macroeconomicsin the global economy course overview · macroeconomicsin the global economy course...

Macroeconomics in the Global Economy

Macroeconomics in the Global EconomyCourse Overview

Scope and objectives of the course

Readings, assignments and web site

Exam, grades, class norms


Global TrendsGDP Growth (2016)

Growth 2016 2017World 3.1% 3.4%Advanced 1.6% 1.8%Emerging 4.2% 4.6%

China and India still growing fast (6.6%

and 7.6%).

Trump economics?(US)

1.05$/€

Europe: permanent stagnation?

Aging Japan

Latin America (-0.6%)

Will the Chinese Yuan Become a

Global Currency?

Sub-Saharan Africa slowing down (1.4%)


Introduction(Session 1)

Basic Markets

Saving, InvestmentTrade/Capital Flows

(Sessions 2 and 3)

Money andCentral Banks

(Session 6)

Volatility and Business Cycles

Business Cycles(Session 7)

A Model of FluctuationsSession 8

Inflation(Session 9)

Current Macroeconomic Issues

Monetary Policy and Financial Markets(Session 12)

Exchange Rates(Sessions 13 and 14)

Macroeconomic Scenarios(Session 15)

Growth(Sessions 4 and 5)

Long-Term

Course Structure

Monetary and Fiscal Policy

(Sessions 10 and 11)


Required video lectures – Prepare and Review

Required (and optional) readings – Motivate and Expand

Data analysis for country reports – Understanding Data

Quizzes – Test Knowledge

Lectures – Absorb and Challenge

[No textbook (unless you want one)]

Preparing for class


Find data for a country/region (assigned to your group)

Data “collection” can be done individually or by group

Group reports to be produced by – Session 7 (Country Report on Growth Prospects)– Session 15 (Macroeconomic Scenarios)

Data available from links posted on the course web site

Group Assignments


Data Assignment #1

Groups Country

1, 7 and 13 Brazil

2 and 8 (and 14) China

3 and 9 India

4 and 10 Nigeria

5 and 11 Poland

6 and 12 Russia


Grade

Class Participation (10%) Group Assignments (20%)Final Exam (70%)

+ self-graded quizzes via course web site


Class Norms

Attend every session with your section even if at 8:30am (requests for exceptions to this rule must be done by email well in advance of the session – with a valid reason, please). All sessions are 90 minutes.

Name tags to be displayed every session. Respect seating arrangement.

No plagiarism or free riding for the group report.

Electronic handouts available in advance. Tablets in class encouraged (no laptops).


Session 1. Macroeconomic Variables. National Accounting.

Measuring economic activity.

What is Gross Domestic Product (GDP)?

Comparing GDP across countries

Comparing GDP over time (Real vs. Nominal GDP)

Inflation

Real and Nominal interest rates and exchange rates


Economic activity can be measured in many ways: employment, capacity utilization, production, income, sales, profits, demand.

The most common measure is the monetary value of economic activity: Gross Domestic Product.

GDP Measures total production at market value over a given period of time such as a year or a quarter (it is a flow).

GDP = PA x QA + PB x QB + …

Measuring Economic Activity


GDP = Income = Production = ExpendituresClosed Economy

Production (GDP)

Income (GDP)

Sales

Wages

Profits

Taxes

Expenditures(GDP)

Financial Sector deals with imbalances

Unsold Production? Inventories = Investment


Different interpretations or ways to calculate GDP:

Production of or Expenditures on Final goods: Consumption + Investment + Government Consumption + Net Exports

Sum of Value Added for all industries. Value added is defined as revenues minus the cost of intermediate inputs.

Income: sum of incomes received by workers (wages), companies (profits) and government (taxes).

Measuring Gross Domestic Product


Gross Domestic Product (GDP): Based on activity within national borders.

Gross National Income (GNI): Based on nationality (previously known as GNP)

-20% -15% -10% -5% 0% 5%

10% 15% 20% 25%

Philippines USA France UK Australia Singapore Kazakhstan Ireland

% Difference between GNI and GDP (2015)

GNI = GDP + Net Factor Payments (NFP)

Gross Domestic Product vs. Gross National Income

Net Factor Payments: Income received from factors of production abroad – Income paid to foreign factors of productions


Is GDP capturing all economic activity?

Prostitutes and drug dealers are set to give Britain a £10bn boost as the country revamps the way it measures its economy.

