Introduction and Measurement Issues - Weeblycanhuihong.weebly.com/uploads/8/8/3/5/8835663/lec1_i_.pdf · Introduction and Measurement Issues Econ 3102 ... Chapter 1 - opicsT What

Introduction and Measurement IssuesEcon 3102

Canhui Hong

University of Minnesota

Fall 2015

Canhui Hong (UofM) Introduction and Measurement Issues Fall 2015 1 / 28

Chapter 1 - Topics

What is Macroeconomics?

GDP, economic growth, business cycles

Macroeconomic models

Understanding recent and current macroeconomics events


What is Macroeconomics?

Macroeconomics is the study of the behavior of large collections of

economic agents

I aggregate behavior of consumers and �rmsI behavior of governmentsI overall level of economic activity in individual countriesI e�ects of �scal and monetary policy

Important phenomena:

I long-run growth: increase in a nation's productive capacity and averagestandard of living that occurs over a long period of time

I business cycles: short-run ups and downs in aggregate economic activity


Gross Domestic Product, Economic Growht and BusinessCycles

Gross Domestic Product (GDP): quantity of goods and services

produced within a country's borders over a particular period of time

Time series of GDP can be separated into trend and business cycle

components


Per Capita Real GDP (in 2005 Dollars)

Figure: Per Capita Real GDP (2005 dollars)

Sustained growth in per capita GDP during the period 1900 - 2011I 1900: $ 4,793 (2005 dollars)I 2011: $ 42,733 (2005 dollars)


Per Capita Real GDP (in 2005 Dollars)

Unusual business cycle event in US economic history: Great

Depression and WWII

I 1929: $ 8,016I 1933: $ 5,695I 1944: $ 14,693I decline of about 29% from 1929 to 1933 and increase of 158% from1933 to 1944

Some fundamental macroeconomic questions raised:

I What causes sustained growth?I Could economic growth continue inde�nitely or is there some limit togrowth?

I Is there anything that governments can or should do to alter the rate ofeconomic growth?

I What causes business cycles?I Could the dramatic decreases and increases in economic growth thatoccurred during the Great Depression and WWII be repeated?

I Should governments act to smooth business cycles?


Real GDP Per Capita - Natural Logarithm

Figure: Natural Logarithm of Per Capita Real GDP

Growth rate: gt =yt−yt−1yt−1

= ytyt−1−1

Approximating: ln(yt)− ln(yt−1)' gtI lnyt − lnyt−1 is the slope of the graph of the natural logarithm of ytbetween periods t-1 and t, the growth rate is a good approximation ofthe slope


Trend and Business Cycle

Figure: Natural Logarithm of Per Capita Real GDP and Trend

Time series componentsI growth or trendI business cycle (deviation from trend)


Business Cycle

Figure: Percentage Deviations from Trend in Per Capita Real GDP

Business Cycles: percentage deviation from trend


Macroeconomic Models

It is not possible to run macroeconomic experiments

A macroeconomic model captures the essential features of the world

needed to analyze a particular macroeconomic problem

It should be simple, but they need not be realistic

Approach: build up macroeconomic analysis from microeconomic

principles

Basic structure of a macroeconomic model:

I consumers and �rmsI set of goods that consumers consumeI consumer's preferencesI production technologyI resources available


Recent and Current Macroeconomic Events

Aggregate productivity

Unemployment and vacancies

Taxes, government spending and government de�cit

In�ation

Interest rates

Business Cycles in the US

Credit markets and the �nancial crisis

Current account surplus


Aggregate Productivity

Figure: Natural Logarithm of Average Productivity

Average Labor Productivity: YN

Log of average labor productivity: slope of graph denotes the growth

rateCanhui Hong (UofM) Introduction and Measurement Issues Fall 2015 12 / 28

Unemployment Rate

Figure: Unemployment Rate for the US

Unemployment rate: percentage of people in the labor force who are

actively searching for work

A�ected by: productivity, generosity of unemployment insurance, ...


Unemployment: Beveridge Curve

Figure: Beveridge Curve

Negative relation between vacancy rate and unemployment rate

Stable from 2000 to 2007. It appears to have shifted over the period

January 2008 to March 2012Canhui Hong (UofM) Introduction and Measurement Issues Fall 2015 14 / 28

Taxes, Gov Spending and Gov De�cit

Figure: Total Taxes and Gov Spending

Upward trend in both taxes and spending: increase in the size of

government in the US relative to the aggregate economy


Total Government Surplus

Figure: Total Gov Surplus in the US as Percentage of GDP

Except for a brief period in the late 1990s, gov surplus has been

negative since 1980


In�ation and Money Growth Rate

Figure: In�ation Rate and Money Growth Rate

Money growth rate and in�ation rate move together over long periods

of time.

However, in the short run, the relationship between the two is very

loose.Canhui Hong (UofM) Introduction and Measurement Issues Fall 2015 17 / 28

Nominal Interest Rate and In�ation Rate

Figure: Nominal Interest Rate and In�ation Rate

Nominal interest rate and in�ation rate are positively related.


Real Interest Rate

Figure: Real Interest Rate

real interest rate = short term nominal interest rate minus actual rate

of in�ation (or the expected rate of in�ation)


Business Cycle

Figure: Percentage Deviation from Trend in Real GDP

1982-2008 aggregate economic �uctuations became less volatile

relative to 1947-1982 period

1982-2008 period is called the Great ModerationCanhui Hong (UofM) Introduction and Measurement Issues Fall 2015 20 / 28

Credit Markets and Financial Crisis

Figure: Interest Rate Spread

Interest Rate Spread: gap between interest rate on AAA and BAA

corporate debt

Increases are observed during recessionsCanhui Hong (UofM) Introduction and Measurement Issues Fall 2015 21 / 28

Credit Markets and Financial Crisis

Figure: Relative Price of Housing

2006-2011: drop of 28% in the relative housing price

Drop in the value of collateralizable wealth


Current Account Surplus

Figure: Exports and Imports of Goods and Services as Percentages of GDP

Increase in imports and exports after WWII (general in world trade)

But, signi�cant decrease during the 2008-2009 recession


Current Account Surplus

Figure: Current Account Surplus

1960-1985, positive most of the time

After 1985, negative most of the time


Appendix - First Order Taylor Approximation

Let f : R→ R be a continous funciton. The �rst order Taylor

approximation around a point x0 is:

f (x)' f (x0)+ f ′(x0)(x−x0)

Let f (x) = ln(1+ x) and x0 = 0. Notice that:

f (x0) = ln(1+0) = ln(1) = 0

f ′(x) =1

1+ x⇒ f ′(x0) =

1

1+0= 1

⇒ f (x)' 0+1(x−0) = x

Now, let x = gt . If gt is a small growth rate, we have:

ln(1+gt)' gt


Appendix - First Order Taylor Approximation

Real per capita GDP growth rate is de�ned as:

gt =ytyt−1

−1⇒ 1+gt =ytyt−1

Consider the property of logarithms:

ln

(x

y

)= ln(x)− ln(y)

Applying logarithm and putting things together:

ln(1+gt) = ln(yt)− ln(yt−1)

⇒ gt ' ln(yt)− ln(yt−1)


Appendix: US Real GDP

Graph taken from Prof. Tim Kehoe's website.


Appendix

The graphs were taken from Williamson's book slides. The graphs are also

in Chapter 1.


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Introduction and Measurement Issues - Weeblycanhuihong.weebly.com/uploads/8/8/3/5/8835663/lec1_i_.pdf · Introduction and Measurement Issues Econ 3102 ... Chapter 1 - opicsT What