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Summary Macroeconomics - A European Perspective
Extensive summary of the first year bachelor course macroeconomics at UU. It is written entirely in English. It's a summary of the book Macroeconomics: A European Perspective
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Voorbeeld 4 van de 72 pagina's
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Door: Gaga21 • 5 jaar geleden
Door: fitorezyh • 6 jaar geleden
Door: jannekekielman • 7 jaar geleden
This is not a summary, a lot of it is just passages copied pasted from the book. Either the information should be structured in a nice global way, or a shortened version of the theories, not taking out some sentences
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Voorbeeld van de inhoud
Chapter 1. A tour of the world1.1 Europe and the euro
Standard of living: A level of output per person. The output of the European Union/ EU-27 exceeds
the output of the USA, and many of them have a standard of living not far from that of the USA.
When macroeconomists study economy, they first look at three variables:
1. Output – the level of production of the economy as a whole – and its rate of growth.
2. The unemployment rate – the proportion of workers in the economy who are not employed
and are looking for a job.
3. The inflation rate – the rate at which the average price of the goods in the economy is
increasing over time.
Although short-run problems dominate the debate, European macroeconomists are also concerned
about three main issues that have been at the heart of the economic debate for a long time:
1. High unemployment (especially in Europe)
2. Growth of income per person
3. A common currency, the euro. Supporters of the euro point to its enormous symbolic
importance. They also point to the economic advantaged of having a common currency: no
more changes in the relative price of currencies for European firms to worry about, no more
need to change currencies when travelling between euro countries. Together with the
removal of other obstacles to trade among European countries, the euro will contribute to
the creation of a large economic zone in the world. Others worry that the symbolism of the
euro has brought serious economic costs. They point out that common currency means a
common monetary policy, and that means the same interest rate across the euro countries
(what happens if one country plunges into recession while another is in the middle of an
economic boom). One important benefit has come to those countries that entered the euro
with high public debt (such as Italy), and has come in the form of a sharp reduction of
interest rates. Why have interest rates dropped so much? Mainly because interest rates
reflect a country’s credibility at maintaining low inflation. Since the cost of public debt is the
interest that the state pays to holders of public bonds, the lower the interest rate, the lower
the cost of debt.
1.2 The economic outlook in the USA
The US economy has slowed down, because families in the USA were hit by 4 economic shocks which
occurred over a short period of time:
1. Increase in oil prices since the end of the WO II, though now partially reversed
2. Fall in price of their homes: Figure 1.4 relates house prices to three variables: population
growth, construction costs and interest rates. The point is that none of these factors explains
the extraordinary rise in the price of homes in the past ten years, which has the
characteristics of a speculative bubble.
3. Fall of the stock market: A fall in de stock market reduced the value of households’ wealth
invested in equities.
4. Restriction of credit: A restriction of credit made it more difficult and expensive to a borrow
from banks. Spending exceeds income you have to borrow.
1.3 The largest emerging economies
BRICs: Brazil, Russian Federation, India and China. Have grown rapidly over the past decades and are
now the largest economies outside of the group of advanced countries. With two other large and
rapidly growing economies, Indonesia and South Africa, they form the BRIICS. ‘Rule of 70’: in order to
know the approximate number of years for a variable to double, take the number 70 and divide it by
the growth rate of that variable. The growth of China comes from two sources:
Summary Macroeconomics
1
, 1. High accumulation of capital: the investment rate is very high. More capital means higher
productivity and higher output.
2. Very fast technological progress. The strategy of Chinese government has been to encourage
foreign firms to come and produce in China, these are more productive. Another aspect of
the strategy has been to encourage joint ventures between foreign and Chinese firms;
making Chinese firms work with and learn from foreign firms has made them much more
productive.
IMF: International Monetary Fund
Chapter 2. A tour of the book
2.1 Aggregate output
System of national accounts (SNA): Accounting system. They first define concepts, and then
construct measures corresponding to these concepts.
GDP: Production and income
The measure of aggregate (total) output in the system of national accounts is called the gross
domestic product (GDP). GDP is the most important macroeconomic variable.
Intermediate good: A good used in the production of another good. Some goods can be both final
goods and intermediate goods. Potatoes sold directly to consumers are final goods. Potatoes used to
produce potato chips are intermediate goods.
Definitions of GDP:
1. GDP is the value of the final goods and services produced in the economy during a given
period. Construct GDP: recording and adding up the production of all final goods.
2. GDP is the sum of value added in the economy during a given period. Value added: value of
its production minus value of the intermediate goods used in production; or labor income +
capital income.
3. GDP is the sum of incomes in the economy during a given period. You can think about
aggregate output/ GDP in three different but equivalent ways (aggregate production =
aggregate income):
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.
Nominal and real GDP
Nominal GDP/ GDP at current prices: The sum of the quantities of final goods produced times their
current price. This makes clear that nominal GDP increases over time for 2 reasons:
1. The production of most goods increases over time.
2. The prices of most goods also increase over time.
Real GDP/ GDP in terms of goods/ GDP at constant prices/ GDP adjusted for inflation: The sum of
the quantities of final goods times constant/common prices. The problem in constructing real GDP in
practice is that there is obviously more than one final good. Real GDP must be defined as a weighted
average of the output of all final goods.
Summary Macroeconomics
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,GDP: Level versus growth rate
Real GDP per capita: The ratio of real GDP to the population of the country. It gives the average
standard of living in a country.
In assessing (beoordelen) the performance of the economy from year to year, economists focus on
the rate of growth of real GDP, on GDP growth. GDP growth in year t is constructed as (Yt – Yt-1)/Yt-1.