Each of the UK’s estimated 60,879 prostitutes took about 25 clients a week in 2009, at an average rate of £67.16. It also estimates that the UK had 38,000 heroin users, while sales of the drug amounted to £754m with a street price of £37 a gram.

Financial Times May 29, 2014


Is GDP a good measure of economic activity?

Japan’s economy jumps 6.3% under new UN standard.

Japan’s economy has grown by 6.3 per cent overnight after it became the latest country to apply new UN standards for compiling national. Under the rules, countries treat spending on research, development, patents and copyrights as investment, adding it to GDP for the first time. Japan’s high R&D spending means the change has a big impact. Similar changes in the US raised GDP only 3.2 per cent.

Financial Times December 8, 2016


Is GDP a good measure of economic well being, quality of life or happiness?

Years 2005-2009


Comparing GDP: Quantities versus Prices

GDP measures value and it is affected by prices and quantities.

GDP (output) = PA x QA + PB x QB + …

When making comparisons (two countries or two years) we care about quantities not prices. To compare quantities we fix prices:

- At an international level for comparisons between countries (PPP – Purchasing Power Parity).

- On a base year when we compare two years for one country. We talk about real versus nominal GDP. The difference (in growth rates) will be inflation.


Comparing GDP between CountriesUS: GDPUS = PUSD

A x QUSA + PUSD

B x QUSB + … = $$$

France: GDPFRA = PEURA x QFRA

A + PEURB x QFRA

B + ... = €€€When comparing macroeconomic variables across countries we need to convert prices (values) that are denominated in different currencies into a common currency. There are two options:

1. Use current (market) exchange rate – The right thing to do if you want to know the amount of foreign goods you can buy with your national income.

2. Use an exchange rate that takes into consideration differences in price levels across countries (“1 dollar does not buy the same amount of goods in all countries”). This exchange rate is called Purchasing Power Parity adjusted exchange rate. We can think of GDP at purchasing power parity as a calculation in which we use international prices (PINT) to value domestic production.

US: GDPUS (PPP) = PINTA x QUS

A + PINTB x QUS

B + ...France: GDPFRA (PPP) = PINT

A x QFRAA + PINT

B x QFRAB + ...


Total Value of OutputProduction (GDP). Measured in current (2016) USD. World = USD 75.2 Trillion

EU, 22.0%

US, 24.7%

Other Advanced,

14.5%

China, 15.1%

BRI, 7.0%

Other Emerging,

16.7%

Japan 6.3%Canada 2.%Korea 1.9%Australia 1.7%

Germany 4.6%UK 3.5%France 3.3%Italy 2.5%Spain 1.7%

Mexico 1.4%Indonesia 1.3%Saudi Arabia 0.8%Turkey 1.0%Iran 0.5%

India 3.0%Russia 1.7%Brazil 2.4%


Measuring GDP Across CountriesProduction (GDP, 2016). Measured in USD (PPP)

EU, 16.8%

US, 15.6%

Other Advanced, 9.5%

China, 17.9%

BRI, 13.1%

Other Emerging, 27.2%

India 7.3%Russia 3.1%Brazil 2.6%

Germany 3.3%UK 2.3%France 2.3%Italy 1.9%Spain 1.4%

Indonesia 2.5%Mexico 2.0%Saudi Arabia 1.5%Turkey 1.4%Iran 1.2%

Japan 4.1%Korea 1.6%Canada 1.4%Australia 1.0%


Population as a ResourcePopulation (2015). World 7.3 Billion

Indonesia 3.5%Pakistan 2.6%Nigeria 2.5%Bangladesh 2.2%

EU, 7.0% US, 4.4%

Other Advanced, 3.1%

China, 18.9%

BRI, 22.7%

Other Emerging, 43.8%

India 18.0%Brazil 2.8%Russia 2.0%


Total GDP = Population x GDP per capita

0 10,000 20,000 30,000 40,000 50,000

USA

EU

Japan

Russia

China

India

Latin America

Emerging Asia

Sub-Saharan Africa

World

GDP Per Capita (USD, PPP). 2016.


Nominal GDP = Sum of production of goods and services valued at currentprices:

Nominal GDP (2016) = PA2016 x QA

2016 + PB2016 x QB

2016 +...

