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3006 Slides

  1. 1. Macroeconomics for Business <ul><li>Microeconomics </li></ul><ul><li>Macroeconomics </li></ul><ul><ul><li>Living Standards (y/pop.) </li></ul></ul><ul><ul><li>Inflation (P) </li></ul></ul><ul><ul><li>Unemployment (U) </li></ul></ul>.
  2. 2. Living Standards <ul><li>Cross-Sectional Data </li></ul><ul><ul><li>North America, Western Europe, Japan vs. </li></ul></ul><ul><ul><li>South America, Eastern Europe, South Asia, Africa </li></ul></ul><ul><li>Time-Series Data </li></ul><ul><ul><li>US over time; Sub-Saharan Africa </li></ul></ul><ul><ul><li>China; Singapore </li></ul></ul>
  3. 6. Inflation <ul><li>Rule of 72 </li></ul><ul><li>Cross-Sectional Data--Venezuela vs. Japan </li></ul><ul><li>Time-Series Data--Germany Then and Now; USA </li></ul>
  4. 7. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000
  5. 8. Unemployment <ul><li>Cross-Sectional Data: </li></ul><ul><ul><li>Switzerland vs. Belgium </li></ul></ul><ul><li>Time-Series Data: </li></ul><ul><ul><li>The U.S. today vs. 1933 </li></ul></ul>
  6. 9. Y, y: Gross Domestic Product <ul><li>GDP vs. GNP </li></ul><ul><li>Market Value </li></ul><ul><li>Final Goods </li></ul><ul><li>Produced </li></ul><ul><li>Year </li></ul>
  7. 10. Value Added = Sales - Cost of Purchased Materials Cotton $5 5-0 = 5 Shirt-Wholesale 15 15-5 = 10 Shirt-Retail 30 30-15 = 15 30 Sales Value Added
  8. 11. Nominal GDP, Real GDP & the GDP Deflator Nominal (Y) = ( P 2005 x Q 2005 ) - (P 2005 x Q 2005 ) [sales] [materials] Real (y) = (P 1997 x Q 2005 ) - (P 1997 x Q 2005 ) GDP Deflator = Nominal GDP/Real GDP Base Year? Chain-Weighted Real GDP
  9. 12. Alternative Measures of Y,y <ul><li>NDP, NNP </li></ul><ul><li>National Income </li></ul><ul><li>Personal Income </li></ul><ul><li>DPI </li></ul><ul><li>Personal Consumption </li></ul><ul><li>Personal Savings </li></ul><ul><li>Size Distribution </li></ul><ul><li>Functional Distribution </li></ul>
  10. 13. Alternative Measures of P <ul><li>GDP Deflator </li></ul><ul><li>Consumer Price Index </li></ul><ul><li>Producer Price Index </li></ul><ul><li>Inflation vs. the Price Level </li></ul>
  11. 14. U = (unemployed/LF) x 100% <ul><li>LF </li></ul><ul><li>Actively looking </li></ul><ul><li>Discouraged workers </li></ul><ul><li>“ Unemployed but with a job” </li></ul><ul><li>Age </li></ul><ul><li>Paid work </li></ul>
  12. 15. <ul><li>GDP Gap = Y p - Y </li></ul><ul><li>Spending components of GDP C (70%) </li></ul><ul><li>I (17%) </li></ul><ul><li>G (19%) </li></ul><ul><li>(X-M) (-6%) </li></ul>
  13. 16. The Federal Reserve System <ul><li>Board of Governors </li></ul><ul><ul><li>Chairman </li></ul></ul><ul><li>District Banks </li></ul><ul><li>FOMC (12) = 7 + 5 </li></ul><ul><li>Lender of Last Resort </li></ul><ul><li>Targeting of Federal Funds Rate </li></ul>
  14. 17. Money Supply Definitions <ul><li>Monetary Base </li></ul><ul><li>M1 </li></ul><ul><li>M2 </li></ul>
  15. 18. The Money Supply: Central Bank Impacts <ul><li>Open Market Operations </li></ul><ul><li>Discount Rate </li></ul><ul><li>Reserve Requirements </li></ul>
  16. 19. The Money Supply: Private Impacts <ul><li>Currency/Deposit Ratio </li></ul><ul><li>Excess Reserves </li></ul><ul><li>Account Shifting </li></ul>
