Chapters 1/2/3 Summary of Olivier's Blanchard's book Macroeconomics, Schemi e mappe concettuali di Macroeconomia

Scarica Chapters 1/2/3 Summary of Olivier's Blanchard's book Macroeconomics e più Schemi e mappe concettuali in PDF di Macroeconomia solo su Docsity! Notes by DLA Chapter 1: Introduction: What Do Macroeconomists Do? Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) For those who want to specialize in macroeconomics, you may want to know what jobs you can expect to get, what you will be doing in those jobs, and how much you can expect to earn. In short, with an undergraduate degree, you can expect to work in the private sector, be it in large firms or in financial institutions, helping them assess the economic situation. Jobs in central banks such as the Fed, or in international organizations such as the IMF or the World Bank, are likely to require you to have a PhD. Jobs in academia have a similar requirement. 1 Notes by DLA Chapter 2: A Tour of the Book: THE UNEMPLOYMENT RATE Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) Because it is a measure of aggregate activity, GDP is obviously the most important macroeconomic variable. But two other variables, unemployment and inflation, tell us about other important aspects of how an economy is performing. Employment is the number of people who have a job. Unemployment is the number of people who do not have a job but are looking for one. The labor force is the sum of employment and unemployment: L = N + U labor force = employment + unemployment The unemployment rate is the ratio of the number of people who are unemployed to the number of people in the labor force: unemployment rate = unemployment/labor force Constructing the unemployment rate is less obvious than it might seem. Determining whether somebody is employed is relatively straightforward. To be classified as unemployed, a person must meet two conditions: - He or She does not have a job; - He or She is looking for one. This second condition is harder to assess. In the Past: Until the 1940s in the United States, and until more recently in most other countries, the only available source of data on unemployment was the number of people registered at unemployment offices, and so only those workers who were registered in unemployment offices were counted as unemployed. This system led to a poor measure of unemployment. The number of those who were looking for jobs and were registered at the unemployment office varied both across countries and across time. 2 Notes by DLA If our goal is to measure production and its change over time, we need to eliminate the effect of increasing prices on our measure of GDP. That’s why Real GDP is constructed as the sum of the quantities of final goods times constant (rather than current) prices. - Nominal GDP is also called dollar GDP or GDP in current dollars; - Real GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, or GDP in chained (2012) dollars, or GDP in 2012 dollars (if the year in which real GDP is set equal to nominal GDP is 2012, as is the case in the United States at this time). GDP: Level versus Growth Rate A country with twice the GDP of another country is eco- nomically twice as big as the other country. Very important is the level of real GDP per person, the ratio of real GDP to the population of the country. It gives us the average standard of living of the country. In assessing the performance of the economy from year to year, economists focus however on the rate of growth of real GDP, often called just GDP growth. - Periods of positive GDP growth are called expansions. - Periods of negative GDP growth are called recessions. 5 Notes by DLA Chapter 2: A Tour of the Book: THE INFLATION RATE Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) Inflation is a sustained rise in the general level of prices (the price level). The inflation rate is the rate at which the price level increases. [Symmetrically, deflation is a sustained decline in the price level. It corresponds to a negative inflation rate] The GDP Deflator If we see nominal GDP increase faster than real GDP, the difference must come from an increase in prices. This remark motivates the definition of the GDP deflator. The GDP deflator in year t, Pt, is defined as the ratio of nominal GDP to real GDP in year t: Pt = NominalGDPt = $Yt Real GDPt Yt The GDP deflator is called an index number. One advantage to defining the price level as the GDP deflator is that it implies a simple relation between nominal GDP, real GDP, and the GDP deflator. To see this, reorganize the previous equation to get: $Yt =PtYt Nominal GDP is equal to the GDP deflator times real GDP. Or, putting it in terms of rates of change: The rate of growth of nominal GDP is equal to the rate of inflation plus the rate of growth of real GDP. 6 SUMMARY We can think of GDP. he measure of aggregate output, in three equivalent ways: (1) GDP is the value of the final goads and services produced in the economy during a given period: (2) GDP is the sum of value added in the economy during a given period: and (3) GDP is the sum of incames in the economy during a given period. Nominal GDP is the sum of the quantities of final goods pro- dnced times their current prices. This implies that changes in nominal GDP reflect both changes in quantities and changes in prices. Real GDP Is a measure of output. Changes in real GDP reflect changes in quantities only. A person is classified as unemployed if he or she does not have a job and is looking for one. The unemployment rate is the ratio