Steel
No intermediate goods
Value added = $100
Two Firm Example

9. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #9
Aggregate Output
Cars
Intermediate goods (steel) = $100
Value added = $210 -$100 = $110
Two Firm Example

10. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #10
Aggregate Output($110) cars added value ($100) steel added Value
($210) GDP


Two Firm Example

11. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #11
Aggregate Output
Would a merger change the total value
added?
Question for Discussion

12. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #12
Aggregate Output
Defining GDP approach added Value approach goods Final 
chain production
the along added value the of Sum
goods final of value the of Sum 


13. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #13
Aggregate Output
Defining GDP
Approach 1 & 2 define GDP from the
production side

14. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #14
Aggregate Output
Defining GDP
3) GDP from the income side

15. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #15
Aggregate Output
Revenues after payment for
intermediate goods
Some pay indirect taxes(sales taxes)
Some pay workers (labor income)
Remainder to the firm (capital income)
Consider

16. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #16
Aggregate Output
GDP from the income side income capital
income labor
taxes indirect (income) GDP



Defining GDP

17. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #17
Aggregate Output
Firm 1: Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
Firm 2: Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
GDP: Income Approach

18. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #18
Income (steel)
Labor = $80
Capital = $20
$100
Income (car)
Labor = $70
Capital = $40
$110$210 $110 $100 (income) GDP 
Aggregate Output($110) car added value
($100) steel added value -$210)-added (value GDP


Compared to:

19. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #19
The Composition of GDP by
Type of Income, 1960 and 1998
Labor income 66% 65%
Capital income 26% 27%
Indirect taxes 8% 8%
In Percent 1960 1998
Question for Discussion
How do these compare to the two firm example

20. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #20
Aggregate Output
Output Approach = Income Approach
Final goods & value added = sum of
indirect taxes + labor income + capital
income
Defining GDP –A Summary

21. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #21
Aggregate Output
Recall
GDP = the valueof final goods and
services produced
Value is the price of the final good
Nominal & Real GDP

22. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #22
Aggregate Output
Therefore,
GDP = Price x Quantity of final goods
produced
Nominal & Real GDP

23. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #23
Aggregate Output
Nominal & Real GDP (correcting for
inflation)
One good economy
Year Quantity of CarsPrice of Cars Nominal GDP
1991 10 $10,000 $100,000
1992 12 $12,000 $144,000
1993 13 $13,000 $169,000

24. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #24
Aggregate Output
1991 --10 x $12,000 = $120,000
1992 --12 x $12,000 = $144,000 (20% increase)
1993 --13 x $12,000 = $156,000 (8% increase)
Real GDP in 1992 $s
Note: Nominal 1992 GDP = Real 1992 GDP
Car Production x 1992 Prices

25. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #25
Nominal and Real
U.S. GDP, 1960-1998

26. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #26
Aggregate Output
GDP --refers to real GDP
Y
t--real GDP in year t
$GDP --nominal GDP
$Y
t= nominal GDP in year t
Technical Notes: For the Course

27. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #27
The Other Major
Macroeconomic Variables)( force labor
)( unemployed number
)( Rate ntUnemployme
L
U
u )(unemployed )( employed )( Force Labor UNL 
The Unemployment Rate

28. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #28)
)
L
U
u
( alftepotentiArbeitskrä
( eArbeitslos
)( enrateArbeitslos 
Die Arbeitslosenrate lt. Mikrozensus
bzw. lt. AMS für Österreich)e(Arbeitslos )( teBeschäftig )( alftepotentiArbeitskrä UNL  geSelbständi ndige UnselbstäsMikrozensu lt. )(sonen Erwerbsper 2N ndige UnselbstäAMS lt. )( teBeschäftig 1N

29. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #29
Unemployed and Discouraged Workers)(16 population adult
)( force labor
Rate ionParticipat


L
The Other Major
Macroeconomic Variables
Macro Terms

30. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #30
Can the unemployment rate rise when
the number of employed increases?
The Other Major
Macroeconomic Variables
What Do You Think?

31. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #31
The Other Major
Macroeconomic Variables
Okun’s Law
High output growth --reduces
unemployment
Low output growth --increases
unemployment
Unemployment and Economic Activity

32. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #32
Change in the U.S. Unemployment Rate
versus U.S. GDP Growth 1960 -1998

33. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #33
The Other Major
Macroeconomic Variables
If unemployment is too high --high
growth policy must be pursued to reduce
it
If unemployment is too low --low growth
policy is required
Economic Policy Implications of Okun’s
Law

34. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #34
The Other Major
Macroeconomic Variables
Unemployment rates and duration vary
by population groups
Certain groups incur a disproportionate
share of the unemployed when
unemployment increases
Social Implications of Unemployment

35. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #35
The Other Major
Macroeconomic Variables
Average price of final goods produced
GDP deflator in year t = P
t t
t
t
t
t
Y
$Y
P
GDP Real
GDP nominal

The GDP Deflator

36. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #36
The Other Major
Macroeconomic Variables
P
tis an index number
•P
1993= 102.6 (1992 = 100)
Index numbers are used to measure rate of
change over time t
1- t
1- t t
P
P
PP


 %

inflation of Rate
The GDP Deflator

37. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #37
The Other Major
Macroeconomic Variables
Average prices of goods consumed
The CPI is not equal to the GDP deflator
Some final goods are sold to business,
government, and foreigners
Some consumer goods are imported
The Consumer Price Index (CPI)

38. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #38
The Other Major
Macroeconomic Variables
1) Consumer expenditure survey to determine
a market basket of items
2) Bureau of labor statistics (BLS) field
workers price the items monthly (85 cities,
22,000 stores)
3) A base period is chosen, currently 1982-84
Steps in Calculating the CPI

39. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #39
Inflation Rate, Using the CPI
and the GDP Deflator, 1960, 1998

40. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #40
Change in the U.S. Inflation Rate versus
the U.S. Unemployment Rate, 1970-1998

41. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #41
The Other Major
Macroeconomic Variables
Prices and wages do not rise proportionately
Inflation creates market distortions due to:
Regulation (regulierte Preise v. “freie” Preise)
Taxation (stille Steuerprogression)
Verteilungsaspekte: fixe Transfers und Pensionen,
steigende Preise
Uncertainty for business investment
Why Do Economists Care About Inflation?

42. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #42
A Road Map
What determines the level of aggregate
output?
Short-run (a few years) --demand
Medium-run (10+ years) --supply
Long-run (50+ years) --government,
education, savings
The Central Question of Macroeconomics

43. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #43
The Organization of the Book

44. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #44
Aufgaben:
Okun’s Law (Fig.2-2)
BIP-und VPI-Index (Fig.2-3)
Phillips-Kurve (Fig.2-4)
Zeichnen Sie für Österreich (1988-2001;
falls möglich) die Graphiken (vgl.
Blanchard):