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Macroeconomics on One Page Head, Keith 2011-09-01

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Macroeconomics on One Page Macroeconomics seeks to explain & predict the be- haviour of the economy \as a whole." Managers need macro knowledge to interpret news & form reasoned views of the likely impact of policy changes. 1 Four macro \markets" Focus on  ve key variables (& their \relatives"): GDP, unemployment, interest rates, in ation rates, & exchange rates. Many macro variables have \real" versions that adjust raw (\nominal") data to take into account price variation. While interdependent, each variable can be thought of as determined within a particular market. All goods & services markets: GDP (Y ), GNI, net vs gross, price level (CPI & GDP de ator: P ), in ation ( =  P=P ).1 Potential GDP (  Y ), real GDP (Q = Y=P ). GDP measured by summing  nal expenditure categories, industry value-addeds, or factor incomes (wL+ rK). Labour markets: employment rate (L=N), job gains/losses ( L), unemployment rate (u = U=L), vacancies (V ), hours, wages (w, real: w=P ). Under-employment: involuntary part- time. Unemployment causes: job search (ex- tended by high U bene ts), mis-match, mini- mum wages, sticky wages, seasonal & cyclical demand changes. u cannot fall below the natu- ral rate, u (NAIRU), w/o accelerating in ation. Financial markets: interest rates, nominal, r, & real, r   . Normal yield curve: higher r for longer term bonds. Central banks lower r via bank rate cuts and buying bonds (to increase reserves). Credit crunches =) TED spread ". Currency markets: exchange rates, nominal, e, & real, e[PH=PF ] = relative price of domestic goods.2 Real depreciation increases X, lowers M . Purchasing power parity for Y comparisons and e predictions. Fixed vs.  oating e. 1 P means the year-on-year change in the price level. Di- vide by inital price level to make it a rate of change. 2PH & PF are price levels in home (H) & foreign (F) cur- rency units (CU), e in FCU/HCU. 2 Macro relationships Composition of nominal GDP Y = C + I +G+ (X  M) C = personal consumption of durable & non-durable goods + services I = private investment in structures (inc. residen- tial) & equipment + change in inventories G = gov’t consumption (GC) +investment (GI) X  M = exports minus imports (trade balance) Aggregate Production Function Q = Af(K;L) Real GDP" (= tech. progress (A "), capital ac- cumulation (K "), labour supply growth (L "). Money supply & in ation Money base, B, is currency + reserves, money sup- ply M is currency + deposits. Money multiplier, due to reserve ratios, =  M= B > 1. \Quantity Theory of Money": Holding V and Q constant in MV = PQ implies in ation ( = (Pt+1 Pt)=Pt) = money supply growth: (Mt+1  Mt)=Mt. Recessions Reductions in GDP, accompanied by extended pe- riods of high u, low V=L, declining L,  , followed by recoveries (Y !  Y ). Accumulation of Capital & Debt Kt+1 = (1  )Kt + It +G I t Debtt+1 = (1 + r)Debtt + PBDt Primary budget de cit = (GCt +G I t + St) Tt Structural budget de cit = PBD(  Yt) +rDebtt. Trade de cit = M  X ! increase in foreign claims 3 Macro Controversies Keynesians attribute recessions (Y #) to insu cient demand and advocate raising C and I by r # and T #. Spending multiplier: G "=)  Y >  G. Chicago school argues budget de cits reduce C (savings to pay future taxes) I (public borrowing \crowds out" private borrowing), leaving  Y  0. Supply-siders advocate reduced marginal tax rates (MTR) to increase I & L, =) Y ". La er-curve claim: MTR # =) T ".

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