Macroeconomics precourse – Part 1
Academic Year 2013-2014
Course Presentation
This course aims to prepare students for the Macroeconomics
course of the MSc in BA. It provides the essential background in
macroeconomics
PAOLO PAESANI
Office: Room B6, 3RD floor, Building B
Telephone: 06-72595701
E-mail: paolo.paesani@uniroma2.it
Office hours: to be agreed
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Macro
MACROECONOMICS
Macroeconomics is a branch of economic theory that studies the
functioning of the economic system of a nation as a whole and its
connections with other economic systems.
Economic system = Households + Non financial Companies +
Financial Intermediaries + Government (including the central bank)
Orthodox approach: Microeconomics (study of single elements) as
the basis of macroeconomics (study of the whole)
Heterdox approach: I’ll tell you about it next time !
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Macro
SOCIO-ECONOMIC CONTEXT
• Well-defined property rights over available resources;
• Freedom to put available resources to the best (most profitable) use as
judged by the owner (resource allocation);
• Property rights protection;
• Freedom to transfer property rights in a regulated and organised way
(Voluntary exchange);
• Price-based resource allocation;
• Capitalist economy;
• Open economy;
• Government as a relevant macroeconomic actor
• Money as medium of exchange, means of payment, unit of account and
store of value.
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Macro
THE ECONOMIC SYSTEM
Mankiw (2010)
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Macro
GOVERNMENT AS A PART OF THE ECONOMIC SYSTEM
GOVERNMENT
Government as a part of the economic system
1. Purchases goods and services from the
private sector (linkage with the market for
goods and services);
2. Hires workers and rents capital goods
from the private sector which it uses in
combination with intermediate goods and
services to produce public goods (linkage
with the market for factors of production);
3. Taxes houselds and firms (direct taxation,
indirect taxation, excises and fees) (TAX)
4. Transfers money to houselds and firms
(pensions, unemployment benefits,
subsidies)
Mankiw (2011)
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Macro
FINANCIAL SYSTEM AS A PART OF THE ECONOMIC SYSTEM
GOVERNMENT
Financial system (institutions and markets
related to the circulation of money and
credit) :
1. Central bank;
2. Monetary financial institutions (normal
banks);
3. Non monetary financial intermediaries
(investment and pension funds, insurance
companies, rating agencies, investement
banks ….)
4. Money markets (Short-term financial
assets)
5. Financial markets (bonds, shares,
derivatives, forex, commodities)
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Macro
THE GLOBAL ECONOMIC SYSTEM
Every economic system is linked to the others
through multiple channels:
GOVERNMENT
1. International trade of goods and services
(Exports and Imports);
2. International mobility of factors of
production (migration, foreign direct
investment);
3. Private international financial flows
(portfolio investment, forex transactions)
4. Public international financial flows
(management of official forex reserves,
interntional aid, international transfers)
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Macro
GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP, Y) is the nominal value of all the final
goods and services produced within a country over a given period of time
evaluated at market prices.
1.
2.
3.
4.
5.
6.
nominal value = measured in terms of money
Final goods and services = goos and services produced over a given
period of time and NOT USED to produce other goods and services
during the same period of time.
Produced = Trading of second hand goods is not part of GDP
Within a country = National dimension
Given period of time = Usually One year (flow variable)
Market prices = Only final goods and services regularly bought and
sold in a market contribute to GDP.
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Macro
GROSS DOMESTIC PRODUCT
Raw Bread
Wheat
Primary sector
AGRICULTURE
Secondary sector
INDUSTRY
50
EUR
Tertiary sector
SERVICES
100
EUR
150
EUR
Total value of goods and services = 300 EUR
Value of intermediate goods and services = 150 EUR
GDP = 150 EUR
Gross National Income = 50 + (100-50) + (150 – 100) = 150 EUR
Packaged bread
Consumers
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Macro
GROSS NATIONAL PRODUCT
Gross National Product (GNP) is the nominal market value of all
the final goods and services produced within a country or a abroad
over a given period of time by national factors of production.
GNP = GDP + NFI
NFI = NET FOREIGN INCOMES = (Income of domestic labour and
capital employed abroad) – (Income of foreign labour and capital
employed in the country)
Nationality + Residence matter
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Macro
NATIONAL INCOME
Gross National Income (GNI) is equal to Gross National Income
minus Indirect Taxation (ex. VAT)
GNI = GNP - VAT
Hint: When you buy anything (eg. a book) , 20% of the price you
pay is VAT and is trasferred to the State, the rest compensates
factors of production employed to produce it.
