Economics 215
Intermediate
Macroeconomics
Introduction
What is Macroeconomics
Studies of economies at aggregate level:
world, nation, region, etc.
 Economic decision makers are
representatives of a broader class
(consumers, banks, firms, etc.)

Why study aggregate economy?




Classes of agents similar in important ways.
Their behavior generates aggregate
movements.
Aggregate markets important to explain, foreign
exchange, credit, energy.
Single national policy-makers: central bank,
treasury.
Feedback when large number of agents act
together.
How is Intermediate Different from
Principles

Main subjects
 Long-term Growth
 Productivity
 Capital Accumulation vs. Technology driven growth
 Exchange Rates
 Long-term exchange rate fundamentals
 Business cycles in small open economy
 Macroeconomic Dynamics
 Savings and Investment
 Trade and Budget Deficits
Concepts you should know
GDP, Nominal and Real
 Price level and Inflation
 Interest Rates, Nominal and Real


Variables are often studied in the form of
time series: A set of observations indexed
by time.
GDP: Output
Nominal GDP (PYt) – the total value of
goods produced in a given period
measured in current prices.
 Real GDP (Yt) – the total value of goods
produced in a given period measured in
the prices prevailing in some base year.

Expenditure Categories in Hong
Kong: 2001
160.00%
140.00%
120.00%
100.00%
% of GDP
80.00%
60.00%
40.00%
20.00%
0.00%
Household Government
Consumption Consumption
Investment
Exports
Imports
Income Distribution
Household Income
20
18
16
14
12
10
8
6
4
2
0
China
Hong Kong, China
Korea, Rep.
Sweden
Ratio of 10% Highest to 10% Lowest
United States
GDP Expenditure Shares
Consumption
Investment
Government
Net Exports
Production Sectors of Hong Kong
Production Account
0.25
0.2
0.15
% of GDP
0.1
1980
0.05
2001
1980
Landlord
Services
FIRE
Transport
Trade
Construction
Utilities
Manufacturing
Mining
AFF
0
P: Price level



Deflator (Pt) ratio of nominal GDP to real GDP
(weighted average of the prices of goods
produced using current expenditures as
weights).
CPI (CPIt) cost of a fixed market basket of
consumer goods relative to the cost in a base
year (weighted average of the prices of goods
consumed using fixed expenditures as weights).
Inflation: Growth rate of price level
Pt  Pt 1
t 
Pt 1
Inflation: HK GDP Deflator
Inflation
20.0
15.0
10.0
5.0
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
#
0.0
-5.0
-10.0
Interest Rates


Nominal Interest Rate (1+it): Number of $ a
borrower will pay you in one year if they borrow
$1 today.
Real Interest Rate (1+rt): Number of goods a
borrower will pay you in one year if they borrow
1 good today.
 Gross
Nominal interest at the time of a loan divided
by gross inflation over course of a loan.
 Net real interest rate approximated by net nominal
rate minus net inflation rate.
HK Real Interest Rate
Real Interest Rate
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-5
Time Series
GDP
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
20 0
03
#
20
97
94
19
91
19
19
88
19
85
82
19
19
79
19
76
19
73
70
19
67
19
19
64
19
61
0
19
Million HK $
Growth
Real GDP tends to grow over time.
Yt  Yt 1
Y
 Growth Rate gt 
 Yt  1  gtY  Yt 1

Yt 1

Growth compounds across time
Yt 1  1  g  Yt , Yt  2  1  g  Yt 1 ,  Yt  2  1  g 1  g  Yt  1  g  Yt
2
Yt 3  1  g  Yt  2  1  g  Yt 
j
Yt  j  1 g Yt
3


Series with Exponential Growth
140
120
100
80
time
GDP
60
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
Natural Log





