Approaches to Macro

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Macroeconomic Analysis 2003
Approaches to Macroeconomics
Lecture 1
1
Measurement
•
•
•
•
•
•
•
Nominal GDP
Real GDP
GDP deflator
GDP Index
Growth rate
Technological Index
Review of AS-AD Framework in various
Schools
Lecture 1
• Exercise
2
Nominal and Real GDP
Nominal GDP in 2001:
P Y  P a Q a  P o Q o  Pb Qb
01 01 01 01 01 01 01 01
Nominal GDP in 2002:
P Y  P a Q a  P o Q o  Pb Qb
02 02
02 02
02 02
02 02
2002 GDP in constant prices of 2001:
P Y  P a Q a  P o Q o  Pb Qb
01 02
01 02 01 02 01 02
Lecture 1
3
Aggregate Demand
Final Demand Structure in the UK 2000 (GTAP)
4 exp
21%
1 cons
51%
3 gov
15%
2 inv
13%
Lecture 1
4
GDP and GDP Components -UK (Seasonally adjusted and in constant prices)
900000
800000
C
I
700000
G
X
M
600000
GDP
500000
400000
300000
200000
100000
0
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
In million £s
Linear (GDP)
Years
Lecture
1
5
19
70
19 Q2
71
19 Q2
72
19 Q2
73
19 Q2
74
19 Q2
75
19 Q2
76
19 Q2
77
19 Q2
78
19 Q2
79
19 Q2
80
19 Q2
81
19 Q2
82
19 Q2
83
19 Q2
84
19 Q2
85
19 Q2
86
19 Q2
87
19 Q2
88
19 Q2
89
19 Q2
90
19 Q2
91
19 Q2
92
19 Q2
93
19 Q2
94
19 Q2
95
19 Q2
96
19 Q2
97
19 Q2
98
19 Q2
99
Q
2
Growth Rates in the UK Economy
12
10
GGDP
Linear (GGDP)
8
6
4
2
0
-2
-4
-6
Lecture 1
6
National Income Identity
C  S  T 1 C  I  G  X  M
Y Y Y
Y Y Y Y Y
S

Y

 T

I
G


       1  X  M  TBAL  KFLOW
Y  Y Y 
Y Y
If
C
I
S
G
T
 0 .6 ;
 0.2 ;  0.15
 0.2 ;
 0.15
Y
Y
Y
Y
Y
;
X
M
 0.15 ;  0.25
Y
Y
What is the net trade balance or the inflow or outflow of capital?
Lecture 1
7
Supply Side of GDP
Production Factor Composition in the UK in 2000
1 Land
5 NatRes0%
0%
4 Capital
35%
2 UnSkLab
39%
3 SkLab
26%
Lecture 1
8
Structure of Production in the UK 2000
10 Other
13%
9 Education
9%
1 Agri
7%
2 Mininng
1%
3 Mnfcs
26%
8 FinServ
12%
4 Electricity
2%
7 Transport
8%
6 Distribution
14%
Lecture 1
5 Construction
8%
9
0
10,051
8,000
6,000
4,000
2,000
Lecture 1
9,754
10,063
Wales
10,000
Northern
Ireland5
11,850
Scotland
20,000
London
12,845
North and
North East
Lincolnshire
East
Riding of
Yorkshire
11,759
Kingston
Upon Hull, City of
12,000
East Riding
and North
Lincolnshire
12,548
England
14,000
United Kingdom
GDP Perhead in Hull and the UK 1998
18,566
18,000
16,000
13,402
12,117
10
UK and Global GDP, 2000 (GTAP Data set)
5 ROW
19%
1 EU
23%
2 UK
4%
4 NAFTA
30%
3 SEASIA
24%
Lecture 1
11
Output Gap in Major Industrail Countries (IMF)
6
4
0
19
79
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Percent of GDP
2
-2
-4
-6
-8
FRANCE
GERMANY
JAPAN
UNITED KINGDOM
UNITED STATES
Lecture 1
-10
12
Macroeconomic Policy
• Fiscal Policy
taxes
expenditure
debt
• Monetary Policy
interest rate/ M-supply
exchange rate/trade
stock market
Lecture •
1 Growth/supply side 13
Aggregate Demand and Aggregate
Supply and Prices
Impact of increase in money supply on Output and Prices in the Classical,
Keynesian and New Keynesian Models
ASCL
ASNK
Pc
Pnk
Pk
ASK
AD2
AD1
o
Yc
Lecture 1
Ynk
Yk
14
Classical view
 Ideas of Adam Smith (1776), Ricardo (1817), J. B.
Say
 Malthus (1842) Mill (1873), Marshall (1925)
 Invisible hand sets prices to equate demand and
supply.
 No excess demand or no excess supply can persist.
 No glut or shortages in goods market.
 No unemployment or labour pressure in the labour
market.
 Money is neutral (quantity theory of money).
 Prices proportional to money supply.
 It is long run view.
 Balance budget recommended.
 Laisser faire: minimum government is the best
government.
 Downward sloping aggregate demand and vertical
supply curve
Lecture 1
15
Keynesian Economist’s view on Economic
Policy
 Automatic equilibrium is not guaranteed. Animal spirits
not the rational choices dominate the economy.
 Unemployment may persist for a long period if the
deficiency in demand continues.
 Active policy can play a very positive role, because of
rigidity in the markets, particularly in the labour market
(minimum wage laws, unions, and efficiency wages).
Also because of the monopolistic powers of the firms.
Active policy can fine tune the economy and correct the
market failure.
Lecture 1
16
Exercises
• GDP deflator
• Technological index
• Growth rate of per capita
income and GDP
• Production function
• Capital share
• Labour share
• Review of
• Problems 1-3
– the IS-LM
– AS-AD
Lecture 1
17
Economic Growth In the UK and
Ireland from 1980-2000
Does Good Economic Policy Matter?
Saving and Investment ratios
Population Growth
Fiscal and monetary policy
Real interest rate
Real Exchange Rate
Inflation rates
Trade Ratios
Lecture 1
18
Growth Rates in the UK and Ireland
14.00
12.00
Ireland
United Kingdom
10.00
8.00
6.00
4.00
2.00
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
81
82
19
-2.00
19
19
80
0.00
-4.00
Lecture 1
19
Saving Ratios in the UK and the Ireland
40.00
35.00
Ireland
United Kingdom
30.00
25.00
20.00
15.00
10.00
5.00
Lecture 1
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0.00
20
Investment Ratio in the UK and Ireland
30.00
25.00
20.00
15.00
Ireland
United Kingdom
10.00
5.00
Lecture 1
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0.00
21
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
Real Interest Rate in the UK and Ireland
Iceland
United Kingdom
Lecture 1
22
Real Effective Exchange Rates in the UK and Ireland (1995=100)
140.00
120.00
100.00
80.00
60.00
Ireland
United Kingdom
40.00
20.00
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
0.00
Lecture 1
23
Trade Ratio in the UK and Ireland
180.00
160.00
Ireland
United Kingdom
140.00
120.00
100.00
80.00
60.00
40.00
20.00
Lecture 1
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0.00
24
Inflation Rates in the UK and Ireland
25.00
20.00
15.00
Ireland
United Kingdom
10.00
5.00
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
0.00
-5.00
Lecture 1
25
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