Macroeconomics - Appunti

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Macroeconomics : introduction DEFINITIONS

D EFINITIONS

Economy

Key words in economy definition : wealth, production, trade

-

- There are different definitions : difficult to give one correct definition (each one focuses on different aspects)

There could be different approaches

‣

- Cambridge : The system of trade and industry by which the wealth of a country is made and used

- Oxford : The relationship between production, trade, and the supply of money in a particular country or region

Economics : how economy works

Key words in economics definition : consumption, production, wealth

-

- In Italian economy and economics are represented by one word : economia

Defined in two different ways

‣

- Cambridge : The way in which trade, industry, or money is organized, or the study of this

- Oxford : The branch of knowledge concerned with the production, consumption, and transfer of wealth.

macroeconomics ≠ microeconomics

macroeconomics ≠ microeconomics

Organized behavior, equilibrium of different actors at individual level

Focuses on a National level - Cambridge : The study of the economic problems of businesses

- Cambridge : The study of financial systems at a national level and people and the way particular parts of an economy behave

- Oxford : The branch of economics concerned with large-scale or - Oxford : The part of economics concerned with single factors and

general economic factors, such as interest rates and national the effects of individual decisions.

productivity

- In a wider perspective they are the same thing (there is a connection between the two)

In reality there is not a distinction | Underlying dynamics are the same

‣

- Individual relation that lead to aggregate relations

There are works in research that are trying to put the two studies together

‣

G RAPHS AND INDICATORS

-

Welfare across centuries

- GDP : added value to a product | Welfare or wellbeing of a country

- Before : around the 17 and 18 century the line was flat (flat welfare) : not much change

across those centuries

Sharp increase in welfare : first is Great Britain

‣

- Something happened that changed the welfare : First industrial revolution

From historical point of view : Scientific revolution brought to the development of tech.

‣ Improved everything in general

•

The technological revolution

Technological progress increases productivity and thus living standards

- For instance how much light (lumen-hours) an hour of work can buy

- The exponential is still going on : technology most important element affecting this improvements

New technologies : more productivity, increased living standards

‣

- Lumen- hours : unit of luminous light, how much light you can produce with one hour of work

- Before it took a lot exponential change : one hour of labour now generate much more light

→

Light seems to be almost free : it is cheaper than before

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Technological progress also greatly increased the speed of information flows

- Technological progress also greatly increased the speed of information flow

Key point : economy growth and welfare is linked to technology (there are also other

‣ elements)

Population growth

- One of the development of population growth

- Model by Max Roser

Stage one : low population, high growth rate, rural economic system (family lives in the

‣ country side, a lot of children was useful, they represented labour force)

Population has also experienced quick growth during industrialization (stages 2 and 3)

‣ due to falling death rate

Growth is currently slowing down in many industrialized countries (stage 4) due to falling

‣ birth rate

Stage five (where we are now) : society is not pushing on having children (costly)

‣

Environmental consequences

- Across centuries : there were some deviations, but it was more or less the same; last century : increase in temperature

- Increased production and population growth affects the environment

Global impacts : climate change

‣ Local impacts : pollution in cities, deforestation

‣ May technology provide the solution?

C APITALISM

- Adding market to an economic system with private property it is not capitalism

- When you add firms (a particular institution) you have capitalism

Firm is crucial, is the one which produces; uses and makes capital; they invest and by investing they innovate (improve efficiency)

‣ Is a pillar of capitalism

•

Capitalism needs a system of private parts

‣

- What is capitalism?

Oxford : an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than

‣ by the state

Cambridge : an economic, political, and social system in which property, business, and industry are privately owned, directed towards

‣ making the greatest possible profits for successful organizations and people

Merriam-Webster : an economic system characterized by private or corporate ownership of capital goods, by investments that are

‣ determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a

free market

- Capitalism: an economic system in which the main institutions are private property, markets,

and firms.

Other institutions for instance governments, families are also important.

‣

- Collecting intelligence concept : restricted number of people make choices for everyone

Instead of planned decision : in collecting intelligence more people (not connected)

‣ make decision, take decision at individual but produces a collective development of the

choice, firms collect (collective decision) 2 - 8 {chapter }

Key concepts in Capitalism

- Private property: ownership rights over possessions

Does not include some essentials e.g. air, knowledge

‣

- Markets: a way for people to exchange products and services for their mutual benefit.

- Firms: a business organization that uses inputs and technology to produce outputs, and sets prices to at least cover production costs.

Inputs and outputs are private property

‣ Firms use markets to sell outputs

‣

The capitalist revolution

- Private incentives for innovation deriving from market competition and secure private property.

- Firms led by those with proven ability to produce goods at low cost.

