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Macroeconomics 33040 - Spring 2015Topic 1: Intro to Macro and Measurement
Loukas Karabarbounis
University of Chicago, Booth School of Business
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
What is Macro?
Definition
Macroeconomics: is the study of the economic performance ofnational economies and of the policies that affect performance.
What causes long-run economic growth?
What causes short-run fluctuations of economic activity (businesscycles)?
What causes unemployment?
What causes inflation?
What causes inequality?
Can governments do something about these?
1 / 62
Long-Run Performance: US Real GDP
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofEconomicAnalysis
RealGrossDomesticProduct
(BillionsofChained2009Dollars)
2 / 62
US Real GDP per Capita (Online Reading 1.1)
12,000
16,000
20,000
24,000
28,000
32,000
36,000
40,000
44,000
48,000
52,000
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofEconomicAnalysis
Realgrossdomesticproductpercapita
(Chained
2009D
ollars
)
3 / 62
US Real GDP per Worker
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
1000000*RealGrossDomesticProduct,3Decimal/AllEmployees:Totalnonfarm
(1000000*Bil.ofChn.2009$/Thous.ofPersons)
4 / 62
Business Cycles
Definition
Business Cycles: are fluctuations of the aggregate economic activityaround a long-term trend
1 We care about aggregate economic activity as measured by variousindicators and not only GDP.
2 Key characteristics of business cycles are periods of expansion andperiods of contractions.
3 Business cycles are typically characterized by sectoral comovement.
4 Business cycles are recurrent but not periodic.
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Business Cycles vs. Growth
6 / 62
NBER Dating of Recessions
NBER stands for the National Bureau of Economic Research.
A recession is a period between a peak and a trough (decliningeconomic activity).
An expansion is a period between a trough and a peak (risingeconomic activity).
Rule of thumb: recession is two consecutive quarters of negativereal GDP growth.
NBER Business Cycle Dating Committee (Great Recession).
NBER uses variety of economic variables to date recessions:
real GDP, economy-wide employment, real sales etc.
7 / 62
Procyclical vs. Countercyclical Macroeconomic Variables
A variable is procyclical if, on average, it co-moves positively withGDP along the business cycle (i.e. increases in expansions anddecreases in recessions).
employment, consumption, investment
A variable is countercyclical if, on average, it co-moves negativelywith GDP along the business cycle (i.e. decreases in expansionsand increases in recessions).
unemployment, net exports (imports decrease more than exports inrecessions)
Inflation is relatively acyclical.
8 / 62
Business Cycles: Growth of US Real GDP
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofEconomicAnalysis
RealGrossDomesticProduct,3Decimal
(PercentChangefromYearAgo)
9 / 62
US Unemployment Rate
2
3
4
5
6
7
8
9
10
11
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofLaborStatistics
CivilianUnemploymentRate
(Percent)
10 / 62
US Inflation
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofLaborStatistics
ConsumerPriceIndexforAllUrbanConsumers:AllItems
(PercentChangefrom
YearAgo)
11 / 62
Great Moderation
1984-2007: 17 months of recession; In the previous 24 years: morethan 50 months of recession.
Great Moderation: Macroeconomic variables became less volatile.
1 Good luck hypothesis
economies hit by smaller shocks (e.g. oil shocks) and good luckended with the current financial crisis
2 Better monetary policy
Fed’s commitment to a low and stable inflation and Fed’s fasterresponse to macroeconomic shocks
3 More efficient credit and housing markets
but recent waves of volatility seem related to unregulated financialdevelopment
4 Improved inventory management policies and smoother inventoryadjustment
inventories account for large fraction of GDP volatility
12 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
GDP: Three Equivalent Approaches
1 Product approach
emphasizes the value-added of domestic producers
2 Expenditure approach
emphasizes spending on final goods and services produceddomestically
3 Income approach
emphasizes income earned by factors operating in domestic markets
13 / 62
GDP: Product Definition
Definition
Gross Domestic Product: is the market value of final goods andservices newly produced in a nation during a given period of time
Why do we care?
GDP is a measure of the goods and services that an economyproduces in a given period of time.
GDP is the measure of economic activity mostly discussed in thepopular press.
Correlated with other macroeconomic variables that we care about(e.g. with unemployment and with consumption).
Still, GDP is an imperfect indicator of “well-being” or “standard ofliving” (we discuss below for what GDP does not measure).
