Introduction to Macroeconomics. Sebastian Koch Lauder Business School Summer term 2016

Transcription

1 Introduction to Macroeconomics Sebastian Koch Lauder Business School Summer term 2016

2 Course Outline 2

3 LBS Intranet CIS Access to course description via LBS Intranet: Check the course webpage regularly! Check you s regularly! 3

4 Grading To pass the course you have to obtain at least 60 points. You can achieve a max of 100 Points: Exercise / assignments / quizzes : 25 Points Midterm exam: 25 Points Final exam: 50 Points Total: 100 Points Pimp your grade: Bonus points are awarded for class participation They help improving your grade: e.g. 58,4% change to 60% (improve to grade 4) e.g % change to 91% (improve to grade 1) Note: by default you are requested to read necessary chapters in advance of the respective lecture to facilitate your learning progress. 4

5 Absence A maximum of 6 contact hours absence allowed! More than 6 contact hours absent promts a retake exam. 5

6 Questions, help, remarks? Please write to Please specify the subject field: macro1 - [and then your concern] 6

7 Textbook Economics N.Gregory Mankiw Mark Taylor Second Edition 7

8 Course Description Updated Chapters refer to book of Mankiw & Taylor Session 1: Ch23 Measuring GDP Session 2: Ch24 Measuring the cost of living Session 3: Ch25 Production & Growth Session 4: Ch28 Unemployment & the natural Rate Session 5: Review and completion of above sessions Session 6: Midterm Exam: APRIL 11 + Ch26 Saving, Investment, financial system Session 7: Ch29 The Monetary System Session 8: Ch30 Money Growth and Inflation Session 9: Ch34 AS-AD model Session 10: Ch35 Monetary and Fiscal Policy Session 11: Ch36 Trade-off between Inflation and Unemployment Session 12: Review Session 13: Final Exam: JUNE 27 8

9 Introduction: GDP Chapter 23 9

10 Have you ever heard of the term GDP? I hope so!

11 GDP of different countries (highest and lowest 30) Millions, billion, or trillions? Source: The World Bank

12 GDP growth of different countries Source: The World Bank

13 Who generates the data on GDP? Here the latest release from Eurostat

14 Who generates the data on GDP? Here the latest release from Eurostat

15 Remember? Our simple economy For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

16 Three approaches one GDP Understanding the framework pdf? blob=publicationfile

17 Three approaches to measuring GDP (1) The expenditure approach is the sum of all final expenditures within an economy. In equation form, this is as follows: GDP(E) = household final consumption expenditure + final consumption expenditure of (NPISHs) (non-profit institutions serving households) + general government final consumption expenditure + gross capital formation + exports imports Final consumption expenditure is expenditure on goods and services purchased for the last time and not to be consumed or transformed in a production process. Gross capital formation comprises investment in fixed assets, changes in inventories and net acquisition of valuables. Exports and imports relate to trade in goods and services with the rest of the world and do not include other cross-border financial flows Sebastian Koch 17

18 Three approaches to measuring GDP (2) The production approach is the sum of all production activity within an economy. In the form of an equation, this is described by: GDP(P) = output intermediate consumption + taxes on products subsidies on products Output is all the goods and services produced, whilst intermediate consumption comprises all the goods and services consumed or transformed in a production process. The taxes and subsidies are included in order to put all three approaches on a consistent valuation basis. (at market prices not producer prices) Sebastian Koch 18

19 Three approaches to measuring GDP (3) The income approach is the sum of all factor incomes within an economy. This could also be described as the sum of incomes directly generated by productive activity. In equation form: GDP(I) = compensation of employees + gross operating surplus + mixed income + taxes on production and products subsidies on production and products Compensation of employees is all income from employment, including employers pension and social contributions. Operating surplus is primarily made up of trading profits and rental income, whilst mixed income is the income of the self-employed. Sebastian Koch 19

20 Measuring GDP Chapter 23 20

21 The measurement of GDP Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. 21

22 The definition of GDP GDP is the Market Value... Output is valued at market prices.... Of All Final... It records only the value of final goods, not intermediate goods (the value is counted only once).... Goods and Services... It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, house cleaning, doctor visits).... Produced... It includes goods and services currently produced, not transactions involving goods produced in the past.... Within a Country... It measures the value of production within the geographic confines of a country.... In a Given Period of Time. It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months). 22

23 The components of GDP According to the expenditure approach, GDP (Y) is the sum of the following: Consumption (C) (this includes NPISHs) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX 23

