Introduction to Macroeconomics
Measuring the economy
The need for measurement
Problems with measurement
height, what is it? How to best measure it? Errors in measurement.
what are they
why do we use them
what problems do they present, as aggregates
averages can be highly misleading
Stock market returns
Construct and example of misleading average
Measuring economic output
adding apples and oranges
New versus Used
Final vs. Intermediate
double counting problem
Set Time Period
Location of production
same except for location of production
Mathematical Formula for Nominal GDP
In this formula there are n final goods produced in an economy. Each of these n goods has a market price, Pi and a quantity produced, Qi, Pi times Qi is the market value of good i. The sum of the market values for all the n goods in the economy is equal to the GDP.
Income = Expenditure
Every time a buyer makes a purchase that expenditure becomes income for the seller. The totality of Income is therefore equal to the totality of Expenditure. We can find the value of GDP by adding up all the expenditures on final goods in the economy, alternatively we can find the value of GDP by adding up all the income received by the various factors of production in the economy.
It should be simple: Rent + Interest + Wages + Profit
That would account for all the income earned by each resource.
Not that simple in the real world because of government, taxes and accounting rules.
Consumption Expenditure + Gross Private Domestic Investment + Government Expenditure on Goods and Services + Net Exports
Aggregate Income = Aggregate Expenditure = GDP
Problems with GDP
Simple Price Index
Value in relation to base period
Value of index in base period
Real GDP is the value of current output at base year market prices. Real GDP thereby measures output at constant dollar value.
Problems comparing GDP across countries
Different mix of market/non-market work
Size of country
Per-capita Real GDP
Measuring the Economy - Unemployment
What is unemployment?
Problems caused by unemployment.
Economic problems caused by unemployment
Measuring Unemployment-Part 1
Classifying the population
Total Population = A + B + C + D
Adult Population = B + C + D
Labor Force = B + C
Unemployed = C
Not-in-Labor-Force = D
Not Working = C + D
Measuring Unemployment - Part 2
Labor Force Participation Rate
Problems with unemployment rate
Unemployment rate decreases when no new people have jobs
Using two different measures to see what is happening in labor markets
Types of Unemployment
Full-employment rate of unemployment
Natural Rate of Unemployment
Changes in the NRU
Measuring the Economy - Inflation
What is a "rate"
Consumer Price Index
CPI keeps the quantities of goods constant and allows the prices to vary. The CPI tells us how much more or less expensive it is to buy the same goods over time.
All goods instead of a selection of goods. Goods vary over time, the GDP deflator uses the actual amount of goods produced in each year. What is fixed in the GDP Deflator are the prices, it uses the prices from the base year so that the dollar value is constant over time.
Note: Real Value
Causes of inflation
Ultimately, 'inflation is always and everywhere a monetary phenomenon' but in the models we will shortly be using inflation can be shown as an result of increasing demand or decreasing supply.
What's wrong with inflation?
See the 19th century battles over
the Bank of the
1983-2008 "The Great Moderation" Fed tried to keep inflation steady at around 3%
Since 2008 Fed has dumped hundreds of Billions of Dollars into economy, little measured inflation so far...
Classical Model of the Economy (Filtered through the Keynesians)
Classical Macro-equilibrium (AD/AS)
Money & Banking
Economic Policy: Fiscal and Monetary