Wprowadzenie do

makroekonomii

M.Brzoza-Brzezina:

Macroeconomics II - Introduction

to Macroeconomics

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Zespół

Wykłady:

- Michał Brzoza-Brzezina

Konsultacje: piątki, 17.30 – 18.30, pokój 6/3 „C”,

Materiały: http://web.sgh.waw.pl/~mbrzez

Ćwiczenia:

- Mgr Anna Duszak,

- Mgr Tomasz Kleszcz

M.Brzoza-Brzezina:

Macroeconomics II - Introduction

to Macroeconomics

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Podręcznik

Podręcznik

Burda & Wyplosz: Makroekonomia. Podręcznik europejski, Polskie Wydawnictwo Ekonomiczne 2013

Materiały w sieci: http://www.oup.com/uk/orc/

Inne materiały wskazane podczas zajęć

M.Brzoza-Brzezina:

Macroeconomics II - Introduction

to Macroeconomics

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Zaliczenie

Zaliczenie ćwiczeń zależy od:

- Aktywności

- Prac domowych

- Kolokwium (12.12 lub 19.12)

- Szczegóły ustalą ćwiczeniowcy

Zaliczenie ćwiczeń warunkiem pisania

egzaminu

Będzie egzamin zerowy (w styczniu)

Ocena końcowa: 50% z ćwiczeń, 50% z

egzaminu

M.Brzoza-Brzezina:

Macroeconomics II - Introduction

to Macroeconomics

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Syllabus

1. Introduction to macroeconomics: questions asked by economists, real and nominal variables, national accounts, the perils of using identities

2. The economy in the long run

Economic growth: stylized facts about growth, the Solow growth model, sources of economic growth

Money, prices and exchange rates in the long run: the economy in long-run equilibrium: potential output, NAIRU, natural rate of interest and eqilibrium exchange rate; long-run neutrality of money; purchasing power parity

Labor markets and unemployment: labour supply and demand, voluntary and involontary unemployment, downward wage rigidities, the Phillips curve

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Macroeconomics II - Introduction

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Syllabus cont’d

3. The economy in the short run

Stylized facts and main theories about business cycles: pro, counter and acyclical variables, deterministic and stochastic theories of business cycles, the role of nominal rigidities and productivity shocks

Private and public sector behavior: budget constraints of the private and public sector, aggregate constraint and Ricardian equivalence, intertemporal choice, sources of private demand, the IS curve

Money and credit: creation of money and credit, demand for money, the LM curve

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Syllabus cont’d

3. The economy in the short run …

General equilibrium and monetary policy: short-run fluctuations under fixed interest rates, stability of equilibrium, monetary policy and its role in stabilizing the economy, the effects of monetary policy, preference and money demand shocks, the AD-AS model

4. Open economy: interest rate parity, Mundell-Fleming model, the economy under flexible and fixed interest rates

5. Fiscal policy: the stabilizing and redistributive role of the government, public debt and deficit, fiscal rules, fiscal multipliers

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Macroeconomics II - Introduction

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Outline of this lecture

1. What is macroeconomics?

- Questions raised by macroeconomics

- The role of models

- Modern approach to macro modelling

2. Macroeconomic accounts

- Gross domestic product

- Flows of incomes and expenditures

- Real and nominal variables

- Macroeconomic identities

This lecture follows chapters 1 and 2 of the textbook

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Macroeconomics II - Introduction

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1. What is macroeconomics?

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Macroeconomics II - Introduction

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Questions raised by macroeconomics

Macroeconomics concentrates on the

behaviour of aggregated variables: GDP,

consumption, investment, unemployment,

inflation, wages, exchange rates, balance of

payments etc.

Tries to answer several important questions

and provide policy advice.

Note: macro performance affects micro

happiness (welfare)

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Macroeconomics II - Introduction

to Macroeconomics

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What determines long-run growth?

Real Gross Domestic Product, 1870 - 2010

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Macroeconomics II - Introduction

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Why do some economies grow faster than other?

