ECO 306 Home Page

1. ECO 306 Home Page http:/www.depaul.edu/~jberdell Select Eco306 ID: macro PW: theory

2. Maths Appendix growth rates, exponents and logs, several variables National Accounts historical genesis and war 1600’s Mercantilism, Petty and Davenant Bolsheviks and WWI: Input Output Analysis WWII: Keynes, Kuznets and Stone Product vs. Expenditure vs. Income Measures Text on Savings identities Real vs Nominal GDP Chain Method Hedonic Methods CPI vs. PCE price indices Wellbeing vs GDP (Time Permitting) Last time W1B Outline

3. Exponent Notation+facts Z0=1 ZaZb= Za+b So Z1/2Z-1/2=Z0=1 (Za)b= Za*b So (Z-a)-1 =Za 5*k1/2=(1/10)*k What is k?

4. Last Time Quarterly-Annual

5. Last Time Growth Rates

6. Logs elasticity and growth

7. Logs and growth rates

8. GNP vs GDP GDP is gross domestic product. gross because it includes depreciation domestic because it is a geographic concept (One that captures production in the geographic confines of the US regardless of the nationality of factors used in production.) GNP is gross national product, it is a nation’s total income and output whether generated at home or abroad. GNP=GDP+ Net Factor Payments Received from the ROW (ROW means Rest Of the World) Or GNP=Y+NFP

9. Savings-NI Identites Net Factor Payments are defined as “income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production..” (our text chapter 2) e.g. interest payments and payments to guest workers. NX are defined as the value of exports less the value of imports so: CA=NFP+NX CA includes payment for all current goods and services, Including the services of factors. Includes interest on debt.

10. S, I and the CA S-I=CA The current account reflects the difference between national saving and investment. If we save more than we invest at home it is invested abroad. I-S=-CA if we invest more than we save it comes from ROW. S=I+CA our savings is either invested at home or abroad.

11. S Private and Public savings sometimes seem a little messy, but total national savings is very simple: S=GNP-C-G, its our national income minus our consumption where the text assumes that all government provided goods and services “G” are used for current consumption.

12. S-I=CA S-I=CA may look odd we can relate it to: Y=C+I+G+NX Add NFP to each side Y+NFP=C+I+G+NX+NFP GNP=C+I+G+CA GNP-C-G-I=CA S-I=CA

13. This Time W2A • Finish GDP Accounting • 1.1 Real Nominal • 1.2 Hedonic Methods and New Goods • 1.3 Wealth vs. Wellbeing 2) Production and Labor Demand The Cobb Douglas Production Function factor shares and elasticities How do changes in technology affect labor? 3) Okun’s Law How are unemployment and growth related? Regression estimates

14. Hedonic Methods NIPA uses “hedonic” methods Goods are separated into characteristics Each characteristic is then priced and tracked It’s not a computer its 256kRam, 20MB drive…. *****This does not solve the problem of fundamentally new goods which need to be initially entered at cost. See Krugman on Viagra *******

15. CPI vs PCE

16. Deflation CPI-U from BLS, extracted 10 January 2009 Nov 2007: -1.7%

17. 1+G=(1+g)^12 • G=((1+g)^12) - 1 With a negative g use absolute value We need to use proportional rates so 1.7% is 0.017 0.22=((1+0.017)^12) -1 So at an annual rate that is deflation of 22%!

18. Figure 2.02 The inflation rate in the United States, 1960-1998 Figure 2.02 The inflation rate in the United States, 1960-1998

19. Figure 2.03 Nominal and real interest rates in the United States, 1960-1998 Figure 2.03 Nominal and real interest rates in the United States, 1960-1998

20. Extension Topics We may have time for.. GDP vs Well Being Tibor Sciovsky On The Joyless Economy Andrew Oswald on Suicide and Growth Nordhaus on Health and Wealth Social Impact of Downturns GDP components in the 2000-01 downturn.

21. Health of Nations The Health of Nations: The Contribution of Improved Health to Living Standards William D. Nordhaus, Yale University January 25, 2002 http://www.econ.yale.edu/~nordhaus/homepage/health_nber_1.doc

22. Little Understood It is little understood outside the priesthood of national accountants that there is no serious attempt to measure the “real output” of the health-care industry. The techniques used to measure the price and quantity of health care are highly defective, and there are no attempts to account for improvements in the length of life into current measures of living standards.

