Introduction to Macroeconomics - uniroma1.it to... · What’s about Macroeconomics? The...
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Introduction to Macroeconomics
Short Run
Emanuele Ragusi, PhD
What’s about Macroeconomics?
The Macroeconomics focuses on the economic
performance of aggregate actors
(Government, families, enterprises and foreign
countries)
ECONOMIC
GROWTH
UNEMPLOY
MENT INFLATION
The Gross Domestic Product
The Gross Domestic Product (GDP) is the main indicator of
a State’s economic activity
GDP= is the sum of
incomes in the economy
during a given period
GDP= is the value of the
final goods and services
produced in the economy
during a given period
GDP= is the sum of added
value in the Economy during
a given period (added value
is the value of a production
minus the value of the
intermediate goods it uses in
a production)
PR
OD
UC
TIO
N S
IDE
INC
OM
E S
IDE
The composition of GDP
• It’s useful to decompose GDP to understand the goods’ demand determinants.
Line
2015
I II III IV
1 Gross domestic product 17649.3 17913.7 18060.2 18128.2
2 Personal consumption expenditures 12055.5 12228.4 12359 12429
3 Goods 3901.5 3978.1 4024.1 4010.9
4 Durable goods 1301.8 1326.4 1339.6 1347.6
5 Nondurable goods 2599.7 2651.8 2684.4 2663.3
6 Services 8153.9 8250.2 8334.9 8418.1
7 Gross private domestic investment 2995.9 3025.5 3030.6 3019.2
8 Fixed investment 2868.6 2897.9 2935.3 2943.4
9 Nonresidential 2280.7 2297.9 2319.4 2311.6
10 Structures 499.3 503.8 496 489.1
11 Equipment 1063.5 1064.6 1090.9 1083.9
12 Intellectual property products 717.8 729.6 732.4 738.6
13 Residential 588 600 615.9 631.8
14 Change in private inventories 127.3 127.5 95.3 75.8
15 Net exports of goods and services -551.6 -519.3 -530.4 -526.4
16 Exports 2257.3 2280 2259.8 2214.7
17 Goods 1517.5 1535.5 1508.9 1458.4
18 Services 739.8 744.5 750.9 756.3
19 Imports 2808.9 2799.3 2790.2 2741.1
20 Goods 2311.7 2299.9 2285.4 2234.1
21 Services 497.2 499.5 504.7 507
22
Government consumption expenditures and
gross investment 3149.5 3179.2 3201 3206.5
23 Federal 1218.2 1220.7 1224.3 1235.6
24 National defense 739 740.1 738.2 746.1
25 Nondefense 479.2 480.6 486.1 489.5
26 State and local 1931.3 1958.4 1976.6 1970.9
Nominal and Real GDP
Nominal GDP (€Y) = is the
sum of the quantities of
final goods produced at
current prices
Real GDP (Y)= is the sum
of quantities of final goods
produced times costant
prices
Production of most
goods increases
over time
Price of most goods
also increases over
time
The Unemployment
Unemployment (U): is the numebr of people who do not
have a job but arer looking for one.
Labour Force (L): it’s
the sum of employment
(N) and unemployment
(U)
𝐿 = 𝑈 + 𝑁
Unemployment rate:
it’s the ratio of the
number of people who
are unemployed to the
numebre of people in
the labor
𝑢 =𝑈
𝐿=𝐿 − 𝑁
𝐿= 1 −
𝑁
𝐿
The Inflation Inflation: is a sustained rise in the general level of prices
in the economy (price-level)
The Inflation rate(𝑷 o π): is the rate at which the price
level increases
π= 𝑷𝒕−𝑷𝒕−𝟏
𝑷𝒕−𝟏*100
How to
measure
the
inflation
level?
1° To Build up a price
index
𝑷𝒕 = 𝟏𝟎𝟎 ∗ 𝒈𝒊
𝒑𝒊𝒕
𝒑𝒕𝟎
𝒏
𝒊=𝟏
The
GDP
deflator
𝑷𝒕
=€𝒀𝒕𝒀𝒕
The
consum
er price
index
Why? Because if the
price of imported
goods increases
relative to the price of
domestic goods
(domestic prices are
cheaper than national
ones), the CPI runs
faster than GDP
deflator.
Why do economists care about inflation?
Pure inflation=
the prices and
wages level
increases
proportionately
Inflation affects income
distribution: retirement
pensions don’t keep up with
inflation (Russian case
1990s)
Inflation leads to more
uncertainty: it’s harder for
firms to make investement
decisions. Changing in
relative price level.