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Macroeconomics II - Introduction

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What causes cyclical fluctuations? Should we reduce

them? How can we do it?

Quarterly Rate of Change in GDP (in %),

UK, 1962:1-2010:4

(% change of GDP in one quarter relative to previous quarter)

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What causes unemployment? How can we

reduce it?

Unemployment rates: EU, US, Switzerland (percent)

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Macroeconomics II - Introduction

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What causes inflation? How can we fight it?

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Macroeconomics II - Introduction

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How do financial markets interact

with the macroeconomy?

Example: financial crisis 2007-08

caused a deep recession

Did wrong macro policy (e.g. to

expansionary monetary policy) cause

the crisis?

How does the credit crunch affect

economic growth? How can we fight it?

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Macroeconomics II - Introduction

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How to deal with poverty and

inequality?

Poverty and inequality are a serious

problem both in national and

international dimentions

Which policies help, which do not?

Often an empirical question

Serious problem: endogeneity!

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Macroeconomics II - Introduction

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The role of models Reality is extremely complicated

To understand it we need models

Simplified versions of real world (selected aspects)

Models are only models …

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Macroeconomics II - Introduction

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Or even better…

„Essentially, all models are wrong, but

some are useful”

Box, G. E. P., and Draper, N. R.,

(1987), Empirical Model Building and

Response Surfaces, John Wiley & Sons,

New York, NY, p.424.

M.Brzoza-Brzezina:

Macroeconomics II - Introduction

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© Oxford University

Press, 2012. All rights

reserved.

Fig. 1.10

Endogenous and Exogenous Variables

Endogenous variables are the object of analysis in an economic

model.

Exogenous variables are determined outside the economic model.

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Macroeconomics II - Introduction

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Modern approach to macro modelling

Until 1970s macro models based on ad-hoc

relationships of aggregated variables

e.g. Phillips curve: permanent trade-off between

inflation and unemployment

This resulted in misleading policy advice (Phelps,

Friedman, Lucas critique) – stagflation in 1970’s

Everything in macroeconomics comes from individual

behaviour

Mainstream approach since 1980’s: We should base

every macro model on individual behaviour

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Microfoundations Households maximize lifetime utility

They choose consumption, labour supply, real money holdings to maximize:

subject to budget constraint

Firms maximize profits

They choose prices and production method subject to production function, market structure (competition), price stickiness etc.

In equilibrium (after aggregation) all markets clear:

- Labour demand equals labour supply

- Production equals consumption

- Money demand equals money supply

This is called general equilibrium

0,,max

tt

ttt

t

P

MlcuU

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Macroeconomics II - Introduction

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Example – contemporaneous macro model

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2. Macroeconomic accounts

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Macroeconomics II - Introduction

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What are national accounts?

Set of statistical definitions

Plays central role in studying

macroeconomics

Discretionary with many drawbacks

But still the best way to measure

economic activity and development we

have

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Gross domestic product

GDP is a measure of productive activity

It is a flow variable

Measured for a geographic area

(usually country)

Defined over a time interval (usually

year or quarter)

Can be measured in three ways

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Macroeconomics II - Introduction

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GDP: definition 1

GDP=sum of all net final sales

Only final sales – e.g. for consumption

purposes.

Intermediate sales are not accounted

for – GDP does not depend on the

length of the production chain

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Macroeconomics II - Introduction

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GDP: definition 2

GDP=sum of value added

Value added is the difference between

sales and cost of raw materials,

unfinished goods and imports

Value added is not counted twice

Hence, sum of value added must equal

value of final sale (corrected for tax).

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Macroeconomics II - Introduction

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GDP: definition 3

GDP=sum of factor incomes

One persons expenditure (def. 1) is

someone else’s income

Usual production factors: labour and

capital

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Macroeconomics II - Introduction

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Drawbacks of GDP accounting

Measures directly only legal economy – underground activities are estimated roughly

Does not account for many important activities – e.g. housekeeping

GDP is a bad measure of welfare – does not account for social conditions (e.g. good sidewalks or playgrounds), environmental conditions, equality of incomes etc.