14 / 62
GDP: Product Definition (1)
Market Value
Goods and services measured at current prices (i.e. at marketdetermined prices)
This allows us to add different goods and services
Economy produces 2 cars and 1,000 apples
The price of a car is 10,000$ and the price of an apple is 5$
Therefore, GDP = 2 ∗ 10, 000 + 1, 000 ∗ 5 = 25, 000
Government’s production of goods and services (“non-marketoutput”, e.g. defense, education, health) is measured at cost ofproduction (compensation of government employees, depreciationof government capital)
15 / 62
GDP: Product Definition (2)
Newly Produced Goods and Services
GDP includes goods and services produced in given period
GDP excludes goods and services produced in the past
Example:
House constructed in 2011 and sold in 2011: house value is includedin 2011 GDP
House constructed in 2010 and sold in 2011: house value is includedin 2010 GDP but the salary of real estate agent is included in 2011GDP
16 / 62
GDP: Product Definition (3)
Only Final Goods Included (Value-Added Approach)
Intermediate Goods (e.g. raw materials): not included in GDP.
They are produced but used as inputs in current production of othergoods. To avoid double-counting we exclude them from GDP.
Example: flour used to produce bread is an intermediate good.
Final Goods: included in GDP. Their value already embeds thevalue of intermediates and that’s why we exclude intermediates.
Final goods are the end products of production. Example: bread.
Capital (or Investment) Goods: included in GDP. There is nodouble-counting because they are not used in current production.
Example: baker starts with 1,000$ worth of flour and ends with1,100$ worth of flour. GDP increases by 100$ (inventories).
Example: computers produced in 2013 are part of 2013’s GDP. Theyare not excluded from 2014 Gross Domestic Product (GDP). If weexclude their depreciation, we get Net Domestic Product (NDP).
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GDP: Value Added
GDP excludes intermediate goods to avoid double-counting.Example:
Firm X uses workers and machines to produce 100$ worth of oranges.It sells 20$ of oranges to consumers and 80$ of oranges to Firm Y.
Firm Y uses oranges as an intermediate good (input) to produceorange juice. It sells 150$ worth of juice to consumers.
GDP is 170$ because the market value of the final goods is: 20$ oforanges + 150$ of orange juice.
Value-added measures sectoral/firm’s contribution to GDP:
Firm X’s value added is 20 + 80 = 100
Firm Y’s value added is (150− 80) = 70
GDP equals the sum of all values added. Note that we subtract 80$from firm Y since this intermediate good was produced by firm X.
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What GDP Does Not Measure (Online Reading 1.2)
1 Goods and services not sold at market
E.g. home production, child care (but nanny services are counted)
E.g. benefits of clean air (price?)
2 Underground economy
legal activities hidden from government (e.g house painter paid incash); statistics try to adjust for that
illegal activities (e.g illegal cigarettes)
3 Natural resource depletion
oil extracted is counted in GDP
there is no offsetting for the depletion of this nonrenewable resource
4 Welfare/Utility Functions U vs. GDP
U defined over consumption, leisure, home production etc.
U can also include health, safety, quality of education, pollution etc.
U not perfectly correlated with GDP
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GDP and Welfare Relative to the US (Line: λ = GDP)
Source: Chad Jones and Pete Klenow.
1/64 1/32 1/16 1/8 1/4 1/2 11/1024
1/256
1/64
1/16
1/4
1
Albania
Algeria
Bahamas
Benin
Bolivia
Bosnia
Botswana
Brazil
Burundi
Cameroon
Central African Republic
Chile
China
Cote d‘Ivoire
Djibouti
Ethiopia
France
Gambia
Germany
Greece
GuineaGuyana
Hong Kong
India
Ireland
Jordan
Kenya
South Korea
Lesotho
Luxembourg
Madagascar
Malaysia
Mali
Malta
Mauritius
Moldova
Mongolia
Namibia
NigerNigeria
Poland
Portugal
Russia
Rwanda
Sierra Leone
Singapore
Somalia
South AfricaTajikistan
Tanzania
Tunisia
U.S.