of the number of people unemployed to the num- ber of people in the labor force. The labor force Is the sum of! those employed and those unemployed. Fconamists care about nmemployment because of the human cost it represents. They also look at unemployment because il sends a signal about how efficiently the economy is using its resources. Iligh unemployment indicates that the country is not using its resources efficientiy. Inflation is a rise in the general level of prices—the price level, The inflation rate is the rate at which the price level increases. Macroeconomists look at two measures of the Notes by DLA price level, The first is the GDP deflator, which.is the average price of the goods produced in the economy. The second is the Consumer Price Index (CPI), which is the average price of goods consumed in the economy. Inflation leads to changes in income distribution, to distar- tions, and to increased uncertainty. There are two important relations among output, unem- ployment, and inflation. The first, called Okun's law, is a relation between output growth and the change in unem- ployment: Iligh output growth typically leads to a decrease in the unemployment rate. The secand, called the Phillips curve, is a relation between unemployment and inflation: A lower unemployment rate typically leads to a higher inflation rate. Macroeconomists distinguish between the short run (a few years), the medium run (a decade), and the long run (a few decades or more). They think of output as being deter- mined by demand in the short run. They think of output ‘as being determined by the level oî technology, the capital stock, and the labor force in the medium run. Finally, they think of output as being determined by factors like educa- tion, rescarch. saving, and the quality of government in thelongrun. Notes by DLA Chapter 3: The Goods Market: THE DEMAND FOR GOODS Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) Denote the total demand for goods by Z. Using the decomposition of GDP we can write Z as: Z C + I + G + X - IM This equation is an identity (which is why it is written using the symbol “ ” rather than an equals sign). It defines Z as the sum of consumption, plus investment, plus government spending, plus exports, minus imports. Consumption C Consumption decisions depend on many factors. But the main one is surely income, or, more precisely, disposable income (the income that remains once consumers have received transfers from the government and paid their taxes). - When their disposable income goes up, people buy more goods; - When it goes down, they buy fewer goods. C = C (Yd) (+). The positive sign below YD reflects the fact that when disposable income increases, so does consumption. Economists call such an equation, a behavioral equation to indicate that the equation captures some aspect of behavior (in this case, the behavior of consumers). It is often useful to be more specific about the form of the function. It is reasonable to assume that the relation between consumption and disposable income is given by the simpler relation: C = c0 + c1YD The relation between consumption and disposable income is then characterized by two parameters, c0 and c1: 10 Notes by DLA - The parameter c1 is called the propensity to consume. (It is also called the marginal propensity to consume. I will drop the word marginal for simplicity.); - The parameter c0 has a less literal and more frequently used interpretation. Changes in c0 reflect changes in consumption for a given level of disposable income. Increases in c0 reflect an increase in consumption given income, decreases in c0 a decrease. There are many reasons why people may decide to consume more or less, given their disposable income. Investment (I) Models have two types of variables. - Some variables depend on other variables in the model and are therefore explained within the model. Variables like these are called endogenous variables. This was the case for consumption given previously. - Other variables are not explained within the model but are instead taken as given. Variables like these are called exogenous variables. This is how we will treat investment here. We will take investment as given (exogenous) and write: I = I Government Spending (G) The third component of demand in our model is government spending, G. Together with taxes T, G describes fiscal policy (the choice of taxes and spending by the government. Just as we did for investment, we will take G and T as exogenous). Governments do not behave with the same regularity as consumers or firms, so there is no reliable rule we could write for G or T corresponding to the rule we wrote, for example, for consumption; 11 Notes by DLA Chapter 3: The Goods Market: THE DETERMINATION OF EQUILIBRIUM OUTPUT Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) Assuming that exports and imports are both equal to zero, the demand for goods is the sum of consumption, investment, and government spending: Z C+I+G The demand for goods Z depends on income Y, taxes T, investment I, and govern- ment spending G. Let’s now turn to equilibrium in the goods market, and the relation between production and demand. If firms hold inventories, then production need not be equal to demand. Y = Z This equation is called an equilibrium condition. 