100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
College aantekeningen Macroeconomics: A European Perspective (ECB1MACR) $9.12   Add to cart

Class notes

College aantekeningen Macroeconomics: A European Perspective (ECB1MACR)

 4 views  0 purchase
  • Course
  • Institution

This document contains all material for the course Macroeconomics, such as lecture notes, literature and sample questions.

Preview 4 out of 138  pages

  • September 11, 2022
  • 138
  • 2020/2021
  • Class notes
  • Drs. f.h. van der salm
  • All classes
avatar-seller
Macroeconomics – everything

Macroeconomics, A European Perspective – Week 1 (Unit 13)
 Fluctuations in the total output of a nation (GDP) affect unemployment, and unemployment
is a serious hardship for people.
 Economists measure the size of the economy using the national accounts: these measure
economic fluctuations and growth.
 Households respond to shocks by saving, borrowing, and sharing to smooth their
consumption of goods and services.
 Due to limits on people’s ability to borrow (credit constraints) and their weakness of will,
these strategies are not sufficient to eliminate shocks to their consumption.
 Investment spending by firms (on capital goods) and households (on new housing) fluctuates
more than consumption.

I. Introduction to macroeconomics

What is macroeconomics?
 Economics: domain concerned with the production, use and management of resources
 Macro: as a whole (from the Greek ‘makro’ which means large)
Societal relevance might be larger
 Macroeconomic choices shape society as a whole

Differences with microeconomics
 Emergent properties
o Property that is present when you have something in large quantities, but not in
small quantities
o Require interaction
o Example: inflation and consumer confidence require many transactions
 General equilibrium effects
o Individual behaviour affects the price level
o The price level is an input for individual behaviour
o Example: If your income doubles, can you buy a bigger house? vs. If all incomes
double, can you buy a bigger house?
 Economy-wide factors
o Economic sectors
o Government
o Central bank

Short-run macro Long-run macro
Involves the business cycle (4-7 years) Most other macro has a longer time frame
Dominates economic news and short-term Important for understanding the structure of
policy making the economy
Key elements: Key elements:
 Shocks and policy (monetary, fiscal)  Changes in institutions, technology and
affect the economy incentives affect the structure of the
 The economy returns towards well- economy
defined equilibrium  No well-defined equilibrium

Macro policy is about smoothing (short-run)
a. Idiosyncratic shocks

1

,  Affect only one household/firm
 Example: new job/job loss, accident, winning the lottery
 Are not macro-relevant
b. Economy wide shocks
 Affect everyone
 Example: inflation, fall/increase house prices, stock market crash/boom
 Are macro-relevant, input for macro-policy

II. Macroeconomic models

What is an economic model?
A simplified description of reality that allows for analysis of a usually complicated issue. A model is
not a correct representation of reality. Yet, model provides insights.
Goals of models
 Positive goals: Understanding, Validation, forecasting
 Normative goals: Policy options (counterfactual analysis)

Traditions in macro-modelling
1. Large-scale macroeconomic models
2. Small theoretical model
3. Empirical work
4. Agent based models

Correlation may not be causation
 Correlation: A statistical association in which knowing the value of one variable provides
information on the likely value of the other, for example high values of one variable being
commonly observed along with high values of the other variable. It can be positive or
negative (it is negative when high values of one variable are observed with low values of the
other). It does not mean that there is a causal relationship between the variables.
 Causality: A direction from cause to effect, establishing that a change in one variable
produces a changes in another. While correlation is simply an assessment that two things
have moved together, causation implies a mechanism accounting for the association, and is
therefore a more restrictive concept.

III. GDP and Components

GDP
= aggregate output
 A measure of the market value of the output of the economy in a given period.
 Gross Domestic Product
o Product = everything that is produced
o Domestic = in the country
o Gross = no discount for depreciation
 How to use GDP?
o Level: Measure for the size of the tax base
o Changes over time: Measure for economic growth
o Between countries: Measure for relative economic power
o Per capita: Crude measure for productivity

Economic growth is not a smooth process. We often hear about economies going through a boom or
a recession as growth swings from positive to negative.

