Economics 302 Sec 001 Intermediate Macroeconomic Theory and Policy Spring 2011 Instructor Prof Menzie Chinn UW Madison Administrative Issues Course website http www ssc wisc edu mchinn web302 s11 html OH MW 4 5 7418 Soc Sci Textbook Blanchard Macroeconomics Additional Readings from WWW Econbrowser CBO Econbrowser NYT FT WSJ Economist Administrative Issues Grading 20 PS PS 50 2 MTs 2 MTs 30 Final Dates Class cancelled on 9 24 MT1 on Wed 2 23 MT2 on Wed 4 4 Final on Mon Mon 5 9 5 9 7 45AM Make ups None Points are re allocated if you h have a legitimate l iti t excuse No N late l t assignments i t accepted must be handed in during lecture Context GDP Growth 10 08 06 06 04 02 02 00 02 02 04 06 08 2000 2002 2004 2006 2008 2010 GDP05 GDP05 1 4 1 GDP05WSJ JAN11 GDP05WSJ JAN11 1 4 1 GDP log levels 9 60 9 60 9 55 In logs of billion Ch 05 Potential GDP CBO Aug 2010 9 50 WSJ Jan 11 11 survey 9 9 45 9 40 GDP bn Ch 05 9 35 9 30 9 25 00 01 02 03 04 05 06 07 08 Source BEA GDP 2010Q3 3rd release CBO Aug 2010 WSJ Jan 2011 09 10 11 Employment 140 000 138 000 Nonfarm payroll employment 136 000 134 000 132 000 130 000 Ex temporary Census workers 128 000 00 01 02 03 04 05 Source BLS Employment Situation Dec 2010 release 06 07 08 09 10 Unemployment Rate 11 10 9 Unemployment rate 8 WSJ Jan 11 7 6 5 4 3 1980 1985 1990 1995 Source BLS Employment Situation Dec 2010 release 2000 2005 2010 Long g Term UE Underemployment Source Calculated Risk 1 7 2011 Inflation 06 Headline Headline CPI inflation year on year 05 04 WSJ headline Jan 11 03 02 Core CPI inflation year on year 01 00 01 02 03 00 Source BLS CPI Dec release WSJ Jan 11 01 02 03 04 05 06 07 08 09 CPIAUCSL CPIAUCSL 12 1 CPILFESL CPILFESL 12 1 CPIINFL WSJJAN11 100 10 11 Monetary Policy 10 Ten year constant maturity Treasurys 8 6 Fed Funds 4 3 month T bills 2 0 90 92 94 96 Source St Louis Fed FRED II database 98 00 02 04 06 08 10 Fed interventions http www clevelandfed org research data credit easing index cfm Consumption 9 3 11 1 9 2 11 0 9 1 10 9 9 0 10 8 8 9 Log household net worth bn Ch 2005 right scale Log consumption bn Ch 2005 left scale 8 8 10 7 10 6 8 7 10 5 8 6 10 4 8 5 10 3 8 4 10 2 90 92 94 96 98 00 02 04 Source BEA 2010Q3 3rd release Fed Flow of Funds 12 13 2010 release 06 08 10 House Prices Source Calculated Risk 12 28 2010 Current Account Net Debt 02 02 20 20 01 15 00 00 10 10 01 05 02 02 03 Cu e t Account Current ccou t to GDP ratio left axis 00 00 05 04 04 10 10 Net International Investment Position to GDP ratio right scale 05 06 06 15 20 20 07 1970 1975 1980 1985 CA GDP 1990 1995 2000 NIIPEOP GDP 1000 2005 25 2010 Net Exports and the Dollar 4 04 X GDP ex oil right scale 3 02 2 00 1 02 0 04 Log real value of USD 1 X GDP right scale 06 2 1975 1980 1985 1990 1995 Source Federal Reserve Board and BEA 2010Q2 GDP 2nd release 2000 2005 08 2010 Long Term Log GDP 10 1 0 2001 recession 0 5 1990 91 recession 0 0 1982 recession 0 5 WWII 1 0 Roaring 20 s 1 5 2 0 WWI 2 5 2 5 1910 Great Depression 1920 21 recession 1920 1930 1940 1950 1960 1970 1980 Source Historical Statistics and BEA 2010Q2 GDP 2nd release rebased to 1980 0 1990 2000 2 1 Aggregate Output National income and product accounts are an accounting system used to measure aggregate economic activity GDP Production and Income The measure of aggregate output in the national income accounts is gross domestic product or GDP 17 of 31 2 1 Aggregate Output GDP P GDP Production d ti and d IIncome There are three ways y of definingg GDP 1 GDP is the value of the final goods and services produced in the economy during a given period period A final good is a good that is destined for final consumption An intermediate good is a good used in the production of another good 18 of 31 2 1 Aggregate Output GDP P GDP Production d ti and d IIncome There are three ways of defining GDP 2 GDP is the sum of value added in the economy during a given period V Value l added dd d equals l th the value l off a fifirm s production minus the value of the intermediate g goods it uses in p production 19 of 31 2 1 Aggregate Output GDP P GDP Production d ti and d IIncome There are three ways of defining GDP 3 GDP is the sum of incomes in the economy during a given period Table 2 1 The Composition of GDP by Type of Income 1960 and 2006 1960 2006 Labor income 66 64 Capital income 26 29 8 7 Indirect taxes 20 of 31 2 1 Aggregate Output N i l and Nominal dR Reall GDP Nominal Nominal GDP is the sum of the quantities of final goods produced multiplied by their current price Nominal GDP increases over time because The production of most goods increases over time The prices of most goods also increase over time Real GDP is constructed as the sum of the quantities of final goods multiplied by constant rather than current prices 21 of 31 2 1 Aggregate Output N i l and Nominal dR Reall GDP Quantity off Cars C Price off cars Nominal GDP Real GDP in 2000 dollars 1999 10 20 000 200 000 240 000 2000 12 24 000 288 000 288 000 2001 13 26 000 338 000 312 000 Y Year To construct real GDP GDP multiply the number of cars in each year by a common price Suppose we use the price of the car in 2000 as the common price This approach gives us in effect real GDP in chained 2000 dollars effect dollars 22 of 31 2 1 Aggregate Output N i l and Nominal dR Reall GDP Fi Figure 2 1 Nominal and Real U S GDP Since 1960 From 1960 to 2006 2006 nominal GDP increased by a factor of 25 Real GDP increased by a factor of about 4 5 23 of 31 2 1 Aggregate Output N i l and Nominal dR Reall GDP The terms nominal GDP and real GDP each have many synonyms Nominal GDP is also called dollar GDP or GDP in current dollars Real GDP is also called GDP in terms of goods GDP …