Stian Ulriksen s Notes Intermediate Macroeconomics Dr Daniel Hicks Part 1 Macroeconomics 7 Macroeconomics What is it 7 History 7 Macroeconomic Models 8 Ex The value of Life and the rise in Health Spending by Jones and Hall 2007 8 Steps to modeling 9 Short Run Model 9 Model 9 Why do we care 10 Measurement Across Countries 11 GDP Today 2010 12 Measurement over Time 12 Ex Pepperridge Farms 12 Northaus Lighting Measure of Quality 13 Math Formulas 15 Exponent Rules 15 Growth Rate Rules 16 Simple Example Acct Trick 16 Production Functions 17 Marginal Products 18 Marginal Product of Labor MPL 18 Marginal Product of Capital MPK 18 Intuition 19 The Production Model 20 Equations 20 System of 5 Equations 20 Mathematical Solution 21 Solow Model 24 Setup 24 Model Capital Accumulation 25 Change in Capital Stock Relevant to Solow Diagram 25 Mechanism to Equilibrium 26 New Stronger Building Material Example 28 Solution 1 28 Solution 2 29 Aside Recall our Production Function 30 Solving Solow Model Algebraically 30 Solow Application 31 Davis Weinstein Bones Bombs and Breakpoints 32 Miguel Roland 2006 32 Growth in Solow 33 Convergence Debate 34 Absolute Convergence 34 Baumol 1986 34 Delong 1988 34 Conditional Convergence 34 Divergence big time Pritchett 34 Development Accounting 34 Part 2 35 Economics of Ideas 35 Terminology 35 Why Would These Concepts Matter for Growth Model 35 Romer Model 35 1 Production Function 35 2 Resource Constraints 36 3 Idea Accumulation Equation 36 Exogenous Variables 36 Endogenous Variables 36 Solutions 36 Solve for At 37 Solve for Yt 37 Compare to Solow 37 Scenarios 38 Changes in the Graph 38 Does this model predict convergence 38 Unemployment Rate BLS 40 Labor Market Trends 40 Turnover 41 Social Safety Nets 41 Hours Worked 43 Greenwood Agular and Hurst 43 Classical Labor Market 44 Classical Economics 44 2 Types of Unemployment 44 Keynesians 46 Modern Labor Market 46 Unemployment 47 Returns to Education 47 How do we measure the value of College 48 Increase in College Wage Premium 50 The Money Supply 51 Measure the Quantity of Money 51 The Quantity Theory of Money 52 Classical Dichotomy 52 Quantity Theory in Growth Rates 53 Fisher Equation 53 Intermediate Macroeconomics 3 Costs Real Economic Costs of Inflation 54 Benefits of Inflation 54 Short Run Model 54 Short Run Themes 55 Phillip s Curve 57 Okun s Law 59 Actual Output 59 What determines the level of components of GDP 59 Model Setup 61 Investment Savings Curve IS Curve 62 What does b do here 62 Federal Reserve 65 Structure 65 Monetary Policy 67 Chain of Events 67 Short Run Model Summary 70 Components of SR Model 70 1 Inflation 70 2 Okuns Law 71 3 The IS Curve 71 Example 72 Part 3 Government and the Macro Economy 73 What does government spend money on 73 How does U S Debt compare to other countries 73 Terminology Balanced Budget 73 Government Budget Constraint Formula 73 Aside One other way to raise money 73 Side note 74 How should we think about solvency 74 Consider a 2 period world 74 Intertemporal Budget Constraint 75 Entitlement Spending 76 Social Security 76 How does Social Security Work 76 Financing 77 Eligibility 77 Effective Return 77 Privatizing Social Security 78 Why does social security have financial problems in the Long Run 78 Medicaid 78 Medicare 78 Solutions to entitlement program fungibility 79 Generational Accounting 80 Concerns 80 Big Questions about Deficits and Debt 80 Intermediate Macroeconomics 4 Crowding Out 81 Japan s Long Recession 81 Carry Trade 82 Indicators 83 U S Durable Goods 83 Why do we care 83 What is Seasonally Adjusted 84 Durables sometimes exclude transport and defense Why 84 GDP 85 Gross Domestic Product 85 3 Approaches to Calculating 85 Expenditure Approach 85 Income Approach 86 Production Approach 86 Cont d GDP 86 Advantages Pros of GDP 87 Problems with GDP 87 Retail Sales 89 The Big Mac Index 90 Idea 90 Consumer Confidence 91 1 Conference Board Consumer Confidence Index 91 2 Consumer Sentiment Index 91 Productivity 92 Consumer Price Index CPI 93 Federal Funds Rate 94 Housing Starts 95 Industrial Production 96 Capacity Utilization 96 Why do we care about Capacity Utilization 96 Jobless Claims 97 Producer Price Index PPI 98 Why do we care about PPI 98 August 2012 98 So what drove August s large increase 98 Core PPI 98 Unemployment Rate BLS 99 U S Government Deficit 100 National Debt 101 Intermediate Macroeconomics 5 Dow Jones S P500 NASDAQ 102 Dow Jones 102 S P 500 102 NASDAQ 102 U S Trade Balance 103 Is this number high or low 103 Does the trade deficit matter 103 6 Intermediate Macroeconomics Part 1 Macroeconomics Macroeconomics What is it Macroeconomics is the study of the collection of individuals firms governments and their market interactions Distinctions between micro and macro Macro study for example herd behavior in investing Macro see the bigger picture consider the externalities Macroeconomics is built on micro foundations Ex Discount rate Personal interest rate how much more you care about today vs your welfare in the future Macroeconomics was born in the 1940s as a response to the great depression Started with Keynes and his General Theory of Employment Interest and Money o Has since been modernized by Paul Samuelson Prior to this there was only scattered writing by people like Pison Richards Malthu and Smith Much of Keynes work has subsequently been challenged o Major competitor Milton Friedman monetarist Schools of macroeconomic thought have sort of disappeared History Macroeconomic Models 1 Document Key Facts 2 Develop a Model 3 Compare Predictions of Model or Data 4 Use model to make predictions Ex The value of Life and the rise in Health Spending by Jones and Hall 2007 Step 1 Document Facts of GDP Expenditure Life Expectancy Share on Health 1950s 1970s 2000s 2009 68 2 72 6 76 9 78 5 Why the increase in health expenditures 5 2 9 4 15 4 17 7 Mandated through employer plans New technology Longer life more time while feeble Age structure No it s determined by preferences and demand the cost comes from a willingness to pay As income rises we have an incentive to spend more and more of it on health care more time as there is a complementarity between time and utility from consumption Perfectly reasonable for expenditure share on health to increase Debate in US is about who should pay for it public or private Is health spending Exogenous 8 Intermediate Macroeconomics Steps to modeling a Document facts b Develop a model c Compare predictions to fact d Use model to make