  17. 20. CLASSICAL MACROECONOMICS VS. MERCANTILISM <ul><li>Real Assets vs. Money </li></ul><ul><li>Openness vs. Balance of Trade </li></ul><ul><li>Free Markets/Free Trade vs. Barriers, Subsidies </li></ul>Adam Smith
  18. 21. COMPETITIVENESS <ul><li>1. USA </li></ul><ul><li>2. Switzerland </li></ul><ul><li>3. Denmark </li></ul><ul><li>4. Sweden </li></ul><ul><li>5. Germany </li></ul>
  19. 22. Advantages of Backwardness <ul><li>Copy existing technology </li></ul><ul><li>Small absolute gains constitute big percentages (1 2 = 100%) </li></ul>
  20. 23. Competitiveness: Main Factors <ul><li>Openness </li></ul><ul><li>Role of Govt </li></ul><ul><ul><li>Tax Rates </li></ul></ul><ul><ul><li>Regulation </li></ul></ul><ul><li>Labor </li></ul><ul><li>Financial Sector </li></ul>
  21. 25. Classical View of Production (y) <ul><li>Background </li></ul><ul><li>y = F(K,N) </li></ul><ul><li>N: N D & N S </li></ul><ul><li>K = K </li></ul>y N Slope =  y/  N = MPN
  22. 26. MPN N Rule: Proceed as long as MR > MC Here: MR = P x MPN MC = W N VMP = P x MPN W 0 N D STOP View of Employment (N)
  23. 27. What if W Changes? W, VMP N W 0 W 0 ’ N D N D ’ VMP
  24. 28. At N D ... <ul><li>W = P x MPN = VMP </li></ul><ul><li>W/P = MPN </li></ul><ul><li>Real Wages Around the World </li></ul>
  25. 29. N S : Labor Supply <ul><li>Upward Slope Not a Straightforward Matter </li></ul><ul><li>Immigration </li></ul><ul><li>LFP: The Changing Nature of Household Production </li></ul><ul><li>Leisure Time in the US </li></ul>N W N S
  26. 30. Labor Market Equilibrium W N N S N D (P x MPN) W E N E Full Employment?
  27. 31. Overall Equilibrium for y, N y N W N y N S N D y E N E
  28. 32. What if P Rises? <ul><li>Labor Demand Shifts Right </li></ul><ul><li>Labor Supply Shifts Left </li></ul><ul><li>‘ N’ is Unaffected </li></ul><ul><li>So ‘y’ Is Also Unaffected </li></ul>y P y s P 0 P 1 y A B
  29. 33. Key Classical Assumptions <ul><li>Wages Adjust Flexibly to Equilibrium </li></ul><ul><ul><li>Contracts? </li></ul></ul><ul><ul><li>Incomplete Information--Inertia? </li></ul></ul><ul><li>Workers Understand Their Real Wage and Base Their Labor Supply Decisions on It </li></ul>
  30. 34. View of Inflation <ul><li>Equation of Exchange </li></ul><ul><ul><li>MV = PT </li></ul></ul><ul><ul><li>MV = Py </li></ul></ul><ul><li>Quantity Theory of Money </li></ul>
  31. 35. Consumer Prices 1800 - 2000 price level 1800 1860 1910 1940 1970 2000
  32. 36. Classical View of y d P y y d Monetary vs. Nonmonetary Factors
  33. 37. The Classical Theory of Interest Rates R NPS, I E R E NPS Key Factors: 1) Net Private Saving 2) Gross Investment I
  34. 38. Suppliers and Demanders of Loanable Funds <ul><li>Households </li></ul><ul><li>Businesses </li></ul><ul><li>Government </li></ul><ul><li>Foreigners </li></ul>
  35. 39. The Impact of the Government’s Budget R R B R A A B S (NPS) D (I + PSBR) I LF I A I B
  36. 40. Budget Surplus NPS S (NPS + SURPLUS ) R I R A R B A B LF I A I B
  37. 42. Role of R: Classical View <ul><li>Coordinate Present vs. Future </li></ul><ul><li>Prevent Nonmonetary Events from Affecting V, Total Spending, y D </li></ul><ul><li>y D = c + i + g; suppose deficit spending </li></ul><ul><ul><li>“ Crowding Out” </li></ul></ul>