12 Notes by DLA Autonomous Spending: An autonomous expenditure describes the components of an economy's aggregate expenditure that are not impacted by that same economy's real level of income. This type of spending is considered automatic and necessary, whether occurring at the government level or the individual level. Fundamental spendings do not rely on disposable income Determination of Equilibrium using a Graph Demand depends on autonomous spending and on income (via its effect on consumption). The relation between demand and income is drawn as ZZ in the graph. The intercept with the vertical axis (the value of demand when income is equal to zero) equals autonomous spending. The slope of the line is the propensity to consume, c1: When income increases by 1, demand increases by c1; Under the restriction that c1 is positive but less than 1, the line is upward sloping but has a slope of less than 1. Equilibrium output, Y, therefore occurs at the intersection of the 45-degree line and the demand function. 15 Notes by DLA This is at point A - To the left of A, demand exceeds production; - To the right of A, production exceeds demand. Only at A are demand and production equal. - Suppose c0 increases by $1 billion. At the initial level of income (the level of disposable income associated with point A since T is unchanged in this example), consumers increase their consumption by $1 billion. [This makes use of the second interpretation of changes in c0. How much more consumers are willing to spend at a given level of income] if c0 is higher by $1 billion, demand is higher by $1 billion - Equilibrium output increases from Y to Y′. The increase in output, 1Y′ - Y2, which we can measure either on the horizontal or the vertical axis, is larger than the initial increase in consumption of $1 billion. This is the multiplier effect. [Look at the vertical axis. The distance between Y and Y′ on the vertical axis is larger than the distance between A and B—which is equal to $1 billion] Demand is $1 billion higher. To satisfy this higher level of demand, firms increase pro- duction by $1 billion. 16 Notes by DLA - This first-round increase in demand leads to an equal increase in production, or $1 billion, which is also shown by the distance AB. This first-round increase in production leads to an equal increase in income, shown by the distance BC, also equal to $1 billion. - The second-round increase in demand, shown by the distance CD, equals $1 billion (the increase in income in the first round) times the propensity to consume, c1— hence, $c1 billion. This second-round increase in demand leads to an equal increase in production, also shown by the distance CD, and thus an equal increase in income, shown by the distance DE. - The third-round increase in demand equals $c1 billion (the increase in income in the second round) times c1, the marginal propensity to consume; it is equal to $c1 * c1 = $c12 billion, and so on Following this logic, the total increase in production after, say, n + 1 rounds equals $1 billion times the sum: Such a sum is called a geometric series. 17 Notes by DLA 20 Notes by DLA EXTRA CHINA Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) China is perceived as one of the major economic powers in the world. The population of China is enormous, together with India it accounts for 37% of the world’s population. But its output, expressed in dollars by multiplying the number in yuan (the Chinese currency) by the dollar–yuan exchange rate, is still only $13.5 trillion, about 60% of that of the United States. Output per person is about $9,700, only roughly 15% of output per person in the United States. So why is so much attention paid to China? There are two main reasons: - The reason is that many goods are cheaper in poor countries. For example, the average price of a restaurant meal in New York City is about $40; the average price of a restaurant meal in Beijing is about 50 yuan, or, at the current exchange rate, about $7.50. If we want to compare standards of living, we must correct for these differences; measures that do so are called PPP (for purchasing power parity) measures. Using such a measure, China’s output is estimated to be $25.3 trillion, thus higher than that of the United States. - Second, and more importantly, China has been growing very rapidly for more than three decades. [One of the strategies followed by the Chinese government has been to encourage foreign firms to relocate and produce in China. As foreign firms are typically much more productive than Chinese firms, this has increased productivity and output] 21 Notes by DLA Focus: Real GDP, Technological Progress, and the Price of Computers Book Reference: MACROECONOMICS by Olivier Blanchard (Eighth Edition) A tough problem in calculating real GDP is how to deal with changes in quality of existing goods. One of the most difficult cases is computers. It would clearly be absurd to assume that a personal computer in 2019 is the same good as a personal computer produced, say, 20 years ago: The 2019 version can clearly do much more than the 1999 version. But how much more? How do we measure it? How do we take into account the improvements in internal speed, the size of the RAM (random access memory) or of the hard disk, faster access to the internet, and so on? The approach used by economists to adjust for these improvements is to look at the market for computers and how it values computers with different characteristics in a given year. This approach, which treats goods as providing a col- lection of characteristics—for computers, speed, memory, and so on—each with an implicit price, is called hedonic pricing (“hedone” means “pleasure” in Greek). What matters in assessing the value of a good is how much utility (“pleasure”) it provides. 22