Macroeconomics - Licence 1 Economie Gestion mention européenne

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1 Macroeconomics - Licence 1 Economie Gestion mention européenne 1 1 Remi.Bazillier@univ-orleans.fr Université d Orléans

2 General outline of the course 1 Introduction: economic aggregates 2 Consumption 3 Investment and public spending 4 Keynesian macroeconomic equilibrium (short run): IS curve 5 Keynesian macroeconomic equilibrium (short run): LM curve / Money and financing of the economy 6 Macroeconomic policies 7 Keynesian macroeconomic equilibrium (medium run): flexible prices and trade-off inflation - unemployment

3 Textbooks and websites In French: Macroéconomie (Blanchard et Cohen, Editions Pearson) Quizz, Glossaries, Flashcards: (Pearson website) In English Macroeconomics (Blanchard, Editions Pearson) Website of the course: and Celene

4 Organization of the course 4 hours a week You need to prepare exercices at home 1 mid-semester exam 50% / 1 final exam (Partiel) 50 %

5 Plan 1 I. Introduction to Macroeconomics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics 2

6 I. Introduction to Macroeconomics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics Goal of economics: study how scarce resources are allocated in order to fulfill human needs Differences between microeconomics and macroeconomics Microeconomics: study individual behaviors on specific markets Macroeconomics: study global economy / Analyze evolutions of national income / unemployment rate / Inflation Macroeconomic issues: How can we foster economic growth? Why and how moderate inflation? How reducing unemployment? Inequalities?

7 A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics A. Goals of macroeconomics Determine variables explaining individuals behavior Study relationships between variables in order to identify stable relationships or laws between these variables Study how an equilibrium between different economic aggregates can appear Analyze main economic unbalances between aggregates and explain these Study economic policies and tools to use in order to reach common goals decided by the society

8 A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics B. Methods in macroeconomics 1 Positive and Normative approaches 2 Hypothesis, deduction and modelling

9 A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics 1. Positive and Normative approaches Positive approach: describe, analyze and explain facts and economic behaviors. Can be used to explain and forecast Normative approach: define what it should be. Can be used to define an optimal economic policy

10 A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics 2. Hypothesis, deduction and modelling Economics is a social science Theoretical representation of the reality Then evaluation of the explanatory power of this theoretical representation The theoretical representation: the model Formalization Studied objects are quantitative Identification of causality links and quantification

11 Modelling I. Introduction to Macroeconomics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics Variables: Aggregates, indexes, prices... Flows and stocks Flow: total value of transactions (sales or purchases, incomes or expenditures) during an accounting period. Changes of stock over time. Stock: the value of an asset at a balance date (or point in time). Some entity that is accumulated over time by inflows and/or depleted by outflows. Stocks can only be changed via flows. Stock variation between t and t+1 = flow in t

12 Modelling I. Introduction to Macroeconomics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics Exogeneous variables Causal relations Endogeneous variables Example: We may know deflation (fall of prices) in France because of consumption s fall explained by economic recession (fall of GDP) π = f (g consumption ) g consumption = h(g y ) Endogeneous variables: π,g consumption Exogeneous variables: g y

13 C. Some statistics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics

14 C. Some Statistics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics Source: INSEE (2014)

15 C. Some Statistics A. Goals of macroeconomics B. Methods in macroeconomics C. Some statistics Unemployment rate Source: INSEE (2013)

16 1 Economic agents firms, households, government, financial firms and rest of the World (foreign) 2 Markets Markets of goods and services, labour market, capital market

17 1. Economic agents Firms: production of goods and services Households: supply labor (production factor) to firms and get an income used to consume and save Government (public administration, State, Social security, local authorities) non-profit service providers Financial firms: financial intermediate and insurance Rest of the World: all economic agents located outside the country

18 2. Markets I. Introduction to Macroeconomics Markets of goods and services: determine national production, consumption goods demand and level of prices Labour market: determine wages, employment level and unemployment Financial markets: determine interest rates and prices of monetary and financial assets Currency markets: determine currency rate

19 Which equilibrium Short-term equilibrium: Labour market is exogeneous Equilibrium on markets of goods and services and on financial markets Prices are fixed Simple version of IS/LM model Mid-term equilibrium: Interactions between 3 markets: goods and services, financial market and labour markets Flexible prices Long-term equilibrium: Economic growth Open and closed economy: relation or not with the rest of the World. Here: study of a closed economy (no currency market)

20 I. Introduction to Macroeconomics Gross Domestic Product (GDP), value-added and income 1 GDP is the value (in, $...) of final goods and services produced in an economy during a specific period (Production approach) 2 GDP is the sum of created added-values during a specific period (Value-added approach) 3 GDP is the sum of income distributed in the economy during a specific period (income approach)

21 Differences between GDP (gross domestic product) and GNI (gross national Income) The difference is that GDP defines its scope according to location, while GNP defines its scope according to ownership. GDP is product produced within a country s borders; GNP is product produced by enterprises owned by a country s citizens.