  38. 43. J.M. Keynes (1883-1946) <ul><li>View of Capitalism </li></ul><ul><li>W E ? R E ? </li></ul><ul><li>S = I (ex ante) </li></ul><ul><li>Uncertainty, herd mentality, animal spirits, instability </li></ul>
  39. 44. Keynesian View (cont’d.) <ul><li>Quantity Adjustment vs. Price Adjustment </li></ul><ul><li>Y = E (Keynesian equilibrium) </li></ul><ul><li>E = C + I + G </li></ul><ul><li>Y = C + I + G </li></ul><ul><li>Fiscal Policy vs. Monetary Policy </li></ul>
  40. 45. Simple Keynesian Multipliers: No Crowding Out k E = 1/1-b k T = -b/1-b k BB = 1 Closing the GDP Gap
  41. 46. Housing Bubble 1975 1995 2005 HOUSING CONSUMER GOODS
  42. 47. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P
  43. 48. What if P Rises? <ul><li>Labor Demand Shifts Right </li></ul><ul><li>Labor Supply Shifts Left </li></ul><ul><li>‘ N’ is Unaffected </li></ul><ul><li>So ‘y’ Is Also Unaffected </li></ul>y P y s P 0 P 1 y A B
  44. 49. Classical, but with W = W P y y s P 0 P 1 y 0 y 1
  45. 50. The Liquidity Preference Theory of Interest Rates R M M S M D = L(R,Y) R E E Note Bond Market and LF
  46. 51. The Federal Reserve: June 2004 R M M D M S M S’ E E’ 1.00% 1.25%
  47. 52. y D -y S Analysis <ul><li>y S slope* </li></ul><ul><li>y D shifts (IS-LM events)* </li></ul><ul><li>y S shifts </li></ul><ul><li>y D slope </li></ul>
  48. 53. What if P Rises? <ul><li>Labor Demand Shifts Right </li></ul><ul><li>Labor Supply Shifts Left </li></ul><ul><li>‘ N’ is Unaffected </li></ul><ul><li>So ‘y’ Is Also Unaffected </li></ul>y P y s P 0 P 1 y A B
  49. 54. Keynesian y s Curve P y y d y d’ y s A B y A y B =y p P
  50. 55. Classical, but with W = W P y y s P 0 P 1 y 0 y 1
  51. 56. y S Shifts: Note Production Costs <ul><li>Transition from SR to LR </li></ul><ul><ul><li>Wage adjustment </li></ul></ul><ul><ul><li>Disappearance of money illusion (P e ) </li></ul></ul><ul><li>Supply shocks (energy, strikes, etc.) </li></ul><ul><li>Supply-side economics? (tr, regulation) </li></ul><ul><li>VLR: K, population, tech. </li></ul>
  52. 57. Restrictive Monetary Policy y D y D’ y S SR y S’ SR y S LR P y A B C
  53. 58. Stimulative Monetary Policy P y y D y D’ y S SR y S’ SR y S LR A B C
  54. 59. Monetarism <ul><li>M S -->Y SR and LR </li></ul><ul><li>M S -->y SR </li></ul><ul><li>M S -->P LR </li></ul><ul><li>Fiscal Policy? </li></ul><ul><ul><li>y D ? (Note slopes) </li></ul></ul><ul><ul><li>LR y S (role of govt) </li></ul></ul>Milton Friedman (1912- )
  55. 60. Name That Economist <ul><li>Classical </li></ul><ul><li>Keynesian </li></ul><ul><li>Neo-Keynesian </li></ul><ul><li>Supply-Sider </li></ul><ul><li>Monetarist </li></ul>Robert Mundell Supply-Sider
  56. 61. The Phillips Curve
  57. 62. Phillips Meets Friedman PC SR U P The Natural Rate of Unemployment PC LR Why Increased Inflation Can Only Temporarily Reduce Unemployment . A B C
  58. 63. Phillips Curve Movements
  59. 64. Types of Unemployment <ul><li>Natural </li></ul><ul><ul><li>Frictional </li></ul></ul><ul><ul><li>Structural </li></ul></ul><ul><ul><ul><li>Skills </li></ul></ul></ul><ul><ul><ul><li>Location </li></ul></ul></ul><ul><ul><ul><li>Labor Market Restrictions </li></ul></ul></ul><ul><li>Cyclical </li></ul>
  60. 65. P, U: Long Run Policies <ul><li>Target Low Inflation </li></ul><ul><li>Caution on Labor Market Restrictions, Welfare </li></ul><ul><li>Education & Training; Lifelong Learning </li></ul>.