23. US Per Capita Consumption Does this overstate or understate rising living standards?

24. Survival Rates

25. Consider… Now consider the following choice. You must forgo either the health improvements over the last half-century or the non-health improvements. That is, you must choose either (a) 1948 health conditions and 1998 non-health living standards or (b) 1998 health conditions and 1948 non-health living standards. Which would you choose?

26. Don’t worry….be happy FT 10 Jan 05 p.4 Kahneman “ I hope [the happiness index] could, years from now, become be as important as GDP

27. W2A Labor Demand The production function Logs, Elasticities and factor shares Participation and Productivity Okun’s Law and Full Employment Output

28. Production and Distribution

29. Production and Distribution

30. Constant Returns and Shares Y

31. Income Shares

32. Income Shares and Elasticities This is a Cobb-Douglas production function. Douglas was a U of C Econ Prof and Senator. Formulated in 1920’s It is Constant Returns to Scale and homothetic. CRS: if N and K double their %change is 100 % change Y= alpha*100+(1-alpha)*100=100

33. Income Shares and Elasticities With marginal productivity factor pricing, elasticities are identical to factor shares.

34. Income Shares and Elasticities • SL and Sk are the shares of labor and capital in national income. • %Change Y=(SL)*%Change L+ (Sk)*%Change K + Technical Change • Technical Change is found as a ‘residual’: • Technical Change= %Change Y-(SL)*%Change N -(Sk)*%Change K

35. Income Shares and Elasticities USA 1960-85 Labor share=0.67, Capital share=0.33 %change Y = 3.1% per year % change K = 3.2% (0.33x3.2 = 1.1) % change L = 1.9% (0.67x1.9 = 1.3) % change Technology = %chgY - 0.33 %chgK - 0.67 %chgL 0.7 = 3.1 - 1.1 - 1.3 So technology is a big contributor to economic growth. Smith regards trade as a key component of technical change. http://pages.stern.nyu.edu/~nroubini/NOTES/HAND4.HTM Nouriel Roubini Understanding the World Macroeconomy Handout for Chapter 4:Productivity and Growth 

36. Figure 3.01 The production function relating output and capital Figure 3.01 The production function relating output and capital

37. Figure 3.02 The Marginal product of capital Figure 3.02 The Marginal product of capital

38. Figure 3.03 The production function relating output and labor Figure 3.03 The production function relating output and labor

39. Figure 3.04 An adverse supply shock that lowers the MPN Figure 3.04 An adverse supply shock that lowers the MPN

40. Figure 3.05 The determination of labor demand Figure 3.05 The determination of labor demand

41. Figure 3.06 The effect of a beneficial supply shock on labor demand Figure 3.06 The effect of a beneficial supply shock on demand

42. Figure 3.07 The labor supply curve of an individual worker Figure 3.07 The labor supply curve of an individual worker

43. Figure 3.08 The effect on labor supply of an increase in wealth

44. Figure 3.09 Average weekly hours, U.S. manufacturing

45. Figure 3.10 The workweek and real GDP per person in 36 countries As income up people work less. What shape would that give to Labor Supply? Shouldn’t We care about Participation Rates as well?

46. Figure 3.11 Labor market equilibrium Figure 3.11 Labor market equilibrium

47. Figure 3.12 Effects of a temporary adverse supply shock on the labor market Figure 3.12 Effects of a temporary adverse supply shock on the labor market Or will nominal and or real wages be sticky?

48. Sticky Wages vs Market Clearing W S With a perfectly functioning market an adverse supply shock will lower wages and employment. With “sticky wages” that shock would cause a greater fall in employment as well as unemployment rather than a falling real wage. Wages may be sticky for different reasons. Some reasons suggest that it is the nominal wage that is sticky, other logics suggest that the real wage is sticky. Chapter 11 discusses the notion. D D’ N W S D D’ N

49. Keynesian vs Classical View of Ue K view: shocks to labor demand come from both the supply side (productivity and oil prices) and the demand side (C+I+G+X-IM). sticky wages cause labor demand shocks to become unemployment rather than lower wages. C view: shocks to labor demand come essentially from productivity shocks.

50. Ue Duration Most spells are short but at any moment in time the Unemployed population is dominated by longer term Unemployed. 2 mo. Spells, 60m spells for the year, 10m at any time 1 yr spells, 20m spells, 20m at any time Average spell= (60/80)2 mo+(20/80)12mo=4.5