Uzbekistan
Venezuela
Vietnam
Yemen
Zambia
Zimbabwe
GDP per person (US=1)
Welfare, λ
20 / 62
GDP: Expenditure Definition
Y = C + I + G + (X −M)
Final Product = Expenditure on Final Goods and Services
C : consumption spending on goods and services
I : investment spending on new capital goods and change ininventories
G : government expenditure (consumption and investment) ongoods and services
NX = X −M: net exports is exports (X ) of goods and servicesminus imports (M) of goods and services
21 / 62
GDP: Expenditure Approach (US, 2009)
Category Billions of Dollars %GDP
Consumption 10001 70.8
Durables 1026 7.3
Non-durables 2204 15.6
Services 6770 47.9
Investment 1589 11.3
Business Fixed Investment 1364 9.7
Residential Investment 352 2.5
Change in Inventories -127 -0.9
Government Spending 2914 20.6
Federal Non-defense 368 2.6
Federal Defense 771 5.5
State and Local 1775 12.6
Net Exports of Goods & Services -386 -2.7
Exports 1578 11.2
Imports 1964 13.9
Total 14119 100
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Expenditures: Consumption
(Note: includes purchases of foreign-produced goods and services. NXadjusts for that.)
1 Household Spending on Durables
e.g.: cars, TVs, furniture, appliances
2 Household Spending on Non-durables
e.g.: food, fuel, clothing
3 Household Spending on Services
e.g.: transportation, financial services, education, health care,housing, recreational services
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Growth of US Real Consumption vs. GDP
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
1960 1970 1980 1990 2000 2010
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RealGrossDomesticProduct,3DecimalRealPersonalConsumptionExpenditures
(PercentChangefromYearAgo)
24 / 62
Growth of US Durables, Nondurables, and Services
-15
-10
-5
0
5
10
15
2002 2004 2006 2008 2010 2012 2014
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
RealPersonalConsumptionExpenditures:NondurableGoodsRealPersonalConsumptionExpenditures:DurableGoodsRealPersonalConsumptionExpenditures:Services
(PercentChangefrom
YearAgo)
25 / 62
Expenditures: Investment
(Note: includes purchases of foreign-produced capital goods. NXadjusts for that.)
1 Business Fixed Investment (Nonresidential investment)
spending on capital goods e.g. equipment, machines, vehicles, andnon-residential structures (factories, offices etc.)
2 Residential Investment
spending on construction of new houses and apartments
3 Change in Inventories
inventories are unsold produced goods held in stock by firms
the change in inventories is included in GDP because whatever isproduced must be spent
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Growth of US Real Investment vs. GDP
-30
-20
-10
0
10
20
30
40
1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
RealGrossDomesticProduct,3DecimalRealGrossPrivateDomesticInvestment,3decimal
(PercentChangefrom
YearAgo)
27 / 62
Growth of US Residential and Nonresidential Investment
-30
-20
-10
0
10
20
2000 2002 2004 2006 2008 2010 2012 2014
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
RealPrivateNonresidentialFixedInvestmentRealPrivateResidentialFixedInvestment
(PercentChangefromYearAgo)
28 / 62
Expenditures: Government
(Note: includes purchases of foreign-produced goods and services. NXadjusts for that.)
1 Government Consumption of Goods and Services (85% of G )
education, health care, defense, judicial, policing: these goods andservices are produced by the government (“non-market output”)
as a matter of accounting, the value of these goods and services lesspartial payments of households is recorded as G consumption
2 Government Investment (15% of G )
e.g.: acquiring buildings or machines
3 Transfers: not included in GDP
welfare benefits, unemployment insurance, and pensions are not paidin exchange for goods and services
in general, a transfer from person A to person B (including financialtransactions) does not change GDP, it only affects the distributionof income and assets
29 / 62
Expenditures: Net Exports
1 Imports M of Foreign Produced Goods and Services
subtracted from GDP because C , I and G already include spendingon foreign-produced goods and services
2 Exports X of Domestic Produced Goods and Services
added to GDP so that total expenditure reflects spending ondomestically produced goods and services
30 / 62
Gross National Product/Income (GNP)
GNP is the total income that domestic (national) factors earn:
GNP = W ∗ N + r ∗ K + GI + δ ∗ K
1 Labor Income (W ∗ N): around 60% of GDP in the US
compensation to employees (wages, salaries, bonuses, benefits)income of self-employed (can be also included in capital income)
2 Capital Income (r ∗ K )
rental income from land and structures, artcorporate profits (retained earnings) and dividendsnet interest receipts (interest earned minus interest paid)
3 Government Income (GI )
indirect business taxes, sales, and excise taxes
4 Depreciation (δ ∗ K )
the value of capital that wears outdepreciation is subtracted from corporate profits and earnings ofself-employed, so we add it back
31 / 62
GDP: Income Definition
GDP = GNP − NFP
GNP is the market value of the final goods and services producedby domestic factors (domestically or in a foreign country)
GDP is the market value of the final goods and services produceddomestically (by domestic and foreign factors)
US factors produce output abroad: this does not count in US GDP
US factors earn income abroad: this counts in US GNP
Net Factor Payments (NFP): (Income of US factors earnedabroad) - (Income of foreign factors earned in US)
In the US, NFP is around 1% of GDP
32 / 62
Example of Measuring GDP
Firm Transactions Dollars
OrangeInc Wages Paid to Domestic Employees 11
Wages Paid to Foreign Employees 2
Sales to Domestic Consumers 11
Sales to JuiceInc 25
Value of Unsold Product 2
JuiceInc Wages Paid to Domestic Employees 32
Taxes Paid to Government 1
Purchases of Oranges from OrangeInc 25
Purchases of Machines from MacInc 4
Sales to Domestic Consumers 78
Sales to Domestic Government 5
Sales to Foreign Consumers 4
MacInc Dividend Distribution 1
Sales of Machines 4
33 / 62
Example (cnt.)