24 The components of GDP Consumption (C): The spending by households on goods and services. Goods include household spending on durable goods, such as cars and appliances like washing machines and fridges, and non-durable goods, such as food and clothing. Services include such intangible items as haircuts and medical care. Investment (I): Investment is the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories and structures. Investment in structures includes expenditure on new housing. By convention, the purchase of a new house is the one form of household spending categorized as investment rather than consumption. The treatment of inventory accumulation is noteworthy. When Aston Martin produces a car and, instead of selling it, adds it to its inventory, Aston Martin is assumed to have purchased the car for itself. That is, the national income accountants treat the car as part of Aston Martin s investment spending. 24

25 The components of GDP Government Purchases (G): Government purchases include spending on goods and services by local and national governments. It includes the salaries of government workers and spending on public works. It does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firm s sale to a buyer in another country, such as the sale of Aston Martin cars to customers in the USA, increases UK net exports. 25

26 The components of GDP over time in Austria Institute for Advanced Studies (IHS) Net Exports BRUTTOINVESTITIONEN ÖFFENTLICHER KONSUM PRIVATER KONSUM

27 The components in % of GDP across Europe Eurostat, % 80% 60% 40% 20% 0% -20% Kosovo Montenegro Serbia Greece Cyprus Macedonia Portugal United Kingdom Bulgaria Lithuania Latvia Romania Italy Poland Croatia Spain EU28 Slovakia EA19 France Finland Germany Switzerland Malta Austria Slovenia Iceland Belgium Estonia Hungary Czech Republic Denmark Sweden Netherlands Ireland Norway Luxembourg Net Exports Final consumption expenditure of general government Gross fixed capital formation Household and NPISH final consumption expenditure 27

28 Real versus nominal GDP 28

29 Assume you need to find out about GDP There is a problem: There is a problem: Imagine you have to download data from Eurostat. There are several types of GDP to choose from: QUESTION: WHICH ONE WOULD YOU SELECT? 29

30 Excursus: The present value - measuring the time value of money (ch.27) Question 1: Imagine that someone offered to give you 100 today or 100 in ten years. Which would you choose? Answer: Getting 100 today is better, because you can always deposit the money in a bank, still have it in ten years, and earn interest on the 100 along the way. The lesson: money today is more valuable than the same amount of money in the future. Question 2: Now consider a harder question: imagine that someone offered you 100 today or 200 in ten years. Which would you choose? Answer: To answer this question, you need some way to compare sums of money from different points in time. Economists do this with a concept called present value. The present value of any future sum of money is the amount today that would be needed, at current interest rates, to produce that future sum. 30

31 Excursus: The present value: measuring the time value of money (ch.27) 31

32 Most important differentiation: Real vs. nominal GDP An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator. Nominal GDP values the production of goods and services at current prices. (= Eurostat unit: Current prices, million euro) Real GDP values the production of goods and services at constant prices. (= Eurostat unit: Chain linked volumes (2010), million euro ) EXPERIMENT: DOWNLOAD DATA FROM EUROSTAT AND CALCULATE GDP GROWTH RATES FROM NOMINAL DATA AND FROM REAL DATA. WHAT IS THE DIFFERENCE? 32

33 Real VS. Nominal GDP 33

34 The GDP Deflator The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. Nominal GDP GDP deflator = Real GDP 100 NOTE: It is something similar to what we usually understand as inflation, just that the measure of inflation corresponds only to households and the GDP deflator corresponds to all components, not only consumption 34

35 GDP and economic well-being 35

36 GDP and economic well-being GDP is the best single measure of the economic well-being of a society. GDP per person tells us the mean income and expenditure of the people in the economy. Higher GDP per person indicates a higher standard of living. However, it must be clear that GDP is not a perfect measure of the happiness or quality of life. 36

37 GDP per capita, PPP PPP= Purchasing power parity LOOK AT THE SCALE!!! 160, ,000 The richest 30 nations by GDP per capita, PPP (current international $) Source: World Bank 120, ,000 80,000 60,000 40,000 20,

38 GDP per capita, PPP PPP= Purchasing power parity LOOK AT THE SCALE!!! 2,500 The poorest 30 nations by GDP per capita, PPP (current international $) Source: World Bank 2,000 1,500 1, And then we still do not know anything about the distribution of GDP within the countries! 38

39 GDP and economic well-being Some things that contribute to well-being are not included in GDP, such as The value of leisure. The value of a clean environment. The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work. 39

40 Gross national income vs life expectancy at birth GNI per capita, PPP (current international $): GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Source: World Bank Indicators 40

41 Gross national income vs adult literacy rate Source: World Bank Indicators 41

42 GDP and economic well-being Alternative Concepts OECD Your Better Life Index 11 subindicators combined (Housing, Income, Jobs, Community, Education, Environment, Governance, Health, Life Satisfaction, Safety) UNDP Human Development Index 4 subindicators combined (life expectancy at birth, mean years of schooling, expected years of schooling, gross national income per capita) 42