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Macro
OTHER MEASURES OF INCOME
Mankiw (2011)
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Macro
GDP PER CAPITA
Dividing GDP by the country’s population (POP) we obtain GDP
per-capita. GDP per capita can be taken as a rough measure of the
economic welfare of a country’s residents.
GDP per capita = GDP / POP
GDP per capita is an average that tells us nothing about
distribution. Economists and statisticians have developed specific
indicators for that (e.g. Lorenz Curve, Gini coefficient, …)
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Macro
GDP PER CAPITA
Source: BNP_perhoofd_2012_%281%29.PNG
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Macro
GDP = AGGREGATE DEMAND
Y=C+I+G+X–M
Mankiw (2011)
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Macro
AGGREGATE DEMAND: CONSUMPTION
Aggregate consumption depends on:
1.
2.
3.
4.
5.
Current disposable income (Ydisp = Y – TAX + TRA) dC/dYdisp > 0
Expected disposable income dC/dYexp > 0
Inflation (?), Real interest rate < 0 (?)
Wealth = Financial assets + Real assets > 0
Income distribution , Consumer credit ….
Ydisp – C(t) = S(t) = Private Savings
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Macro
AGGREGATE DEMAND: PRIVATE INVESTMENT
Aggregate investment depends on:
1.
2.
3.
4.
Expected profits + attitude towards risk
Expected aggregate demand
Inflation (?), Real interest rate < 0
Credit + financial factors
K(t+1) – K(t) = I(t) – dK(t) = Net investement
K(t) = Aggregate Stock of capital , 0< d <1 depreciation rate
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Macro
AGGREGATE DEMAND: GOVERNMENT PURCHASES
Government purchases depend on:
1.
2.
Size of the public sector
Fiscal policy decisions
G(t) + TRA(t) – TAX(t) = Government budget deficit
GBD = change in public debt + monetary financing of BD
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Macro
AGGREGATE DEMAND: NEXT EXPORTS
1.
2.
3.
4.
5.
6.
7.
Net Exports depend on:
Nominal exchange rate E (amount of foreign currency per unit of domestic
currency) dNX / dE < 0
Domestic price level P dNX / dP < 0
Foreign price level P* dNX / dP* > 0
Domestic GDP Y dNX / dY < 0
Foreign GDP Y* dNX / dY* > 0
Barriers to international trade
Quality, National specificities …
NX (t) + NFI(t) + NFTRA(t) + FDI(t) + PRMK(t) + dRES (t) + EO(t) = 0
Balance of payments
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Macro
DECOMPOSING GDP
Y = PQ where Y = Nominal GDP, P = GDP deflator, Q = real GDP
Mankiw (2011)
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Macro
INFLATION
Inflation rate = Rate of change of the GDP deflator over time
Π = [P(t) – P(t-1)] / P(t-1)
1.
2.
3.
4.
5.
Π > 0 = Moderate Inflation
Π = 0 (approx.) = Stable prices
Π < 0 = Deflation
Π >> 0 = High Inflation
Π >>>>>> … 0 = Hyper-inflation
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Macro
INFLATION AND THE PURCHASING POWER OF MONEY
1/P can be taken as an indicator of the purchasing power of money
(amount of goods which can be purchased spending 1 euro)
1. M/P = Real Money balances
2. W/P = Real wage
Inflation erodes the purchasing power of money. As such creditors and
people on fixed income fear it while debtors and people on floating
income do not (if their income move at the place of inflation).
Interesting link on the effects of inflation:
http://203.200.22.249:8080/jspui/bitstream/123456789/2209/1/A_tract_on_moneta
ry_reform.pdf
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Macro
MEASURING INFLATION
Mankiw (2011)
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Macro
GROWTH
Inflation rate = Rate of change of the real GDP over time
Γ = [Q(t) – Q(t-1)] / Q(t-1)
1. Π > 0 = Growth
2. Π = 0 (approx.) = Stagnation
3. Π < 0 = Recession
Growth theory is one of the main branches of macroeconomics
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Macro
REAL GDP AND GROWTH
Mankiw (2011)
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Macro
REAL GDP AND GROWTH
Mankiw (2011)
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Macro
REFERENCE
Mankiw, G.N. (2010) Brief Principles of Macroeconomics, 6° ed.,
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