(Note: in this example machines are treated as an intermediate input,not as a capital good!)
1 Product approach (Value-added of each firm)
GDP = Yo+Yj+Ym = (11+25+2)+(78+5+4−25−4)+(4) = 100
2 Expenditure approach
C + I + G + X = (11 + 78) + (2) + (5) + (4) = 100
3 Income approach [Profits = After Tax Revenues - Costs]
GNP = wN + rK +GI = (11 + 32) + [(25 + 25 + 3) + (1)] + (1) = 98
GDP = GNP − NFP = 98− (−2) = 100
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Examples: Does it Count in 2012 GDP? (1)
(Assume production/transaction takes places in 2012 unless o/wspecified)
Buy 10 gallons of gasoline at 2.80$ per gallon. Gas stationpurchased the gasoline during the previous year at a wholesale priceof 2.60$ per gallon.
Expenditure 2$: Consumption of 28$ plus Change of Inventories of-26$.
Product 2$: Value added of gas station is 2$.
Income approach 2$: paid to factors of production at the gas station(wages of employees, interest, taxes, profits).
I buy a 500$ Swiss watch
consumption goes up by 500 and imports go up by 500
Win 1m$ in lottery, to be paid immediately
Nothing is produced, not an expenditure (it is a transfer), not afactor payment
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Examples: Does it Count in 2012 GDP? (2)
(Assume production/transaction takes places in 2012 unless o/wspecified)
Give 10$ to (a) movie ticket; (b) to my brother; (c) to the ATMmachine in my savings account
Transaction (a) is consumption
Transaction (b) is a transfer; it appears in GDP only when brotherspends money
Transaction (c) is savings; it appears in future GDP only when spentin the future
A French company builds a plant in Illinois for 100m$, using locallabor, capital, and materials
Product: 100m of a capital good
Expenditure: 100m in net exports (would be investment if owned byUS citizens)
Income: 100m go to US factors of production
36 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
Real vs. Nominal Variables
Until now, Y , C , I etc. have been measured in current marketvalues. These are called nominal variables.
Market values are useful because we can add apples and oranges
Nominal variables are problematic in comparisons across time
This is because an increase in nominal GDP could be because ofincrease in quantity of goods or because of increase in prices ofgoods
From a welfare point of view, increasing quantities or increasingprices are two very different things (U is a function of quantities!)
Definition
Nominal or Current-Dollar Variable X : The value of X when marketdetermined or current prices are used to compute values.Real or Constant-Dollar Variable X : The value of X when prices insome base year are used to compute values.
37 / 62
Example: Real vs. Nominal GDP
2008 2009 Growth (%)
Apples
Price 10 11 10.0%
Quantity 90 100 11.1%
Current Value 900 1100 22.2%
Constant-2008 Value 900 1000 11.1%
Cars
Price 1000 1200 20.0%
Quantity 5 6 20.0%
Current Value 5000 7200 44.0%
Constant-2008 Value 5000 6000 20.0%
GDP
Current Value 5900 8300 40.7%
Constant-2008 Value 5900 7000 15.7%
38 / 62
Price Index and Inflation
Definition
Inflation: is the change of the price level Pt over a period of time:
πt+1 = (Pt+1 − Pt) /Pt
1 Pt measured by GDP Deflator: Value of Current Output atCurrent Prices / Value of Current Output at Base Year Prices
In above example: P2009/P2008 = 8300/7000 = 1.185 andπ = 18.5%
Conversely: real GDP is current-value GDP over P2009
2 Pt measured by CPI: cost of a fixed representative “basket” ofgoods
quality bias, inventions, and substitution bias overstate π by ≈ 1%
Fed uses core personal-consumption expenditure (PCE) which avoidssubstitution bias
“core”: excludes energy and food (very volatile) but includeshousing (Online Reading 1.3)
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Convention
For the rest of the course, all variables are real unless o/w noted(e.g. Y denotes real GDP)
40 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
Interest Rates
Definition
Interest Rate: The rate of return promised by a borrower to a lender
Example: Interest rate on 100$ one-year loan is 8% =⇒ borrower repays108$ in the next year
There are many interest rates in an economy: Fed funds rate,credit cards, housing loans, corporate bonds, country bonds.