2

,3 ways to calculate GDP // macro circularity
1. Production approach
 Sum of value added of everything produced in the domestic economy
 Production is measured by the value added by each industry: this means that the
cost of goods and services used as inputs to production is subtracted from the value
of output. These inputs will be measured in the value added of other industries,
which prevents double-counting when measuring production in the economy as a
whole.
 Value added: For a production process this is the value of output minus the value of
all inputs (called intermediate goods). The capital and labour used in production are
not intermediate goods. The value added is equal to profits before taxes plus wages.
2. Income approach
 The sum of all incomes received, comprising wages, profits, the incomes of the self-
employed, and taxes received by the government.
3. Spending approach
 The total spent by households, firms, the government and residents of other
countries on domestically produced goods and services

The relationship between spending, production, and incomes in the economy as a whole can be
represented as a circular flow: the national accounts measurement of GDP can be taken at the
spending stage, the production stage, or the income stage.
 National accounts: The system used for measuring overall output and expenditure in a
country.

Two views on GDP
a. “world’s most powerful statistical indicator of national development and progress” – Philipp
Lepenies (2016)
b. “The welfare of a nation can scarcely be inferred from a measurement of national income as
defined by the GDP.” – Simon Kuznets (1932)

a. Powerful statistical indicator
 Integral part of language of macro-economists and statisticians (National accounts, ESA95)
 Calculated in all countries at quarterly frequency

b. Bad measure for well-being
 Missed traded-offs
o Individual trade-offs: labour  leisure
o Societal trade-offs: environment, social cohesion, equality
 Not all spending is “happy” spending
o People would rather not spend money on cancer treatment
 With consequences
o Society focusses more on production, than on well-being
o Leads to less well-being

GDP components (spending approach)
 relates total production (Y) to expenditure (C+I+G+X-M)
 Macro-economics National income formula: Y = C + I + G + (X – M)

Y = C + I + G + (X – M)
 National income: GDP (Y)

3

, To calculate GDP, which is the aggregate demand for what is produced in the country, we
take the total of the components of spending in the economy.
 Consumption (C)
Expenditure on consumer goods including both short-lived goods and services and long-lived
goods, which are called consumer durables.
 Investment (I)
Expenditure by firms on newly produced capital goods (machinery and equipment) and
buildings, including new housing.
 Government Spending (G)
Expenditure by the government to purchase goods and services. When used as a component
of aggregate demand, this does not include spending on transfers such as pensions and
unemployment benefits.
 Exports (X)
Domestically produced goods and services that are purchased by households, firms, and
governments in other countries.
 Imports (M)
Goods and services purchased by households, firms, and governments in the home economy
that are produced in other countries.

 Net exports (X-M)
Also called the trade balance, this is the difference between the values of exports and
imports. The trade balance is a deficit if the value of exports minus the value of imports is
negative; it is called a trade surplus if it is positive.

IV. Okun’s Law

Okun’s law
 Relationship between changes in unemployment and changes in output (changes in GDP
growth)
 The empirical regularity that changes in the rate of growth of GDP are negatively correlated
with the rate of unemployment.  A higher output growth is associated with a decrease in
unemployment and vice versa.
 First noted by Arthur Melvin Okun in the 1960s
 “Rule of thumb” … no causality
 Can be modelled: Y = a + b u
o a, b constants
o Y change in GDP
o u change in unemployment
 Note: Core uses u = a +b Y

Okun’s coefficient: The change in the unemployment rate in percentage points predicted to be
associated with a 1% change in the growth rate of GDP.

A fall in output growth  A rise in the unemployment rate  A fall in wellbeing


V. Fluctuations

Business cycle: Alternating periods of faster and slower (or even negative) growth rates. The
economy goes from boom to recession and back to boom.



4

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller bodejong2001. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $9.12. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

81113 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$9.12
  • (0)
  Add to cart