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UW-Madison ECON 312 - Lecture 1 Introduction and Labor Supply

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Lecture 1 Introduction and Labor Supply Noah Williams University of Wisconsin Madison Economics 312 Spring 2014 Williams Economics 312 Introduction to Macroeconomics The study of aggregate economic behavior Issues economic growth employment and unemployment business cycles inflation macroeconomic policy international trade and exchange rates Williams Economics 312 Real GDP 1947 2012 Quarterly Williams Economics 312 Per Capita Real GDP 1960 2011 Williams Economics 312 1950 01 01 Taiwan S Korea India Williams Greece Ethiopia Japan Economics 312 China 2010 01 01 2008 01 01 2006 01 01 2004 01 01 2002 01 01 2000 01 01 1998 01 01 1996 01 01 1994 01 01 1992 01 01 1990 01 01 1988 01 01 1986 01 01 1984 01 01 1982 01 01 1980 01 01 1978 01 01 1976 01 01 1974 01 01 1972 01 01 1970 01 01 1968 01 01 1966 01 01 1964 01 01 1962 01 01 1960 01 01 1958 01 01 1956 01 01 1954 01 01 1952 01 01 Real GDP Relative to US for Selected Countries 1950 2010 100 00000000 Real Per Capita GDP Relative to US 90 00000000 80 00000000 70 00000000 60 00000000 50 00000000 40 00000000 30 00000000 20 00000000 10 00000000 0 00000000 Gross Domestic Product Most widely used measure of economic activity Measures market value of newly produced final goods and services Each term is key market value newly produced final goods and services For the 3rd quarter of 2012 nominal GDP was 15 811 000 000 000 The total population in Dec 2012 was 315 255 000 so nominal GDP per capita was roughly 50 153 Williams Economics 312 Computing GDP through Expenditure Y C I G X M Y Nominal GDP C Consumption durables non durables services I Gross Private Investment Nonresidential fixed investment residential fixed investment inventories G Government Purchases Sum of federal state and local purchases of goods and services and government investment Government transfer payments not included X Exports deliveries of US goods and services to other countries M Imports deliveries of goods and services from other countries to the US Trade Balance Exports Imports Williams Economics 312 Composition of GDP 2012 Q3 Composition of GDP Spending Total Nom GDP Consumption Durable Goods Nondurable Goods Services Gross Private Investment Nonresidential Residential Changes in Inventory Government Purchases Federal Gov State Local Gov Net Exports Exports Imports Williams in billion 15 811 0 11 154 4 1 218 9 2 573 6 7 361 9 2 080 1 1 610 0 387 9 82 3 3 093 3 1 241 4 1 851 9 516 8 2 198 7 2 715 5 Economics 312 in of GDP 100 0 70 5 7 7 16 3 46 5 13 2 10 2 2 5 0 0 19 6 7 8 11 7 3 3 13 9 17 2 Computing GDP through Income National Income broadest measure of the total income Gross Domestic Product 15 811 0 Factor Inc from abroad 775 8 Factor Inc to abroad 532 7 Gross National Product 16 054 2 Depreciation 2 019 8 Net National Product 14 034 4 Statistical Discrepancy 145 8 National Income 13 888 6 GNP output produced by domestically owned factors versus GDP which is output produced within a nation Difference between GDP and GNP for US is small 1 5 larger for countries with many citizens working abroad Williams Economics 312 Difference between GDP and GNP Ireland In 2011 GDP in Ireland 158 993 million euros but GNP was 127 016 million euros GNP is more than 20 smaller than GDP Simon Johnson Due to its role as a tax haven many foreign companies have set up operations in Ireland with a controlling shell company located in a tax free nation in order to take advantage of Ireland s regulations that specify that the controlling owner rather than the resident company is subject to tax For this reason companies channel license revenues and royalties through Irish subsidiaries These royalties and revenues are in large part excluded from the tax base in Ireland These companies would move if Ireland changed rules and made such revenues taxable Since the relevant concept for fiscal sustainability is the taxable base it makes sense that this should be used to measure Ireland s indicators Williams Economics 312 Employment and Unemployment Why important a main determinant of individual experience of workers Large secular trends in employment especially female labor force participation US experience no strong trend in unemployment rates mostly cyclical European experience growth in unemployment rates post WWII Recent downward trend in labor force participation Williams Economics 312 Labor Force Participation Rate 1948 2013 Williams Economics 312 Unemployment Rate 1948 2013 Williams Economics 312 Figure 1 03 The U S unemployment rate 1890 1998 Abel Bernanke Macroeconomics 2001 Addison Wesley Longman Inc All rights reserved Williams Economics 312 Unemployment Rates in France and Spain Williams Economics 312 The Representative Household We will now begin formal modeling by considering individual household behavior As an abstraction we will think of one representative household as a stand in for the whole economy Justification aggregation Limitations Will define household preferences Then think about household constraints Finally what will household do given preferences and constraints Williams Economics 312 Commodity Space 2 goods consumption c and leisure l Total time of h hours N labor N h l Each good s set 1 2 c R l 0 h Then c l R 0 h Williams Economics 312 Preferences Preferences binary relation defined over pairs c l ci li cj lj Working directly with binary relations difficult Definition a real valued function u R2 R is called a utility function representing the binary relation defined over pairs c l if for ci li cj lj R 0 h ci li cj lj u ci li u cj lj Theorem if the binary relation is complete reflexive transitive strictly monotone and continuous there exist a continuous real valued function u that represents Williams Economics 312 Properties of Utility Functions u simply represents the indifference curves Indifference curves are level sets c l u c l u We ll always assume u is continuous and differentiable u c l is a function of two variables To consider properties of u and so optimal choices we ll need to consider how it varies separately with c and l To do so we ll use partial derivatives of the utility function We ll write these in one of two ways uc c l u u c l ul c l c l c l Williams Economics 312 Utility Function and Indifference Curves Utility Function Indifference Curves 0 9 2 0 8 1 0 7 0 0 6 2 Leisure Utility 1 3 4 0 5 0 4 5 0 3 6 1 0 2 3 0 5 2 0 1 1 Leisure 0 0 Consumption Williams 0 5 1 Economics 312 1 5 2 Consumption 2 5 3 Budget Constraint Leisure l labor supply N h l Wage w


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