- Public policy supporting these conditions, and supplying other essential goods and services.

The role of governments :

- There are many varieties of capitalism, depending on the particular political system

- The government’s importance in the capitalist economy differs among nations because

political systems differ.

Where we live now it is not pure capitalism : mixture with market economy

‣ Governments take decision for health (managed by the public sector : not controlled by

‣ the private)

The economy where we live now is a mixture of market economy and governments plays

‣ an important role

I NEQUALITY

Inequality around the world

- Debated topic also in political economy

Trends in inequality across countries

- There are cross-country differences in the level of inequality, but also common trends for instance a fall in inequality over 1920-1980.

- Countries differed in what happened after 1980 though but in general inequality increased

Technology and inequality

- Automation increases demand for some skills and reduces demand for others.

- Effects:

Machines replace routine labour, increasing unemployment.

‣ Workers whose skills are complementary earn higher wages, increasing inequality.

‣ Profits share increase, increasing inequality

‣ MACROECONOMICS

- Adam Smith with “The wealth of nations”, 1776

- John Maynard Keynes “The general theory of employment, interest, and money”, 1936

O BJECTIVES

- What are the objectives of the Macroeconomics/Political Economy?

(Historical exponents of political economy: Adam Smith, John Stuart Mill, David Ricardo, Henry George, Karl Marx, John Maynard

‣ Keynes, among others)

Studying production and trade, and their relations with law, custom, governments and public institutions, as well as with the

‣ distribution of national income and wealth

Studying the intervention of public institutions in the economic system and suggesting the instruments to use to achieve some socially

‣ desirable goals

- How do we reach these objectives?

By collecting and analysing data from the real world

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By designing economic models

‣

- What is a model?

A description or analogy used to help visualise something (such as an atom) that cannot be directly observed (Merriam-Webster)

‣ A simplified description, especially a mathematical one, of a system or process, to assist calculations and predictions. (Oxford)

‣

- And an economic model?

Mathematical instrument represent the idea and other aspect of the way

‣

M ODELS

- Monopoly example :

Created by Elizabeth Magie, a follower of the political economist Henry

‣ George

First patented in 1904 as “The Landlord's game”

•

- Magie declared: “It might well have been called the ‘Game of Life’, as it

contains all the elements of success and failure in the real world, and the

object is the same as the human race in general seems to have, i.e., the

accumulation of wealth.”

- What do we want to describe with our model?

The relation among several important economic indicator, such as:

‣ Income and production (goods markets)

• Wages, prices, unemployment rate (labour markets)

• Interest rates (financial markets)

•

The interconnection among all these markets

‣

- How do we use the model?

By performing experiments where we change some parameters of the model (economic shocks) and we analyze the effects on the

‣ economy

When these parameter describe the intervention of public institutions, as the government of the central bank, we speak of economic

‣ policy

Designing appropriate economic policies is the main objective of macroeconomics

‣

- From where should we start?

From a description of the main economic indicators we want to study

‣

- Model : way to analyse the relation between several indicators: most important GDP

PRODUCTION

- Production is carried out by firms (or companies), which use three main factor of production

- Land: all of the natural resources that businesses need to make and distribute goods and services. The ground on which the factory,

warehouse, and office buildings are located would be classified as land. But also: soil, forests, oil, coal, air, lakes, rivers. All of these things

are alike in that they are provided by nature rather than made by humans.

The payment for land owners is rent

‣

- Labor: workers necessitated to produce goods and services. The factory workers, office workers, marketing staff, and sales staff of a

company would all be considered labor.

The payment for workers who provide labor is wages

‣

- Capital: the human-made equipment required to produce goods and services. Machinery, office building, and delivery trucks would be

examples of capital. Sometimes capital is also defined to include the money used to buy such equipment and to start and maintain business

operations.

The payment for capital owners is profit

‣

P RODUCTION AND NATIONAL ACCOUNTING

- In our model the concept of economic activity is measured as gross domestic product (GDP) of a country. It is defined in the following way :

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GDP: Market value of the sum of final goods and services produced during a year in a country

‣

- The GDP of a country can be obtained by three methods and, of course, the final result should be the same:

Total spending necessary to buy all final goods and services produced during a year in a given country.

‣ Total income payment to the factors of production for a year in a given country.

‣ Sum of the value added in the economy during a given period (a year)

‣

Considerations about our definition of GDP

-

- The definition of GDP as "market value" means that, while not stated

otherwise, all goods and services are presented at market prices.

- Consideration of final goods and services, means you have to avoid double

counting of goods and services. It includes the value of intermediate goods.

- Finally, speaking of "produced in one country" is meant that in GDP

includes goods and services produced within a country, regardless of the

nationality of the factors of production.