If nominal GDP goes up from 2015 to 2016, what do we learn? We want to understand separately the evolution of quantities and prices. To look at quantities we calculate Real GDP, which eliminates the effect of inflation by fixing prices in a base year (this is the equivalent of using PPP when comparing across countries)

Real GDP = Sum of production of goods and services valued at constant prices (prices of a base year):

Real GDP (2015) “in 2000 dollars” = PA2000 x QA

2015 + PB2000 x QB

2015 +...

Real GDP (2016) “in 2000 dollars” = PA2000 x QA

2016 + PB2000 x QB

2016 +...

Comparing GDP over time:Real and Nominal Gross Domestic Product


Real and Nominal GDP in the UK (in billions of pounds)

0

500

1000

1500

2000

2500

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Real GDP Nominal GDP


Inflation is the growth rate of the price index. Inflation can be calculated from different price indices (GDP deflator, Consumer Price Index, Producer Price Index).The relationship between inflation and GDP growth rates can be expressed as:

nominal GDP growth = real GDP growth + inflation

[Notice that this expression is exact if you are using logarithms to calculate growth rates but only an approximation if you use standard growth rates (see appendix for details)]

Inflation


-5

0

5

10

15

20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Nominal GDP Growth Real GDP Growth Inflation

1996. Nominal Growth (17.9%) is equal to real growth (2.1%) plus

inflation (15.8%).

2010. Nominal Growth (12.3%) is equal to real growth (7.3%) plus

inflation (5.0%).

Nominal, Real Growth Rates and Inflation (Brazil)


Nominal and real interest ratesAll nominal variables can be transformed into real ones by removing the effect of inflation. For example, for interest rates we have:

real interest rate = nominal interest rate - inflation

The nominal interest rate gives the return of your investment in terms of money. The real interest rate shows your return in terms of goods. If the real interest rate is positive, then you can buy more goods at the end of your investment period.

-4 -3 -2 -1 012345

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Japan

Nominal Interest Rate Inflation Real Interest Rate

1991. Real Interest Rate (1.2%) is equal to Nominal Interest Rate (4.1%)

minus inflation (2.9%).

2005. Real Interest Rate (1.38%) is equal to Nominal Interest Rate (0.08%) minus inflation (-1.3%).


Nominal and Real Exchange Rates

Nominal Exchange rate– Relative price of the currencies of two countries– How many units of foreign currency one can buy with one unit of domestic currency

Real exchange rate– How many foreign goods one can buy with one unit of a domestic good

eR – real exchange rate

eN – nominal exchange rate

P – price of a domestic good (basket of goods)

P* – price of a foreign good (basket of goods)

e" = e%PP*


Big Mac in Colombia 8,900 Pesos

Nominal Exchange Rate 2,929 Pesos/USD

Big Mac in Colombia in USD= $3.02

Big Mac in the US in USD = $5.04

Real exchange rate = $3.02 /$5.04 = 0.60

Source: The Economist July 2016

Nominal and Real Exchange Rates


Session 1. Summary

Gross domestic product is the market value of final goods and services produced within a country over a fixed period of time.

Comparison of living standards across countries requires that GDP figures be adjusted for differences in prices. This adjustment is called purchasing power parity adjustment.

Real variables reflect quantities and returns in terms of goods, while nominal variables reflect values in money terms.

Inflation is the growth rate of a price index.

The real interest rate shows the return in terms of goods (not money).

The real exchange rate represents the relative price of domestic to foreign goods.


GDP in 2012 was 100. GDP in 2013 was 110. What was the growth rate of GDP?

Standard calculation

Growth = 10%.

But what if you calculate the growth rate after 6 months and compound it during the second half of the year?

GDP2013 = GDP2012 * (1+g)2

6-month growth is equal to 4.88%, which means an annual growth rate of 9.76%.

What if you calculate a three-month compounded growth rate? What about one-month? What about one-day?...

Growth = GDP 2013 - GDP2012

GDP2012

*100

Appendix: Calculating Growth Rates


If you make the time horizon over which you calculate and compound growth rates as small as possible you end up with an alternative way to calculate growth rates, one that assumes a continuously-compounded growth rate. The formula is

Growth = 100 x [ln (GDP2013) – ln (GDP2012)]

Advantages of this formula:

1. It does not depend on the reference year for the calculation.

Example:

2. Useful shortcuts:

growth of (XY) = growth of X + growth of Y

growth of (X/Y) = growth of X - growth of Y

Appendix: Calculating Growth Rates

2000 2010 Standard Change

LogarithmicChange

USD/EUR 1 1.30 +30% +26%EUR/USD 1 0.77 -23% -26%

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