01 Intro Macro

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Introduction to Macroeconomics

Intermediate Macroeconomic Theory

Macroeconomic Analysis

University of North Texas

ECON 3560 / 5040 Introduction to Macroeconomics
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Outline

1 What Macroeconomists Study

2 The Data of Macroeconomics

Measuring the Value of Aggregate Economic ActivityMeasuring the Cost of Living

Measuring Joblessness

3 How Economists Think

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Outline






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What Macroeconomists Study

Macroeconomics, the study of the economy as a whole,attempts to answer the following issues:

1 Economic growth

2 Inflation

3 Unemployment

Microeconomics: the study of the economy in the small

(individual firm, industry, or consumer)


Wh M i S d
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1 Economic growth

2 Inflation

3 Unemployment




Wh t M i t St d
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1 Economic growth

2 Inflation

3 Unemployment




Wh t M i t St d
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1 Economic growth

2 Inflation

3 Unemployment




Wh t M i t St d
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1 Economic growth

2 Inflation

3 Unemployment




Outline
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Outline







The Data of Macroeconomics
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1 Economic growth rate: g = % value of aggregate economic

activity (Y)

2 Inflation rate: = % cost of living (P)

3 Unemployment rate: u = # of unemployedlabor force

100


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1 Economic growth rate: g = % value of aggregate economic

activity (Y)

2 Inflation rate: = % cost of living (P)

3 Unemployment rate: u = # of unemployedlabor force

100

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Measuring the Value of Aggregate Economic Activity


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Gross Domestic Product (GDP)

1 Sum ofmoney (market)values of

2 allfinalgoods and services

3 producedwithina country

4 in a given period of time(usually a calendar year)


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Measuring the Value of Aggregate Economic ActivityNominal GDP versus Real GDP

Nominal GDP (P Y): the value of goods and servicesmeasured atcurrentprices

Changes in nominal GDP can be due to

1 changes in prices

2 changes in quantities of output produced

Not a good measure of economic well-being

Real GDP (Y): the value of goods and services measured at

constantpricesChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-yearprices


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1 changes in prices





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1 changes in prices






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g gg g yNominal GDP versus Real GDP



1 changes in prices






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1 changes in prices








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1 changes in prices








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1 changes in prices






Measuring the Value of Aggregate Economic ActivityN i l GDP R l GDP
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The Bureau of Economic Analysis (http://www.bea.doc.gov)

U.S. Real & Nominal GDP, 1967-2001

0

1,0002,000

3,000

4,000

5,000

6,000

7,0008,000

9,000

10,000

11,000

1965 1970 1975 1980 1985 1990 1995 2000

(billionso

fU

.S

.dollars)

NGDP (billions of $) RGDP (billions of 1996 $)


Measuring the Value of Aggregate Economic ActivityRGDP
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g gg g yRGDP per person

Real GDP per person (y = YN

): income of the average person in

the economy

U.S. real GDP per person in 1996 dollars

Stylized Facts ECON 3560 / 5040 Introduction to Macroeconomics

Measuring the Value of Aggregate Economic ActivityRGDP per person
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RGDP per person



the economy


Stylized Facts

1 Long-run upward trend

2 Short-run fluctuations


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RGDP per person



the economy


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RGDP per person



the economy


Stylized Facts




Measuring the Cost of Living


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1 Consumer Price Index (CPI)

2 Producer Price Index (PPI)

3 GDP Deflator




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3 GDP Deflator




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3 GDP Deflator




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3 GDP Deflator


Measuring the Cost of LivingCPI
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C

CPI is measured by pricing the items on a list representative of

a typicalurbanhousehold budget

CPI is calculated and announced each month by the Bureau of

Labor Statistics (BLS, http://www.bls.gov)

How the BLS constructs the CPI

most price indexes, like CPI, are computed by pricing a

standard market basket of goods in subsequent periods


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a typicalurbanhousehold budgetCPI is calculated and announced each month by the Bureau of



1

Survey consumers to determine composition of the typicalconsumers basket of goods

2 Every month, collect data on prices of all items in the basket;compute cost of basket

3 CPI in any month equals

cost of basket in that month

cost of basket in base period 100


standard market basket of goods in subsequentperiods


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The composition of the U.S. CPIs basket

16.2%

40.0%

4.5%

17.6%5.8% 5.9%

2.8%

2.5%

4.8%

Food and bev.

Housing

Apparel

Transportation

Medical care

Recreation

Education

Communication

Other goods andservices


Measuring the Cost of LivingCPI Inflation
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Inflation rate ( = %P): the percentage change in the average

level of prices from the year before


Measuring the Cost of LivingDeflating
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Deflating: the process of finding the real value of some

monetary magnitude by dividing by some appropriate price

index

A price index (P) can be used to1 measure inflation

2 deflate nominal values to adjust for inflation

real wage in 2000 =

money wage in 2000

CPI of 2000

100


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index



real wage in 2000 =

money wage in 2000

CPI of 2000

100


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index



real wage in 2000 =

money wage in 2000

CPI of 2000

100


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index



real wage in 2000 =

money wage in 2000

CPI of 2000

100


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index



real wage in 2000 =

money wage in 2000

CPI of 2000

100


Measuring the Cost of LivingGDP Deflator
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GDP Deflator: price index used to deflate GDP

real GDP = nominal GDP

GDP deflator 100

The GDP deflator includes the price of airplanes, government

service, other goods purchased by business

Different price indexes, such as the CPI and the GDP deflator,

will show different measures of inflation because they use

different market basket

However, the discrepancy is usually minor


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GDP deflator 100








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GDP deflator 100








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GDP deflator 100








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GDP deflator 100








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GDP deflator 100







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Measuring JoblessnessUnemployment Rate


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Unemployment: the macroeconomic problem that affects

people most directly and severely

How well an economy uses its resources

Unemployment rate is calculated and announced each month

by the BLS (http://www.bls.gov)

u =# of unemployed

labor force

100


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u =# of unemployed

labor force

100


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u =# of unemployed

labor force

100


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u =# of unemployed

labor force

100


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U.S. unemployment rate


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Stylized Facts

1 There is always some unemployment (even in the LR)



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Stylized Facts




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Stylized Facts




Okuns Law
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Employed workers help produce GDP, while unemployed

workers do not

So one would expect a negative relationship betweenunemployment and real GDP

This relationship is clear in the data


Okuns Law
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workers do not




Okuns Law
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workers do not




Okuns Law
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workers do not

So one would expect a negative relationship between

unemployment and real GDP



Okuns Law
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1951

1984

1999

2000

1993

1982

1975

Change in

unemployment rate

10

-3 -2 -1 0 1 2 43

8

6

4

2

0

-2

Percentage change

in real GDP

Okuns Law states

that a one-percent

decrease in

unemployment is

associated with two

percentage points

of additional growth

in real GDP

Okuns Law states

that a one-percent

decrease inunemployment is

associated with two

percentage points

of additional growth

in real GDP


Outline
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Measuring the Cost of LivingMeasuring Joblessness



How Economists Think
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Economists use model to illustrates the essence of the real

economy and to help explaineconomic variables

Economic variables

1 Endogenousvariables: those that the model explains

2 Exogenousvariables: those that come from outside the model

An economic model can show how the exogenous variablesaffect the endogenous variables

1 The model of supply and demand

2 The circular flow of dollars through the economy




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Economic variables







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Economic variables







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Economic variables







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Economic variables






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01 Intro Macro