22 The production approach Definition GDP is the value (in e, $...) of final goods and services produced in an economy during a specific period An example: two firms Firm 1 produces steel. She sells e100 to firm 2 which produces cars. Firm 1 use workers and machines. Workers are paid 80 e. Profit is e20. Firm 2 buys steel (e100) and use it to produce cars. Cars are sold for e210. Workers are paid e70. Profit is e40. GDP: 310? (sum of productions) or 210? (value of final products?)

23 The production approach (2) GDP is 210 Steel is an intermediate good, used in the production of the final good (cars) Intermediate goods are not included in the calculation of GDP.

24 The added-value approach Definition GDP is the sum of added-values created in the economy during a specific period Added-value = Final production - intermediate consumptions AV 1 = 100 AV 2 = GDP = 2 i=1 AV = = 210

25 The income approach Definition GDP is the sum of incomes distributed in the economy during a specific period Income of a firm: One part is taxed (indirect taxes) One other part is used to pay workers The last part is profit Added value: sum of indirect taxes, capital income and labour income

26 Income approach (2) In our example: No indirect taxes Labour income: 70+80=150 Capital income: 20+40=60 GDP = =210

27 Share of labour income in France Source: Cotis (2009)

28 Real and nominal GDP French GDP in 2005: e1710 billions French GDP in 1960: e46 billions Has the French production been multiplied by 37 between 1960 and 2005? Answer is no Difference between real and nominal GDP

29 Real and nominal GDP Nominal GDP: Quantities t prices t Real GDP: Prices are constant. Quantitiest prices constant An example: Year Number of cars Price of cars Nominal GDP

30 Real and nominal GDP Real GDP (prices 2005): In 2004: = In 2005: = (=nominal GDP) in 2006: = Growth Nominal GDP Real GDP % +20% % +8% Difference between nominal GDP growth and real GDP growth is inflation.

31 Difference between nominal and real GDP in France Real GDP: constant prices 2005

32 GDP growth I. Introduction to Macroeconomics ŷ t 1,t = Y t Y t 1 Y t 1 (1) Positive growth rate: growth Negative growth rate: recession (2 semesters of negative growth)

33 The composition of French GDP, 2013

34 GDP composition Consumption (C): Goods and services purchased by households (foods, holidays, cars..) Investment (I): gross fixed capital formation. Two components: investments by firms (machines, factories...) and investments by households (Apartments, house) difference between intermediate goods and investment Government spendings: purchase of goods and services by the government (local and national authorities). Services: provided by public servants. Value of services (free or cheap for citizens) = cost. Transfers and interests: not included here. if included: almost 50% of GDP Investment in stock (I s ): Stock variation. If Production > sells stocks If Production < sells stocks

35 Trade balance I. Introduction to Macroeconomics Imports (M): purchase of foreign goods and services by households, firms and government Exports (X): purchase by foreigners of goods and services produced in the country Difference (X-M): Trade balance or net exports (trade surplus or trade deficit)

36 Fundamental GDP decomposition Y = C + I + G + X M (2)

37 Unemployment rate Unemployment rate: ratio unemployed over active population u = U L (3) Active population: sum of employed workers and unemployed L = N + U (4)

38 Unemployment rate How to measure unemployment rate: Number of unemployed registered to the unemployment office (Pole emploi in France) but problems Large surveys: Enquête emploi in France (INSEE) or Current population survey in the US Only unemployed looking for a job are considered as unemployed. The others: not included in active population Problem: when unemployed rates are high, some unemployed give up looking for a job. High unemployment rate = low participation rate.

39 Unemployment rate and growth Okun law: high growth fall of unemployment rate / low growth increase of unemployment rate relatively intuitive: if high growth rate, increase of production, rise of employment In the nineties: some economists consider unemployment rate in the US was too low claim for a more restrictive monetary policy Unemployment rate in Europe too high because of a too restrictive monetary policy

40 Evolution of unemployment and growth rate in France,

41 Inflation rate I. Introduction to Macroeconomics Inflation: increase of the prices general level. Two measures of prices level: GDP deflator and consumption price index GDP deflator: If nominal GDP increases but real GDP remains constant: increase of nominal GDP = increase of prices P t = nominal GDP t real GDP t (5) nominal GDP = P t Y t (6)

42 Inflation rate I. Introduction to Macroeconomics Consumption price index (CPI): Consumers are concerned by the price of products they buy, not the general level of prices Differences: Some goods are not sold to consumers but to firms, foreigners or governments Some consumed goods are not produced in the country (imports) CPI gives a better approximation of the cost of life, based on a representative basket of goods Small differences with GDP deflator (less than 1%) except for specific period (1974 / )

43 Inflation rate measured by CPI and GDP deflator Source: OECD, economic perspectives, 2006

44 Inflation and unemployment Is there a relation between inflation and the output or the unemployment? Very often: a negative correlation between the variation of inflation rate and unemployment rate When unemployment rate is low, inflation increases But important exception: stagflation in the 70 s (high inflation, low growth) This negative correlation is called Phillips curve

45 Inflation rate evolution and unemployment, France, Source: OECD, economic perspectives, 2006