Dr Nicola Pavoni Office: DH 225 n'pavoniucl'ac'uk www'ucl'ac'ukuctpnpa

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Dr Nicola PavoniOffice DH 225n.pavoni_at_ucl.ac.uk
www.ucl.ac.ukuctpnpa
B01 Macroeconomics
MacroeconomicsOliver Blanchard (MIT)Third (or
fourth) Edition, Prentice Hall
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Introduction--The Issues and Approach of
Macroeconomics

• Three time-frames of macroanalysis
• Short-run
• Medium-run
• Long-run

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Introduction
The Issues and Approach of Macroeconomics

• Central Variables of Macroeconomics
• Output, Y
• Real gross domestic product (GDP)
• Measures total income of an economy
• Unemployment, u
• Measures the number of people looking for a job,
  but who are without a job
• Inflation, p
• The rate of change of the general price level

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Aggregate Output
Defining GDP Three Approaches

• 1) Final good
• 2) Value added
• 3) Income

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Aggregate Output
Aggregate Output (national income and product
accounts, or NIPA)

• Gross Domestic Product (GDP) Y
• The value of the final goods and services
  produced in an economy during a given period

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Aggregate Output
Nominal Real GDP

• Recall
• GDP the value of final goods and services
  produced
• Value is the price of the final good

• Therefore,
• GDP Price x Quantity of final goods produced

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Aggregate Output
Calculating Real GDP

• Real GDP value of final goods in constant
  prices
• PtYtNominal GDPt(Todays )
  PtcarsQtcarsPtban. Qtbananas
• Yt Real GDPt (base year )
  P0carsQtcarsP0ban. Qtbananas
• P0 base year (1980 for instance)

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Aggregate Output
Real GDP in Units
Production of cars

• 1991 -- 10,000
• 1992 -- 12,000 (20 increase)
• 1993 -- 13,000 (8.33 increase)

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Aggregate Output
Real GDP in 1992 s
Car Production x 1992 Prices

• 1991 -- 10 x 12,000 120,000
• 1992 -- 12 x 12,000 144,000 (20 increase)
• 1993 -- 13 x 12,000 156,000 (8 increase)

Note Nominal 1992 GDP Real 1992 GDP
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Nominal and RealU.S. GDP, 1960-1998
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Aggregate Output
Defining GDP Three Approaches

• 2) Value Added Approach
• The increase in the value of goods as a result of
  the production process

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Aggregate Output

• Defining GDP

• Final Goods are purchased by the ultimate user
• Intermediate Goods form inputs to other firms
  production processes

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Aggregate Output
Defining GDP

• 3) GDP from the income side

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The Composition of GDP byType of Income
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Aggregate Output
Technical Notes For the Course

• GDP growth in year t -- rate of change in real
  GDP in year t
• GDP growth (yt - yt-1)/yt-1
• Expansions -- periods of positive growth
• Recessions -- periods of negative growth(2
  consecutive quarters)

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The Other MajorMacroeconomic Variables
The Unemployment Rate
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The Other MajorMacroeconomic Variables
Counting the Unemployed

• 1998

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The Other MajorMacroeconomic Variables
Unemployment and Economic Activity

• Okuns Law
• High output growth -- reduces unemployment
• Low output growth -- increases unemployment

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Social Implications of Unemployment

• Unemployment rates and duration vary by
  population groups
• Certain groups incur a disproportionate share of
  unemployment when unemployment increases
• These are mainly young people

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Change in the U.S. Unemployment Rate versus U.S.
GDP Growth 1960 - 1998
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The Other MajorMacroeconomic Variables

• The Inflation Rate, p
• A sustained rise in the average price level
• Two Measures of the Price Level
• GDP Deflator
• Retail Price Index (RPI)

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The Other MajorMacroeconomic Variables
The GDP Deflator

• Average price of final goods produced
• GDP deflator in year t Pt

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The Other MajorMacroeconomic Variables
The GDP Deflator

• Pt is an index number
• P1993 102.6 (1992 100)
• Index numbers are used to measure rate of change
  over time

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The Other MajorMacroeconomic Variables
The Retail Price Index (RPI)

• Average prices of goods consumed
• List of goods consumed by the typical person
• Calculate the weighted average level of prices
• The RPI is not equal to the GDP deflator
• Some final goods are sold to business,
  government, and foreigners
• Some consumer goods are imported

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Why do we care about inflation?

• Prices and wages do not rise proportionally
• Inflation creates market distortions due to
• Regulation
• Taxation
• Uncertainty for business investment

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Change in the U.S. Inflation Rate versus the U.S.
Unemployment Rate, 1970-1998
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The Other MajorMacroeconomic Variables
The Phillips Curve

• Low unemployment --inflation rate increases
• High unemployment -- inflation rate decreases

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Growth, Unemployment, andInflation in the EU,
1960-2004
1960-2000 1994-2000 2001-2004 (in
percent) (average) (average) (average)
Output growth rate 3.1 2.3 1.5 Unemployment
rate 5.8 9.0 7.8 Inflation rate 5.4 2.0 2.3
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A Road Map
The Central Question of Macroeconomics

• What determines the level of aggregate output and
  unemployment?
• Short-run (a few years) demand policies
• Medium-run (10 years) supply policies
• Long-run (50 years) government, education,
  savings