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Macroeconomics precourse – Part 1 Academic Year 2013-2014. Course Presentation This course aims to prepare students for the Macroeconomics course of the MSc in BA. It provides the essential background in macroeconomics. PAOLO PAESANI Office: Room B6, 3RD floor, Building B

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Macroeconomicsprecourse – Part 1

AcademicYear 2013-2014

CoursePresentation

This course aims to prepare students for the Macroeconomics course of the MSc in BA. It provides the essential background in macroeconomics

PAOLO PAESANI

Office: Room B6, 3RD floor, Building B

Telephone: 06-72595701

E-mail: paolo.paesani@uniroma2.it

Office hours: to be agreed

slide2

Macro

  • MACROECONOMICS
  • Macroeconomicsis a branchofeconomictheorythatstudies the functioningof the economic system of a nationas a whole and itsconnectionswithothereconomicsystems.
  • Economic system = Households + Non financialCompanies + Financial Intermediaries + Government (including the centralbank)
  • Orthodoxapproach: Microeconomics (studyof single elements) as the basisofmacroeconomics (studyof the whole)
  • Heterdoxapproach: I’lltellyouaboutitnexttime !
slide3

Macro

  • SOCIO-ECONOMIC CONTEXT
    • Well-definedpropertyrightsoveravailableresources;
    • Freedomto put availableresourcesto the best (mostprofitable) useasjudgedby the owner (resourceallocation);
    • Propertyrightsprotection;
    • Freedomto transfer propertyrights in a regulated and organised way (Voluntaryexchange);
    • Price-basedresourceallocation;
    • Capitalist economy;
    • Open economy;
    • Governmentas a relevantmacroeconomicactor
    • Money as medium ofexchange, meansofpayment, unitof account and storeofvalue.
slide4

Macro

THE ECONOMIC SYSTEM

Mankiw (2010)

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Macro

GOVERNMENT AS A PART OF THE ECONOMIC SYSTEM

Governmentas a part of the economic system

  • Purchasesgoods and servicesfrom the private sector (linkagewith the market forgoods and services);
  • Hiresworkers and rents capital goodsfrom the private sectorwhichituses in combinationwith intermediate goods and servicesto produce public goods (linkagewith the market forfactorsof production);
  • Taxeshouselds and firms (directtaxation, indirecttaxation, excises and fees) (TAX)
  • Transfersmoneytohouselds and firms (pensions, unemploymentbenefits, subsidies)

GOVERNMENT

Mankiw (2011)

slide6

Macro

FINANCIAL SYSTEM AS A PART OF THE ECONOMIC SYSTEM

Financial system (institutions and marketsrelatedto the circulationofmoney and credit) :

  • Centralbank;
  • Monetaryfinancialinstitutions (normalbanks);
  • Non monetaryfinancialintermediaries (investment and pensionfunds, insurancecompanies, rating agencies, investementbanks ….)
  • Money markets (Short-termfinancialassets)
  • Financial markets (bonds, shares, derivatives, forex, commodities)

GOVERNMENT

slide7

Macro

THE GLOBAL ECONOMIC SYSTEM

Everyeconomic system islinkedto the othersthrough multiple channels:

  • International tradeofgoods and services (Exports and Imports);
  • International mobilityoffactorsof production (migration, foreigndirectinvestment);
  • Private internationalfinancialflows (portfolio investment, forextransactions)
  • Public internationalfinancialflows (management ofofficialforexreserves, interntionalaid, internationaltransfers)

GOVERNMENT

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Macro

GROSS DOMESTIC PRODUCT

GrossDomesticProduct (GDP, Y) is the nominalvalueofall the finalgoods and servicesproducedwithin a countryover a givenperiodoftimeevaluated at market prices.

nominalvalue = measured in termsofmoney

Finalgoods and services = goos and servicesproducedover a givenperiodoftime and NOT USED to produce othergoods and servicesduring the sameperiodoftime.

Produced = Trading ofsecondhandgoodsisnot part of GDP

Within a country = National dimension

Givenperiodoftime = UsuallyOneyear (flow variable)

Market prices = Onlyfinalgoods and servicesregularlybought and sold in a market contributeto GDP.

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Macro

GROSS DOMESTIC PRODUCT

Wheat

RawBread

Primarysector

AGRICULTURE

Secondarysector

INDUSTRY

Tertiarysector

SERVICES

100

EUR

50

EUR

150

EUR

Packagedbread

Total valueofgoods and services = 300 EUR

Valueof intermediate goods and services = 150 EUR

GDP = 150 EUR

Gross National Income = 50 + (100-50) + (150 – 100) = 150 EUR

Consumers

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Macro

GROSS NATIONAL PRODUCT

Gross National Product (GNP) is the nominal market valueofall the finalgoods and servicesproducedwithin a country or a abroadover a givenperiodoftimebynationalfactorsof production.