  61. 66. Austrian Business Cycle Theory <ul><li>Nonneutral Injections of Money, Misdirection </li></ul><ul><li>i: Capital Goods vs. Consumption Goods </li></ul><ul><li>Later Reversal in Relative Prices and Resource Allocation </li></ul><ul><li>Frictions, Unemployment </li></ul>Friedrich Hayek
  62. 67. Austrian Business Cycle Theory R NPS, I NPS NPS +  M S I I 0 I 1 Natural Market PV & Duration; Misdirection E E’
  63. 68. A Metaphor: Pour in Honey P K P C
  64. 69. Share Prices: Japan vs. US CPI-Japan
  65. 70. Updating the Theory <ul><li>Responsiveness of C to R </li></ul><ul><ul><li>Durable Goods, Housing </li></ul></ul><ul><ul><li>Proceeds from Refi’s </li></ul></ul><ul><li>Wealth Effects on C </li></ul><ul><li>Duration of High-Tech Company Investments (dot.com cash flows) </li></ul><ul><li>“ R” vs. “Cost of Capital” </li></ul>
  66. 71. Housing Price Bubble? 1975 1995 2005 HOUSING CONSUMER GOODS
  67. 72. Long Run Growth <ul><li>System </li></ul><ul><li>Culture </li></ul><ul><li>Saving (K) </li></ul><ul><li>Education (Human K) </li></ul><ul><li>Technology </li></ul>$40000 5000 1500 $500
  68. 73. Competitiveness: Main Factors <ul><li>Openness </li></ul><ul><li>Role of Govt </li></ul><ul><ul><li>Tax Rates </li></ul></ul><ul><ul><li>Regulation </li></ul></ul><ul><li>Labor </li></ul><ul><li>Financial Sector </li></ul>
  69. 75. BALANCE OF PAYMENTS <ul><li>CREDITS (+) DEBITS (-) </li></ul><ul><li>CURRENT ACCOUNT: </li></ul><ul><ul><li>Exports Imports </li></ul></ul><ul><ul><li>Investment Income Investment Income Received Paid </li></ul></ul><ul><ul><li>Transfer Income Transfer Income Received Paid </li></ul></ul><ul><li>CAPITAL ACCOUNT: </li></ul><ul><ul><li>Capital Inflow Capital Outflow </li></ul></ul>
  70. 76. Flexible ER, Trade Deficit , BP = 0 foreign currency/$ $ Q (Q + CO ) (S) E ER E X (X + CI ) (D) (X-Q)<0 ER (X-Q=0)
  71. 77. Flexible ER, Trade Surplus, BP=0 X (X + CI) (D) foreign currency/¥ E ER E Q (Q + CO ) (S) ER (X-Q)=0 ¥
  72. 78. PURCHASING POWER PARITY? <ul><li>The Big Mac Test </li></ul><ul><li>Short Run </li></ul><ul><li>Long Run? Role of Inflation </li></ul><ul><li>Barriers </li></ul><ul><li>Sustained Capital Flows? </li></ul>
  73. 79. Major Reasons for Currency Movements <ul><li>Short-term: Expected IRRs, Central Bank intervention Long-term: </li></ul><ul><ul><li>PPP? </li></ul></ul><ul><ul><li>Reversal of Current Account Balance? </li></ul></ul><ul><ul><ul><li>Recent US </li></ul></ul></ul>$

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