Deflation limits the ability of monetary policy to
affect output
Okun’s Law
• Economic growth and
unemployment
Phillips Curve
• Inflation rate and
unemployment
The approach to Macroeconomic model:
The model without Government
Markets
Goods Markets (Y)
the price is P
Labor market (N)
The price is W
(wage)
Families who buy
𝑌𝑑 and they sell
(offer) their labor
force 𝑁𝑠 to
enterprises and
perceive their profit
(π)
Enterprises produce
goods by technology
𝑌 = 𝐹(𝑁) and
demand labor force
𝑁𝑑 to families; they
sell the goods 𝑌𝑠
and redistribute
profits (π)
Two main
economic
actors
The Budget Constraint and
Aggregate Actors
𝑃𝑌𝑑= 𝑊𝑁𝑠 + 𝜋 𝑊𝑁𝑑 + 𝜋= 𝑃𝑌𝑠 A budget constraint represents all the combinations
of goods and services that a consumer may
purchase given current prices within his or her
given income. Consumer theory uses the concepts
of a budget constraint and a preference map to
analyze consumer choices. Both concepts have a
ready graphical representation in the two-good
case.
The market link
𝜋 =𝑃𝑌𝑑 −𝑊𝑁𝑠
𝑊𝑁𝑑 + 𝑃𝑌𝑑 −𝑊𝑁𝑠
= 𝑃𝑌𝑠
Replace 𝜋 into
the firms’ budget
constraint
𝑃𝑌𝑑 − 𝑃𝑌𝑠 + 𝑊𝑁𝑑 −𝑊𝑁𝑠 =0
𝑃 𝑌𝑑 − 𝑌𝑠 +𝑊 𝑁𝑑 − 𝑁𝑠 =0
The
Walras’
Lex
The excess demand supply
4 Aggregate variables
Output
(Y) Labor
(L)
Money
(M)
Bond
(B)
3 Main Economic Actors
Family
Aggregate consumers
and Firms’ owners
cash profits and
distribute labor; They
consume (C) a part of
Output and saving (S)
a part of it in bonds
(B)
Government
Outcome: Government
spending (G), and
transfers (Tr); Income
Taxes (T) and bond
issue (B)
Enterprises
produce Y, involving
labor input (L) and
capital one (K), Firms
sell Output to families
(C), to enterprises (I),
and to Government
(G). They ensure
themselves to the risk
through the bonds’
issue (B)
Price and Market
4 Goods 4 Market 4 Price
Output
Labor
Bond
Money
The Budget constraint: the Government
𝒀 − 𝑻 + 𝑻𝒓= 𝑪+ ∆𝑩𝑫
∆𝑩𝑆= 𝑰 I
𝑻 + ∆𝑩𝑺= 𝑮 + 𝑻𝒓
INCOM
E OUTCO
ME
G
Famil
y
Firm
s
Go
v.
INCOM
E
INCOM
E OUTCO
ME OUTCO
ME
The Goods Markets and IS Curve
(Close Economy)
The short run
Dott. Emanuele Ragusi
The Goods Markets
Fixed price
We assume that prices do
not react to excess
demand and therefore this
reaction, it has effect only
in the long run. Then
𝑃 = 𝑃 = 1
Fixed wages
In the short run we
assume that the wage
barganing impacts only in
the mid run
𝑊 = 𝑊 = 1
Two importat
assumption
The Goods Market’s short run
hypothesis
1. Fixed price
𝑷 = 𝑷 = 𝟏
2. The production is
equal to demand
𝒀 = 𝒁
Closed Economy:
The GDP components are:
• ConsumptionC;
• Investments I;
• Government SpendingG;
𝒁 ≡ 𝒀 = 𝑪 + 𝑰 + 𝑮
GDP components
• Goods and services purchased by private consumers C
• Nonresidential investment
• Residential investment
• Now we consider it as exogenous variable I=𝐼
I
• Goods and services purchased by Government
• The Government trasfers, as Medicare or Social Security payments, are excluded .
G C+I+G
National or
aggregate
spending
Consumption C
It depends on many factors: it’s a function of disposable
output (Yd),
We assume that the function is a linear relation