GNP = GDP + NFI

NFI = NET FOREIGN INCOMES = (Incomeofdomesticlabour and capital employedabroad) – (Incomeofforeignlabour and capital employed in the country)

Nationality + Residence matter

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Macro

NATIONAL INCOME

Gross National Income (GNI) isequaltoGross National IncomeminusIndirectTaxation (ex. VAT)

GNI = GNP - VAT

Hint: Whenyoubuyanything (eg. a book) , 20% of the price youpayis VAT and istrasferredto the State, the restcompensatesfactorsof production employedto produce it.

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Macro

OTHER MEASURES OF INCOME

Mankiw (2011)

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Macro

GDP PER CAPITA

Dividing GDP by the country’s population (POP) weobtain GDP per-capita. GDP per capita can betakenas a roughmeasureof the economic welfare of a country’s residents.

GDP per capita = GDP / POP

GDP per capita isanaveragethattellsusnothingaboutdistribution. Economists and statisticianshavedevelopedspecificindicatorsforthat (e.g. Lorenz Curve, Ginicoefficient, …)

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Macro

GDP PER CAPITA

Source: BNP_perhoofd_2012_%281%29.PNG

slide15

Macro

GDP = AGGREGATE DEMAND

Y = C + I + G + X – M

Mankiw (2011)

slide16

Macro

AGGREGATE DEMAND: CONSUMPTION

Aggregate consumptiondepends on:

Currentdisposableincome (Ydisp = Y – TAX + TRA) dC/dYdisp > 0

ExpecteddisposableincomedC/dYexp> 0

Inflation (?), Real interest rate < 0 (?)

Wealth = Financial assets + Realassets > 0

Incomedistribution , Consumer credit ….

Ydisp – C(t) = S(t) = Private Savings

slide17

Macro

AGGREGATE DEMAND: PRIVATE INVESTMENT

Aggregate investmentdepends on:

Expectedprofits + attitudetowardsrisk

Expected aggregate demand

Inflation (?), Real interest rate < 0

Credit + financialfactors

K(t+1) – K(t) = I(t) – dK(t) = Net investement

K(t) = Aggregate Stock of capital , 0< d <1 depreciation rate

slide18

Macro

AGGREGATE DEMAND: GOVERNMENT PURCHASES

Governmentpurchasesdepend on:

Sizeof the public sector

Fiscal policy decisions

G(t) + TRA(t) – TAX(t) = Government budget deficit

GBD = change in public debt + monetaryfinancingof BD

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Macro

AGGREGATE DEMAND: NEXT EXPORTS

Net Exportsdepend on:

Nominalexchange rate E (amountofforeigncurrency per unitofdomesticcurrency) dNX / dE < 0

Domestic price level P dNX / dP < 0

Foreign price levelP*dNX / dP* > 0

Domestic GDP Y dNX / dY < 0

Foreign GDP Y*dNX / dY* > 0

Barrierstointernationaltrade

Quality, National specificities …

NX (t) + NFI(t) + NFTRA(t) + FDI(t) + PRMK(t) + dRES (t) + EO(t) = 0

Balanceofpayments

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Macro

DECOMPOSING GDP

Y = PQ where Y = Nominal GDP, P = GDP deflator, Q = real GDP

Mankiw (2011)

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Macro

  • INFLATION
    • Inflation rate = Rateofchangeof the GDP deflatorovertime
    • Π = [P(t) – P(t-1)] / P(t-1)
    • Π > 0 = Moderate Inflation
    • Π = 0 (approx.) = Stableprices
    • Π < 0 = Deflation
    • Π >> 0 = High Inflation
    • Π >>>>>> … 0 = Hyper-inflation
slide22

Macro

  • INFLATION AND THE PURCHASING POWER OF MONEY
    • 1/P can betakenasanindicatorof the purchasingpowerofmoney (amountofgoodswhich can bepurchasedspending 1 euro)
    • M/P = Real Money balances
    • W/P = Realwage
    • Inflationerodes the purchasingpowerofmoney. As suchcreditors and people on fixedincomefearitwhiledebtors and people on floatingincome do not (iftheirincomemove at the placeofinflation).
    • Interesting link on the effectsofinflation:
    • http://203.200.22.249:8080/jspui/bitstream/123456789/2209/1/A_tract_on_monetary_reform.pdf
slide23

Macro

MEASURING INFLATION

Mankiw (2011)

slide24

Macro

  • GROWTH
    • Inflation rate = Rateofchangeof the real GDP overtime
    • Γ = [Q(t) – Q(t-1)] / Q(t-1)
    • Π > 0 = Growth
    • Π = 0 (approx.) = Stagnation
    • Π < 0 = Recession
    • Growththeoryisoneof the mainbranchesofmacroeconomics
slide25

Macro

REAL GDP AND GROWTH

Mankiw (2011)

slide26

Macro

REAL GDP AND GROWTH

Mankiw (2011)

slide27

Macro

  • REFERENCE
  • Mankiw, G.N. (2010) BriefPrinciplesofMacroeconomics, 6° ed.,