Empirical economists often study (natural) logarithms of
series
Study yt = ln Yt
Natural log is a logarithm with Euler’s constant, e as
base.
Natural logarithm is a mathematical function that takes a
straight line and turns it into a concave
Most importantly, natural logarithm takes an
exponential growth function and turns it into a
straight line.
-2
7.75
7.25
6.75
6.25
5.75
5.25
4.75
4.25
3.75
3.25
2.75
2.25
1.75
1.25
0.75
0.25
Natural Log of a Straight Line
10
8
6
4
X
ln X
2
0
Exponential to straight line
8
7
6
5
Y
4
lnY
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Properties of Natural Logarithm
1.
If
X t  Yt  Zt  ln X t  ln Yt  ln Zt
Yt 
2.
3.
If
If
Xt
Zt
 ln Yt  ln X t  ln Zt
Yt  X t a  ln Yt  a  ln X t
Log of exponential growth function is linear function of time
Yt  j  (1  g ) j Yt  ln Yt  j  ln (1  g ) j Yt   ln Yt  ln (1  g ) j 
 ln Yt  ln(1 g )  j
GDP vs. Log GDP
ln(GDP)
GDP
1,600,000
16
1,400,000
14
1,200,000
12
1,000,000
10
800,000
8
600,000
6
400,000
4
200,000
2
0
0
61 64 67 70 73 76 79 82 85 88 91 94 97 00 3#
19 19 19 19 19 19 19 19 19 19 19 19 19 20 200
19
61 964 967 970 973 976 979 982 985 988 991 994 997 000 03#
1
1
1
1
1
1
1
1
1
1
1
1
2 20
Small changes in X imply %
changes in ln(X)

If x = ln(X) and X changes by a small
amount dX, then x changes by dX
X

Growth Rates: Between two periods of
time Y changes by an amount ΔY = Yt –
Yt-1. Then
Y Yt  Yt 1
Y
t  ln Yt  ln Yt 1 

 gt
Y
Yt 1
-0.05
-0.1
2002#
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
Continuous vs. Discrete Growth
0.2
0.15
0.1
0.05
g
μ
0
GDP Growth


GDP displays exponential, but uneven,
growth.
Macroeconomists split GDP into two
parts: 1) trend; and 2) cycle
Trend – smooth, expositional growth
2. Cycle – Deviations of Actual GDP from
Trend
1.
Calculating Trend
Developed Economies: Ln(GDP) is a
linear function of time. Estimate linear
regression of ln(GDP) on constant and
time.
 Emerging Markets: Tend to experience
slowing growth. Estimate linear regression
of ln(GDP) on constant, trend, trend2.

Log Trend & Log Cycle
16
14
12
10
ln(GDP)
8
TREND
6
4
2
2001
1997
1993
1989
1985
1981
1977
1973
1969
1965
1961
0
HK GDP – Trend and Cycle
1600000
1400000
1200000
1000000
800000
600000
400000
200000
19
61
19
66
19
71
19
76
19
81
19
86
19
91
19
96
20
01
0
trend
GDP
Calculating Cycles



Gap (output gap) between actual ln(GDP) and
trend ln(GDP).
Small difference between two natural logs can
be interpreted as a % difference. Output gap is
the % deviation of GDP from trend.
Output gap is variable and persistent but does
not permanently grow or shrink over time.
Output Gap
Output Gap
0.15
0.1
0
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
%
0.05
-0.05
-0.1
-0.15
-0.2
Output Gap & Unemployment
10
8
6
4
2
Unemployment
Output Gap
-4
-6
-8
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
-2
19
82
19
80
0
Statistics
Standard deviation of the output gap to
measure the volatility of the output gap.
 Correlation to measure the movement of
one stationary time series with one
another.
 Auto-correlation measures the persistence
of stationary time series.

Point Elasticities
Elasticity: The % change in one variable
caused by % change in another variable.
 Given x = ln(X), y = ln(Y) and y = δ x

=δ
 dy = (dY/Y), dx = (dX/X)
 So δ can be interpreted as the elasticity of X
with respect to Y
 (dy/dx)
Main Sources of Hong Kong
Statistics

1.
There are two main sources of macroeconomic
statistics.
Census and Statistics Department:
National Income Accounts, CPI, Interest Rates, Employment,
etc.
See Frequently Requested Statistics
http://www.info.gov.hk/censtatd/eng/hkstat/index1.html
2.
Hong Kong Monetary Authority:
Money and Banking Statistics
See Monthly Statistical Bulletin
http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm