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Samenvatting Macroeconomics a European perspective
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INTRODUCTIONChapter 1: A TOUR OF THE WORLD
1.1 EUROPE AND THE EURO
When macroeconomists study an economy, they first look at three variables:
- Output: the level of production of the economy as a whole – and its rate of growth
- The unemployment rate: the proportion of workers in the economy who are not employed
and are looking for a job
- The inflation rate: the rate at which the average price of the goods in the economy is
increasing over time
Three main issues that have been at the heart of the economic debate for a long time:
1. High unemployment: this has not always been the norm in Europe --> very low until the late
1970s.
2. Growth of income per person (or per capita): gap between income per capita in Europe and
the VS has started to grow since the 1980s.
3. The introduction of a common currency, the euro: what has the euro done for Europe? What
macroeconomic changes has it brought about? How should macroeconomic policy be
conducted in this new environment? Etc.
Supporters of the euro point to:
1. Its enormous symbolic importance: no more wars between each other because of having
a common currency
2. The economic advantages of having a common currency: no more changes in the relative
price of currencies for European firms to worry about, and no more need to change
currencies when travelling between euro countries.
Others worry about serious economic costs: a common currency means a common monetary
policy, and that means the same interest rate across the euro countries:
- One country is in a recession, while another country is in an economic boom:
▪ Recession: lower interest rates to increase spending and output
▪ Economic boom: higher interest rates to slow down its economy
Why can interest rates drop from 10% to 3%?
--> interest rates reflect a country’s credibility at maintaining low inflation: the ECB enjoys a better
reputation than a local bank and this is reflected in much lower interest rates.
1.2 THE ECONOMIC OUTLOOK IN THE USA
Output growth rate Unemployment rate Inflation rate
1991-2000 2001-2011 1991-2000 2001-2011 1991-2000 2001-2011
3.3 1.6 4.8 6.2 2.8 2.3
- The average rate of growth was 3.3% per year, substantially higher than the average growth
rate in the previous two decades
- The average unemployment rate was 4.8%, again substantially lower than the average
unemployment rate in the previous two decades
- The average inflation rate was 2.8%, slightly higher than in Europe, but lower than the
average inflation rate over the previous two decades
,Four economic shocks in the USA:
1. Oil price increase: earlier a barrel of oil cost $20, later it was $106 per barrel
--> if oil becomes more expensive, this means that in order to import the same amount of oil,
importing countries will have to transfer a greater share of their income to the oil producing
countries.
2. A fall in house prices: house prices were related to three variables:
• Population growth
• Construction costs
• Interest rates
--> none of these factors explains the extraordinary rise in the price of homes: speculative
bubble
3. A fall in the stock marked reduced the value of households’ wealth invested in equities
4. A restriction of credit made it more difficult and expensive to borrow from banks
If you purchase more goods than you are able to sell, it means that your spending exceeds your
income, and you must bridge the difference by borrowing. Exactly the same thing is true for
countries.
1.3 THE LARGEST EMERGING ECONOMIES
The BRIC countries (Brazil, the Russian Federation, India, China) have grown rapidly over the past
decade and are now the largest economies outside of the group of advanced countries.
China has been growing very fast for more than two decades, and its growth rate is almost twice that
of the others. Where does the growth come from?
1. Very high accumulation of capital: investment rate 40-45% --> higher productivity, higher
output
2. Very fast technological progress: the Chinese government has been encouraging foreign
firms (more productive firms) to come and produce in China (less productive)
In many countries, widespread corruption and poor property rights make firms unwilling to invest.
Why is China so much better?
1. This is the result of a slower, better managed transition: many firms remain owned by the
state
2. The fact that the communist party has remained in control has actually helped the economic
transition: tight political control, has allowed for a better protection of property rights, at
least for firms, giving them incentives to invest
1.4 LOOKING AHEAD
-
,Chapter 2: A TOUR OF THE BOOK
2.1 AGGREGATE OUTPUT
Aggregate is the word macroeconomists use for total.
GDP: production, and income
The measure of aggregate output in the system of national accounts is called the gross domestic
product, or GDP, for short.
A simple example:
- Firm 1 produces steel, employing workers and using machines to produce the steel. It sells
the steel for €100 to Firm 2, which produces cars. Firm 1 pays its workers €80, leaving €20 in
profit to the firm.
- Firm 2 buys the steel and uses it, together with workers and machines, to produce cars.
Revenues from car sales are €200. Of the €200, €100 goes to pay for steel and €70 goes to
workers in the firm, leaving €30 in profit to the firm.
Summary:
Steel company (Firm 1) Car company (Firm 2)
Revenues from sales €100 Revenues from sales €200
Expenses €80 Expenses €170
Wages €80 Wages €70
Steel purchase €100
Profit €20 profit €30
An intermediate good: used in the production of goods
Definitions of GDP:
1. GDP is the value of the final goods and services produced in the economy during a given
period
The important word here is final. We want to count only the production of final goods, not
intermediate goods.
2. GDP is the sum of value added in the economy during a given period
The term value added means exactly what it suggests. The value added by a firm is defined
as the value of its production minus the value of the intermediate goods used in production.
3. GDP is the sum of incomes in the economy during a given period
So far, we have looked at GDP from the production side. The other way of looking at GDP is
from the income side. In our example, think of the revenues left to a firm after it has paid for
its intermediate goods:
- Some of the revenues go to pay workers: labor income
- The rest goes to the firm: capital income or profit income
To summarize:
- From the production side: GDP equals the value of the final goods and services
produced in the economy during a given period
- Also from the production side: GDP is the sum of value added in the economy during
a given period
- From the income side: GDP is the sum of incomes in the economy during a given
period
, Two lessons to remember:
- GDP is the measure of aggregate output, which we can look at from the production side
(aggregate production), or the income side (aggregate income)
- Aggregate production and aggregate income are always equal
Nominal and real GDP
Nominal GDP is the sum of the quantities of final goods produced times their current price. Nominal
GDP increases over time for two reasons:
1. The production of most goods increases over time
2. The prices of most goods also increase over time
Real GDP is constructed as the sum of quantities of final goods times constant (rather than current)
prices.
Example:
Real GDP
Year Quantity of cars Price of cars Nominal GDP (in 2005 prices)
2004 10 €20,000 €200,000 €240,000
2005 12 €24,000 €288,000 €288,000
2006 13 €26,000 €338,000 €312,000
- To construct real GDP, we need to multiply the number of cars in each year by a common
price: 2005
- Real GDP in 2004: 10 x €24,000 = €240,000
Real GDP in 2006: 13 x €24,000 = €312,000
Real GDP must be defined as a weighted average of the output of all final goods.
The terms nominal GDP and real GDP each have many synonyms, and you are likely to encounter
them in your readings:
- Nominal GDP is also called GDP at current prices
- Real GDP is also called GDP in terms of goods, GDP at constant prices, GDP adjusted for
inflation
- GDP will refer to real GDP and Yt will denote real GDP in year t
- Nominal GDP, and variables measured in current prices, will be denoted by a euro sign in
front of them: €Yt for nominal GDP in year t
GDP: level versus growth rate
The level of GDP gives the economic size of a country. Equally important is the level of real GDP per
capita, the ratio of real GDP to the population of the country: it gives us the average standard of
living of the country.
In assessing the performance of the economy from year to year, economists focus on GDP growth.
- Periods of positive GDP growth are called expansions
- Periods of negative GDP growth are called recessions
2.2 OTHER MAJOR MACROECONOMIC VARIABLES
The unemployment rate
Unemployment and inflation tell us about other important aspects than GDP of how an economy is
performing.
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