Expansions: Periods of positive GDP growth.
Recessions: Periods of negative GDP growth. Although there is no official definition of what
constitutes a recession, the convention is to refer to a recession if the economy goes through at least
two consecutive quarters of negative growth.
Hedonic pricing: An approach to calculating real GDP that treats goods as providing a collection of
characteristics, each with an implicit price (example: focus p.21). It is used to estimate changes in the
price of complex and fast changing goods, such as automobiles and computers.
2.2 Other major macroeconomic variables
The unemployment rate
Employment (N): The number of people who have a job.
Unemployment (U): The number of people who do not have a job but are looking for one.
Labor force (L): The sum of employment and unemployment, L = N + U.
Unemployment rate (u): The ratio of number of people who are unemployed to the number of
𝑈
people in the labor force, 𝑢 = 𝐿 .
Labor force survey (LFS): Large surveys of households to compute the unemployment rate. It relies
on interviews to a representative sample of individuals.
Not in the labor force: Those who do not have a job and are not looking for one.
Discourage workers: When unemployment is high, some of the unemployed give up looking for a job
and therefore no longer counted as unemployed.
Participation rate: The ratio of the labour force to the total population of working ages.
Why do economists care about unemployment? There are two reasons:
1. Because of its direct effect on the welfare of the unemployment. Unemployment is often
associated with financial and psychological suffering.
2. Because it provides a signal that the economy may not be using some of its resources
efficiently. The economy is now utilizing efficiently its human resource. But an economy in
which unemployment is very low may be over-utilizing its resources and may run into labor
shortages.
The inflation rate
Inflation: A sustained rise in the general level of prices – the price level.
Inflation rate: The rate at which the price level increases.
Deflation: Sustained decline in the price level. It corresponds to a negative inflation rate.
How to define the price level so the inflation rate can be measured? GDP deflator and CPI.
- GDP deflator: The ratio of nominal GDP to real GDP; a measure of the overall price level.
Gives the average price of the final goods produced in the economy. Pt = Nominal GDPt/Real
GDPt = €Yt/Yt. If nominal GDP increases faster than real GDP, the difference must come from
an increase in price. GDP deflator is an index number. Rate of change = 𝜋t = (Pt – Pt-1)/Pt-1
It gives the rate at which the general level of prices increases over time – the rate of inflation.
- CPI: Consumers care about the average price of consumption. The set of goods produced in
the economy is not the same as the set of goods purchased by consumers, for two reasons:
Some of the foods in GDP are sold not to consumers but to firms, government or foreigners.
Some of the goods bought by consumers are not produced domestically but are imported
from abroad.
Summary Macroeconomics
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, Cost of living: Average price of consumption. To measure the cost of living, macroeconomists
look at the consumer price index.
Harmonized index of consumer prices (HICP): Most frequently used price index in Europe. It
is an indicator of inflation and price stability for the European Central Bank. It is a consumer
price index which is compiled according to a methodology that has been harmonized across
EU countries. The HICP gives comparable measures of inflation in different subsets of
European countries. The euro area HICP is a weighted average of price indices of member
states who have adopted the euro. It is an index.
Increase is in HICP is smaller than the increase in GDP deflator The price of goods
consumed (measured by HICP) was lower than the price of goods produced (measured by
GDP deflator). When the price of imported goods decrease relative to the price of goods
produced, the HICP increases less than the GDP deflator.
Why do economists care about inflation? If a higher inflation rate meant just a faster but
proportional increase in all prices and wages – a case called pure inflation – inflation would be only a
minor inconvenience, as relative prices would be unaffected. Workers’ real wage: The wage
measured in terms of goods rather than in euros. Economists care about inflation, because there is
no such thing as pure inflation:
- During periods of inflation, not all prices and wages rise proportionately.
- Inflation leads to other distortion. Some prices, which are fixed by law or by regulation, lag
behind the others, leading to changes in relative prices. Variation in relative prices also lead
to more uncertainty, making it harder for firms to take decisions about the future, such as
investment decisions. Taxation interacts with inflation to create more distortion.
Deflation: A decrease in the price level.
Recession: A decrease in real output
2.3 Output, unemployment and the inflation rate, Okun’s law and the Phillips curve
Output, unemployment and the inflation rate are not independent.
Okun’s law: If output growth is high, unemployment will decrease. The regression line is downward
sloping and fits the cloud of points quite well. The line crosses the horizontal axis at the point where
output growth is roughly equal to 3%. In economic terms, it takes a growth rate of about 3% to keep
unemployment constant. This is for two reasons: the first is that population, and thus the labor force,
increases over time, so employment must grow over time just to keep the unemployment rate
constant. The second is that output per worker is also increasing with time, which implies that output
growth is higher than employment growth.
Phillips curve: When unemployment becomes very low, the economy is likely to overhead, and this
will lead to upward pressure on inflation. The regression line is downward sloping, although the fit is
not as tight as it was for Okun’s law.
A successful economy is an economy which combines high output growth, low unemployment and
low inflation.
2.4 The short run, medium run and long run
What determines the level of aggregate output in an economy?
- Movements in output come from movement in the demand for goods.
- How much the economy can produce. This depends on how advanced the technology of the
country is, how much capital it is using, and the size and skills of its labor force. These factors
– not consumer confidence – are the fundamental determinants of a country’s level of
output.
- The true determinants of output are factors like a country’s education system, its saving rate,
and the quality of its government.
Summary Macroeconomics
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