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ECN5114 MACROECONOMICS

ECN5114 MACROECONOMICS. DR NORMAZ WANA ISMAIL nwi@econ.upm.edu.my 03-89467708 Room A212 Research Interest : Regional Economic Integration, ASEAN, AFTA, trade, FDI, growth, poverty. What is Macroeconomics.

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ECN5114 MACROECONOMICS

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  1. ECN5114MACROECONOMICS DR NORMAZ WANA ISMAIL nwi@econ.upm.edu.my 03-89467708 Room A212 Research Interest: Regional Economic Integration, ASEAN, AFTA, trade, FDI, growth, poverty

  2. What is Macroeconomics • Motivated by large question and by issues that affected many people and many nations of the world • Why are some countries exceedingly rich while others are exceedingly poor • Why are there fluctuations in aggregate economic activity • Why is there unemployment?

  3. What is Macroeconomics • Is the study of the behavior of large collections of economic agents • It focuses on the aggregate behavior of consumers and firms, govt., the overall level of economic activity in individual countries. • The economic interaction among nations and the effects of fiscal and monetary policy

  4. Macroeconomics vs Microeconomic • Macro- deals with overall effects on economies of the choices that all economic agents make • Micro-on the choices of individual consumer and firms • Macro focuses on the issue-long run growth and business cycles • However, the distinction getting blurred-both use similar tools

  5. Basic facts in Macro • GDP-gross domestic product -The quantity of goods and services produced within a country’s borders during some specified period of time. -represent the quantity of income earned by those contributing to domestic output.

  6. NOMINAL GDP • Market value of expenditure on all final goods and services in a country during a period of time –usually a quarter or a year • GDP measures product-by location (all people living in Malaysia for example) • GDP measure what has been consumed, invested or exported, but does not measure directly what has been produced.

  7. REAL GDP • Market value of all final goods and services expressed in local currency of a base year and divided by working-age population.

  8. NOMINAL NET DOMESTIC PRODUCT (NDP) • GDP- depreciation Nominal GNP • Market value of all final goods and services produced by the citizens of a country during a period of time • GNP measures product ‘by nationality’ (all Malaysian)

  9. DEVELOPMENT • Development has a broader definition than income • However, economist typically measure development by real GDP per capita • The justification is that real GDP per capital is positively correlated with life expectancy, access to clean water, literacy, and the provision of public goods • It is negatively correlated with infant mortality

  10. GROWTH • Economic growth is the rate at which real per capita GDP or GNP grow over time • Define  = 1 + g = (Yt + 1)/Yt Where  growth factor of Y g is the growth rate

  11. Figure 1.1 Per Capita Real GDP (in 2000 dollars) for the United States, 1900–2005 Facts: • Growth (in per capita GDP) has been sustained during the period 1900 – 2005 • 1990: average income= $4323; in 200 grew to $37,773 • Average American About 9 times richer in real terms over the course of 105 yrs

  12. Figure 1.1 Per Capita Real GDP (in 2000 dollars) for the United States, 1900–2005 1944:a peak of war production, GDP has risen about 158% from 1933 Facts: • Growth not really steady • Growth was higher at some times , but there was periods over which per capita real GDP declined- business cycles 1929- dropped about 29% in 1933

  13. Macroeconomic Models • A macroeconomic model captures the essential features of the world needed to analyze a particular macroeconomic problem. • Macroeconomic models should be simple, but they need not be realistic.

  14. Basic Structure of a Macroeconomic Model • Consumers and firms • The set of goods that consumers consume • Consumers’ preferences • The production technology • Resources available

  15. Understanding Recent and Current Macroeconomic Events • Aggregate productivity • Taxes, Government Spending and the Government Deficit • Interest Rates • Business Cycles in the United States • The Current Account Surplus and the Government Surplus • Inflation • Unemployment

  16. Comparison of GDPs GDP at market exchange rates • Convert GDPs in common currency by multiplying it with the market exchange rate • Problems- exchange rate is the relative price of traded goods- so it does not say anything about non traded goods (non traded goods are systematically cheaper in poor than in rich countries) • the GDP evaluated at market rates is an understatement (for poor countries) and an overstatements for rich countries • The worst part-exchange rate controlled by govt.

  17. GDP at International prices • Account of the price of non-tradable relative when constructing an ‘international price’ • Then convert GDPs into international dollars by evaluating quantities at the international prices • The basic idea is similar to the reason why we use real GDP when we want make within country comparison over time. • A country did not get richer just because its nominal GDP doubled –if the priced level of that country also doubled. • Therefore we required to compare the quantities at common prices.

  18. We cannot compare 2 countries’ GDP at market exchange rates-because that evaluates GDP at each country’s own price level-and not a common one. • However, for meaningful comparison we have to evaluate quantities at a common set of prices. • The most popular –used to make cross-country and cross regional comparison is the so called Geary-Khamis method.

  19. Suppose we have n country, and each country’s GDP consists of m different category • Denote the quantity of expenditure on good i in country j by qij. • Let denote the domestic price of good i in country j by pij. • Then the nominal GDP of country j is given

  20. Let πi be denote ‘international price’ of good i which for all countries. • Define real GDP as quantities evaluated at international prices, thus International dollars because prices quoted in international dollars would be the same for the same good in any country

  21. How international prices calculated? • Let denote PPPi the exchange rate between the local currency and international dollars (πi) Purchasing power parity exchange rate or PPP

  22. The international price for good i is defined as • So international prices are the weighted averages of the domestic prices relative to the country’s purchasing power parity.

  23. Can solve by iteration • Problem of the methodology- data on expenditure on individual goods and prices are not available • What available is expenditure of some broad category of goods at domestic prices such as ‘bread and cereal’ • Thus pij and qij is not observed • The original work of Geary-focused on valuing agriculture-in tonnes & prices per tonnes • This is not possible in the case of international income comparison

  24. The PWT uses prices collected by the international comparison program-run by WB • Which collected prices for the same basket of goods for a large number of countries • This basket are the same across countries • For all categories that make up the GDP • Example….

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