- For the calculation of GDP, we use information from the National

Accounting.

- National accounts try to follow and quantify the monetary flows between

the different parts of the economy, arising due to the interaction of agents

in different markets.

P :

OSSIBLE ALTERNATIVE DEFINITIONS OF THE MACROECONOMIC INDICATORS

Gross Domestic Product vs. Gross National Product

-

- GDP : Market value of goods and services produced in a year in a country

- GNP : Market value of goods and services produced in a year by national factors of production (national enterprises)

GNP = GDP + NR – NP

-

- NR (Net income inflow from domestic assets abroad)

-

- NP (Net payment outflow to foreign assets)

-

Gross vs. Net

-

- Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.

NDP = GDP - Depreciation

-

Market Price Vs. Cost of Factors

- GDP = GDP – Indirect Taxes (It) + Subsidies (Sb)

cf

-

L GDP

IMITATIONS OF IN NOMINAL TERMS

- The GDP is not useful to measure changes in aggregate production (output) over time, as it can change for two reasons:

1. Because different amount of goods and services have been produced

2. Because prices have varied

Nominal GDP Real GDP

- -

the sum of the quantity of goods and services produced in a year the sum of the quantity of goods and services produced in a

-

multiplied by their prices in that year (current prices p ) year multiplied by their prices in a base year (p )

t 0

Σ (p · q ) Σ (p · q )

i t,i t,i i 0,i 0,i

- -

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Difficulty to measure GDP

-

Underground or shadow economy (not accounted in GDP)

-

- Underground economy generally refers to illegal economic activity. It is illegal because:

The traded good or service is itself illegal (e.g. drugs, prostitution)

‣ A licit transaction does not comply with government reporting requirements (e.g. untaxed labor, undeclared financial transactions)

‣

- Underground economy is difficult to measure

They are by nature not subject to government oversight

‣ They do not generate tax returns and official statistics

‣

- The can be approximated by measuring

Excess of national expenditure with respect to national income

‣ Comparing official GDP growth with other neutral measures, e.g.

‣ electricity consumption growth

- Measuring GDP is often difficult, due to underground economy

- Underground economy in Italy is around 13% (2014).

Limitations of GDP as a measure of well-being

-

- Distribution issues

The per capita GDP value does not take into account how income is distributed to the population

‣

- Public Administration quality and efficiency

Public sector productivity and service quality affects the well-being of residents, but does not necessarily impact GDP (e.g. Scandinavian

‣ countries)

- Harmful productions (pollution, congestion)

If, alongside an increase in goods and services, there is also an increase in levels of pollution and congestion, we will see an increase in

‣ GDP but that increase will not necessarily correspond to an increase in well-being.

- Crime

Equal to all other conditions, a country with a high crime rate will probably have a spending on public policy (and therefore a GDP)

‣ higher than a country with a lower crime rate

- Consideration of free time

An increase in production because people are working harder by giving up leisure time, does not necessarily rise in well-being (Gov.

‣ promo China).

P RODUCTION AND PRICE INDEXES

GDP deflator

- Nominal GDPt ∑(pt · qt)

= × ×

GDP deflatort 100 = 100

Real GDPt ∑(p0 · qt)

-

- In the base year it is 100.

- It measures the level of prices of all new, domestically produced, final goods in time t with respect to the base year prices

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- It can be used to measure the percentage change in the value of the prices on a year-on year basis (inflation)

GDP deflatort - GDP deflatort-1 P - P

t t-1

≈ = π t

Pt-1

GDP deflatort-1

-

Consumer Price Index (CPI)

-

- The consumer price index is a statistical estimate of the level of prices of goods and services bought for consumption by households. The CPI

is calculated by collecting the prices of a sample of representative items (basket of goods) over a specific period of time.

- The GDP deflator differs from the CPI because it is not based on a fixed basket of goods and services. The GDP deflator "basket" changes

from year to year depending on people's consumption and investment patterns. GDP deflator is not impacted by substitution bias, which is

a weakness in the CPI that overstates inflation because it does not account for the substitution effect, when consumers choose to substitute

one good for another after its price becomes cheaper than the good they normally buy.

- Despite the GDP deflator being more flexible, the CPI is a more accurate reflection of the changes in the cost of living.

- Moreover, GDP Deflator only takes into account goods that are produced domestically. It does not consider imported goods and it reflects

the prices of all the commodities, services included.

Cost of goods in the basket of reference in that year

= ×

CPI in a given year 100

Cost of the basket in the base year

- p2,t

P1,t pn,t

CPIt=[g1 + g2 + ... + gn ]

P1,0 p2,0 pn,0

-

- Where

g is the average proportion of family spending in the good i in the base year (=

‣ i

year 0)

It is obtaine