Fed affects the “funds rate” which is the interest rate at whichbanks lend balances (federal funds) to other banks overnight.
Typically (but not always!) interest rates move together.
41 / 62
Fed’s Fund Rate
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:BoardofGovernorsoftheFederalReserveSystem(US)
EffectiveFederalFundsRate
(Percent)
42 / 62
Euro-Countries Long Term Interest Rates Diverging
43 / 62
Zero Lower Bound on the Nominal Interest Rate i
Typically, the nominal interest rate i cannot be lower than 0.
If some asset offered a negative nominal interest rate, no one wouldhold this asset.
The reason is that there exists an alternative “investment” strategythat pays a 0 nominal interest: keep the money under yourmattress or in a vault.
In reality, however, holding currency may be costly (e.g. danger oftheft, fees associated with the vault, other transaction costs).
Therefore, the lower bound for the nominal interest rate may not beexactly 0, but something slightly lower than 0. This encompasses allthe costs associated with hoarding money (Online Reading 1.4).
In periods of extreme financial distress, negative nominal interestrates may be observed reflecting flight to safety.
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Real vs. Nominal Interest Rates
Nominal Interest Rate i : the rate at which borrowers repay nominalloans, i.e. loans written in nominal terms.
Lenders and borrowers make decisions based on real interest rates.Note: Fed directly affects the nominal interest rate, not the real.
Real interest rate r given by the Fisher equation:
r ≈ i − π
Inflation reduces rate of return because it lowers the value ofholding money.
Example: 2008-loan of 100$ with i = 5%. In 2009 receive 105$.But if π = 5%, the 2008-constant (“real”) value of the 105$ is100$. So r = 0%.
Inflation benefits borrowers and hurts lenders.
45 / 62
Real Interest Rate
-5
0
5
10
15
20
1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
EffectiveFederalFundsRateGrossDomesticProduct:ImplicitPriceDeflatorEffectiveFederalFundsRate-GrossDomesticProduct:ImplicitPriceDeflator
(Per
cent)
,(
Per
cent
Change
from
Yea
rAgo)
,(
%-
%C
hg.
from
Yr.
Ago)
46 / 62
Expected Real Interest Rate
Borrowers and lenders do not know future inflation rate and mustformulate expectations
Expected real interest rate r e given by the Fischer equation:
r e ≈ i − πe
Expected inflation (model)
adaptive expectations: based on past inflations, e.g. πet = πt−1
rational expectations: πe is the mean inflation generated by aneconomic model, e.g. if model says that with probability 1/2πt = 0.02 and with 1/2 πt = 0, then people set πe
t = 0.01
Expected inflation (data)
surveys
publicly announced government or private forecasts
47 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
Measurement
Total adult population: Pop
Employed E : worked in past week
Unemployed U: didn’t work in past week but searched for a jobduring past four weeks or being on temporary layoff
Labor Force: L = E + U
Not in Labor Force: Pop− L (e.g. homemakers, students, retirees)
Definition
Unemployment Rate: u = U/L
captures non-employment conditional on being in the labor force
Definition
Employment-Population Ratio: E/Pop
this includes both unemployed and out of the labor force48 / 62
US Employment-Population Ratio (Online Reading 1.5)
54
55
56
57
58
59
60
61
62
63
64
65
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofLaborStatistics
CivilianEmployment-PopulationRatio
(Percent)
49 / 62
US Labor Force Participation Rate
58
59
60
61
62
63
64
65
66
67
68
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
Source:US.BureauofLaborStatistics
CivilianLaborForceParticipationRate
(Percent)
50 / 62
Types of Unemployment: u = u + (u − u)
Definition
Natural Rate of Unemployment u: The unemployment rateprevailing when economy is not in recession (e.g. 5-6%)
1 Structural unemployment: part of u (Online Reading 1.6)
long-term mismatch of skills and employer needs (e.g. due toautomation)
industry/product structural change (e.g. US manufacturing decline)
2 Frictional unemployment: part of u
costly matching process between firms and workers
like a car entering parking lot and not finding space immediatelyeven though there are vacant spaces
3 Cyclical unemployment: u − u
due to the business cycle; businesses do not hire when output is low
monetary and fiscal policy tries to stabilize cyclical unemployment
51 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
Increasing Inequality
Inequality between labor and capital: declining labor share ofincome (Online Readings 1.7).
