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