Alternative measures exist, e.g. UN human development index.

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GDP per Capita and Life Satisfaction in 2006

Sati

sfac

tio

n w

ith

life

ind

ex

GDP per capita 2006

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Macroeconomics II - Introduction

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Components of HDI

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Source: HDR 2013

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Macroeconomics II - Introduction

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Circular flow

As mentioned, every expenditure is someone’s income

Examples:

- taxes are private sector’s expenditure but the government’s income

- imports are the domestic economy’s expenditure but the foreign economy’s income

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(S-I) (X-Z)

(T-G)

Rest of

World

Government

Private

Sector

Figure 2.02

Circular flow (manual)

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(S-I) (X-Z)

(T-G)

Rest of

World

Government

Private

Sector

Figure 2.02

Circular flow (automatic)

Components of GDP

Consumption (C) Investment (I) Government

purchases (G)

Australia 56.4 22.4 17.4

Germany 58.5 18.2 18.9

France 56.8 20.1 23.6

UK 65.0 17.0 21.0

Italy 59.3 20.7 19.9

Japan 57.4 24.0 18.1

Canada 56.4 21.4 19.7

Switzerland 59.1 21.4 11.3

USA 69.8 18.8 15.8

Euro Area 57.2 20.8 20.5

Source: IMF

Table 2.3

© Oxford University

Press, 2012. All rights

reserved.

67.5 1,057.6 1,565.7 United Kingdom

78.2 7,911.5 10,122.6 United States

59.6 211.4 354.5 Switzerland

53.1 154.4 290.9 Sweden

67.8 1,293.9 1,907.7 France

64.9 1,554.2 2,395.0 Germany

% of GDP (billions of € ) (billions of € )

Households disposable income GDP

Sources: OECD Economic Outlook, ECB

Table 2.4

GDP and Household Disposable Income, 2009

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Real and nominal variables

Most economic variables including the national accounts can be measured in nominal or real terms

Nominal variables are measured in units of money

Examples: nominal GDP, nominal consumption, nominal wages

Real variables are measured in units of goods

Examples: real GDP, real consumption, real wages

Real variables tell us how much purchasing power has our income, wage etc.

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Macroeconomics II - Introduction

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How to construct real variables?

Nominal variables are usualy easily available: e.g. the lecturers wage

Real variables are constructed by dividing the nominal variable by the respective deflator (price of the underlying good)

Real GDP=Nominal GDP/GDP deflator

Real wage=Nominal wage/CPI

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Macroeconomics II - Introduction

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Deflators

Source: IMF

Inflation in Italy, 1985-2010

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Table 2.01

Source: Eurostat

Euro Area: Growth Rates (% per annum)

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Key accounting identities

From definition 1 (final sales go for consumption, investment etc.):

Y=C+I+G+X-M

From definition 3 (incomes are spent on consumption, savings and (net) taxes):

Y=C+S+T

Resulting balance of sectors:

(S-I)+(T-G)=(X-M)

Savings of the private and public sector equal (approx.) the trade balance

Consequence: twin deficits

Important: these are all definitions, do not speak about causality!!!

© Oxford University

Press, 2012. All rights

reserved.

S - I T - G CA

USA -5.6 -8.8 -3.2

Japan 10.3 -6.7 3.6

Belgium 3.9 -2.6 1.3

Denmark 4.7 0.8 5.5

France 2.6 -4.8 -2.2

Germany 8.1 -2.5 5.6

Italy -1.3 -2.2 -3.5

Netherlands 11.5 -3.8 7.7

Spain 0.7 -5.2 -4.5

Sweden 4.7 1.6 6.3

UK 5.8 -8.3 -2.5

Euro area 4.1 -3.9 0.2

The Accounting Identity in 2010 (% of GDP)

Table 2.5

Source: OECD

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Twin deficits

Source: Wikipedia

The Effect of Fiscal Consolidation on the Current Account

John Bluedorn and Daniel Leigh

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