Inequality between skills: increasing real wages for skilled labor andstagnating real wages for the less educated.
Automation, job market polarization with opportunitiesconcentrated in relatively high-skill, high-wage jobs and low-skill,low-wage jobs (Online Reading 1.8).
Inequality between top incomes and the rest: increasingconcentration of income to the top 1% and the top 10% (OnlineReading 1.9).
Is there a unifying explanation? Technology? Trade andglobalization? Policies? Unions?
52 / 62
US Labor Share (Non-Farm Business Sector)
0.56
0.58
0.60
0.62
0.64
0.66
0.68
0.70
1950 1960 1970 1980 1990 2000 2010
ShadedareasindicateUSrecessions-2015research.stlouisfed.org
NonfarmBusinessSector:LaborShare/(100/0.6)
(Index2009=100/(100/0.6))
53 / 62
Median Real Wage: College+ vs. Other (Men, 25-55)
1015
2025
Med
ian
Wag
e (1
999
Dol
lars
)
1964 1970 1980 1990 2000 2007 2012
Group 1 Group 2
54 / 62
Mean Real Wage: College+ vs. Other (Men, 25-55)
1015
2025
30M
ean
Wag
e (1
999
Dol
lars
)
1964 1970 1980 1990 2000 2007 2012
Group 1 Group 2
55 / 62
US Top 1 Percent (World Top Incomes Database)
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
5
10
15
20ShareOfIncometoTop1Percent
56 / 62
1 What is Macro?
2 GDP and Expenditure Components
3 Real vs. Nominal Variables, Prices, and Inflation
4 Interest Rates
5 Employment and Unemployment
6 Inequality
7 Summary, Readings, and Exercises
What Have We Learned?
How to define and measure GDP, inflation, unemployment in thedata
How various expenditures comove with GDP along the businesscycle
Why GDP may be less than perfectly correlated with things we careabout (i.e. with utility)
General trends of macro variables
Why we should care about real variables instead of nominalvariables
Topic 2: first toy model!
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Readings and Exercises
1 Pre-Course Readings Topic 0
2 ABC: Chapter 1, Chapter 2, Chapter 3.5 and Chapters 8.1-8.3
3 Online Readings Topic 0 and Topic 1
4 Numerical Problems 1.1 and 2.4 in ABC
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OPTIONAL MATERIAL
Useful Identities: Division of GNP and Disposable Income
Yp = Y + NFP + Tr + INT − T
Yp: private (household+corporate) disposable income
Y : GDP
NFP: net foreign payments
Tr : transfers from the government
INT : interest payments on government debt
T : taxes paid to the government
Yg = T − Tr − INT
Yg : net government income or government’s disposable income
Yp + Yg = GNP
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Useful Identities: Private and Public Savings
Sp: private savings
Cp: private consumption
Sp = Yp − Cp
Sg : government saving
Cg : government consumption
Sg = Yg − Cg
D: government’s budget deficit (D − INT is the primary deficit)
Ig : government investment
D = Ig − Sg
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Useful Identities: National Savings and Current Account
S = Sp + Sg = Yp + Yg − Cp − Cg = Y + NFP − Cp − Cg
Y = Cp + Ip + Cg + Ig + NX
Combine these two equations:
Sp + Sg = Ip + Ig + NX + NFP =⇒ S = I + NX + NFP
S = I + CA
Current Account = National Savings - National Investment
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Measuring GDP in Practice
The Bureau of Economic Analysis (BEA) measures US GDP.
Source data examples: retail sales, manufacturers’ shipments,inventories, value of construction put in place, employmentcompensation, international trade flows of goods and services,revenue of services industries, estimates of government outlays, etc.
These sources come from surveys (e.g. annual survey of retail tradefrom the Census) or from direct sources (e.g. tobacco shipments).
Services are either imputed (e.g. housing rent) or measured fromgovernment agencies (e.g. financial services) or measured fromrevenue data (e.g. transportation).
For most components, estimates are derived from source data thatare “value data.” In some cases, BEA relies on other methods toderive appropriate expenditure data, including a “quantity timesprice” method (e.g. for gasoline).
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