C= C(Yd) 0<C’<1
𝑪 = 𝒄𝟎 + 𝒄𝟏𝒀𝒅
𝒄𝟎
What people need
to consume if their
disposable income
is zero >0
𝒄𝟏 Propensity to
consume
0< 𝒄𝟏<1
Yd=Y-T+Tr
Disposa
ble
Output
Consumption
C
Y
d
𝑪 = 𝒄𝟎 + 𝒄𝟏𝒀𝒅
𝒄𝟏
𝒄𝟎
Investment and Government Spending
In this previous part we have assumed investment as
given, and so exogenous I=𝑰
The Fiscal policy components (G and T) are exogenous
because:
1. The Government behaviour isn’t linear as consumers
or firms;
2. The investment-saving model assumes G and T as
variables chosen by the government
The Equilibrium Output
𝑌 ≡Z
𝑌 = 𝐶 + 𝐼 + 𝐺
𝐶 = 𝑐0 + 𝑐1𝑌𝑑
𝐼 = 𝐼
𝐺 = 𝐺
𝑇 = 𝑇
𝑌𝑑 = 𝑌 − 𝑇
𝑌 = 𝑐0 + 𝑐1 𝑌 − 𝑇 + 𝐼 +𝐺 𝑌 = 𝑐0 + 𝑐1𝑌 − 𝑐1𝑇 + 𝐼 +𝐺 𝑌 − 𝑐1𝑌 = 𝑐0 + 𝐼 +𝐺 − 𝑐1𝑇
𝑌(1 − 𝑐1) = 𝑐0 + 𝐼 +𝐺 − 𝑐1𝑇
𝑌 =1
(1−𝑐1)(𝑐0 + 𝐼 +𝐺 − 𝑐1𝑇 )
Multiplier >1 Autonomuos
spending (𝑨 )
indipent of Output
Using a graph
Y 45°
Y ;
Z
𝒄𝟎 + 𝑰 +𝑮 − 𝒄𝟏𝑻
A
Z < Y
Z > Y
𝒄𝟏
Z
Z
Introduce Taxes and Tranfers
𝑌 ≡Z
𝑌 = 𝐶 + 𝐼 + 𝐺
𝐶 = 𝑐0 + 𝑐1𝑌𝑑
𝐼 = 𝐼
𝐺 = 𝐺
𝑇 = 𝑡0+tY
𝑌𝑑 = 𝑌 − 𝑇 + 𝑇𝑟
𝑌 = 𝑐0 + 𝑐1 𝑌 − 𝑡0 + 𝑡𝑌 + 𝑇𝑟 + 𝐼 +𝐺 𝑌 = 𝑐0 + 𝑐1𝑌 − 𝑐1𝑡0 − 𝑐1𝑡0𝑌 + 𝑐1𝑇𝑟 + 𝐼 +𝐺 𝑌 = 𝑐1(1 − 𝑡0)𝑌 + 𝑐0 + 𝐼 +𝐺 −𝑐1𝑡0+𝑐1𝑇𝑟
𝑌(1 − 𝑐1)(1 − 𝑡0) = 𝑐0 + 𝐼 +𝐺 − 𝑐1𝑡0+𝑐1𝑇𝑟
𝑌 =1
(1−𝑐1)(1−𝑡0)[(𝑐0 − 𝑐1𝑡0+𝑐1𝑇𝑟 + 𝐼 +𝐺 ]
Multiplier>1 Autonomous
spending(𝑨 )
Taxati
on 𝑇𝑟 = 𝑇𝑟
The Investment-Saving Model (IS curve)
Saving= 𝑺𝒑𝒗𝒕 + 𝑺𝒑𝒖𝒃
Private Saving 𝑺 ≡ 𝒀𝒅 − 𝑪
so
𝑺 ≡ 𝒀 − 𝑻 − 𝑪
Public Saving T−G
If T > G budget surplus
If T<G budget deficit
The Model I=S
𝒀 = 𝑪 + 𝑰 + 𝑮
𝑺≡𝒀−𝑻−𝑪
𝒀 − 𝑻 − 𝑪 = 𝑰 + 𝑮 − 𝑻
𝑺 = 𝑰 + 𝑮 − 𝑻
𝑰 = 𝑺 + (𝑻 − 𝑮)
𝑆 = 𝑌 − 𝑇 − 𝐶 = 𝑌 − 𝑇 − 𝑐0 − 𝑐1 𝑌 − 𝑇 = −𝑐0 + (1 − 𝑐1)(𝑌 − 𝑇)
The
propoensity
to save (s)
Using graph
S
Y
S= −𝒄𝟎 + (𝟏 −𝒄𝟏)(𝒀 − 𝑻)
𝟏 − 𝒄𝟏 −𝒔𝟎
Investments
Both families and firms buy goods to invest. In particular
the firms buy goods to invest in non-residential
investments, while families invest in «fixed investment» as
homes.
The investment demand is function of interest rate (r); in
fact the performance of bond should exceed the costs.
The interest rate is the price of investing project. If the
interest rate rises, the investing projects’ number will
decrease proportionally.
The Investment
Consider a firm deciding wheter or not to buy a new
machine. Suppose that to buy a new machine the firm must
borrow. The profit of the new machine is 10% per year. If
the interest rate is higher than additional profit, the firm
will not buy the new machine because the interest rate will
not cover the interest payment.
If the profits’ return rate is higher than interst rate, the
number of investment project will increase.
If the price (P) is major of r for each project (K), the
investment level (I) will be :
𝐼 = 𝐾𝑛
𝑛
𝑖=1
Investments
If r grows, then
𝐼 = 𝐾𝑛𝑛𝑖=1 falls and
vice versa
So:
𝐼 = 𝐼 𝑖 𝑐𝑜𝑛 𝐼′ < 0
𝐼 = 𝐼 − 𝑏𝑖
Using graph…
i
I 0 𝑰
I(
i)
-b
I(i
)’
I(i)
’’
i’
’ i’
The IS curve
Consider the Output equation and introduce the
Government and the Investment
𝑌 =1
1 − 𝑐(1 − 𝑡)[ 𝑐0 − 𝑐1𝑡0 + 𝑐1𝑇𝑟 + 𝐼 − 𝑏𝑖 + 𝐺 ]
Multiplier
m Autonomous: it’s
indipent by i
𝐴
𝑌 = 𝑚(𝐴 − 𝑏𝑖)
Graph derivation
Y
S
4
5
°
S
I
I
i i
Y
I
S