Economics 302 (Sec. 001)Intermediate Macroeconomic Theory and PolicyTheory and Policy(Spring 2011)Instructor: Prof. Menzie ChinnUW MadisonAdministrative IssuesAdministrative Issues• Course website: http://www.ssc.wisc.edu/~mchinn/web302_s11.html• OH: MW 4-5, 7418 Soc Sci•Textbook:Blanchard,MacroeconomicsTextbook: Blanchard, Macroeconomics• Additional Readings: from WWW, Econbrowser CBOEconbrowser, CBO• NYT, FT, WSJ, EconomistAdministrative Issues•Grading: 20% PS 50% 2×MTs 30% Final•Grading: 20% PS, 50% 2×MTs, 30% Final• Dates: - Class cancelled on 9/24- MT1 on Wed, 2/23,- MT2 on Wed, 4/4Final onMon5/9 7:45AM-Final on Mon. 5/9, 7:45AM• Make-ups: None. Points are re-allocated if you h l iti tNlt i thave a legitimate excuse. Nolate assignments accepted (must be handed in during lecture)Context: GDP Growth06.08.1002.04.06-02.00.02-.06-.04.02-.082000 2002 2004 2006 2008 2010(GDP05/GDP05(-1))^4-1(GDP05WSJ_JAN11/GDP05WSJ_JAN11(-1))^4-1GDP (log levels)9609.559.60Potential GDPIn logs ofbillion Ch.05$99.50(CBO, Aug. 2010)WSJJan'119.409.45Jan11survey9.35GDP(bn Ch.05$)9.259.3000 01 02 03 04 05 06 07 08 09 10 11Source: BEA GDP 2010Q3 3rdrelease, CBO (Aug 2010), WSJ (Jan. 2011)Employment140,000138,000Nonfarm136,000Nonfarmpayrollemployment134,000132,000130,000Ex. temporary128,00000 01 02 03 04 05 06 07 08 09 10Census workersSource: BLS, Employment Situation, Dec. 2010 releaseUnemployment Rate111089UnemploymentrateWSJ67WSJJan '11563431980 1985 1990 1995 2000 2005 2010Source: BLS, Employment Situation, Dec. 2010 releaseLong Term UE, g,Under-employmentemploymentSource: Calculated Risk, 1/7/2011Inflation.06"Headline".04.05HeadlineCPI inflation(year-on-year)WSJ.02.03WSJ"headline"Jan '11.00.01CoreCPI inflation(year-on-year)-.02-.01-.0300 01 02 03 04 05 06 07 08 09 10 11Source: BLS, CPI Dec.(CPIAUCSL/CPIAUCSL(-12))-1(CPILFESL/CPILFESL(-12))-1CPIINFL_WSJJAN11/100Source: BLS, CPI Dec. release, WSJ (Jan. ’11)Monetary Policy108Ten year constantmaturity Treasurys646Fed Funds243 monthT-bills02090 92 94 96 98 00 02 04 06 08 10Source: St. Louis Fed FRED II databaseFed interventionshttp://www.clevelandfed.org/research/data/credit_easing/index.cfmConsumption9.29.311.011.19.09.110.810.98.88.910.610.7Log consumption(bn Ch.2005$)[left scale]Log householdnet worth(bn Ch.2005$)[right scale]8.68.710.410.5[]8.48.510.210.39092949698000204060810Source: BEA, 2010Q3 3rd release; Fed Flow of Funds (12/13/2010 release)9092949698000204060810House PricesSource: Calculated Risk, 12/28/2010Current Account, Net Debt022000.01.0210.15.2002-.01.0000.05.10Current Account04-.03-.0210-.05.00Cuetccoutto GDP ratio[left axis]-06-.05-.04-20-.15-.10Net InternationalInvestment Positionto GDP ratio[rightscale]-.07-.06-.25-.201970 1975 1980 1985 1990 1995 2000 2005 2010[rightscale]CA/GDP NIIPEOP/(GDP*1000)Net Exports and the Dollar.3.4.02.04X/GDP(ex.oil).2 .00()[right scale].1 -.02-.1.0-.06-.04Log realvalueofX/GDP[right-.2 -.081975 1980 1985 1990 1995 2000 2005 2010valueofUSD[rightscale]Source: Federal Reserve Board, and BEA, 2010Q2 GDP 2ndrelease10Long Term Log GDP0.51.0\2001 recession ____0.0\1982\1990-91recession-1.0-0.5WWIIrecession-1.5"Roaring'20's"-2.5-2.0WWI \\1920-21 recession__Great Depression2.51910 1920 1930 1940 1950 1960 1970 1980 1990 2000Source: Historical Statistics, and BEA, 2010Q2 GDP 2ndrelease, rebased to 1980 = 02-1 Aggregate Output•National income and product accounts are an accounting system used to measure aggregate economic activity.GDP: Production and IncomeThe measure of aggregate output in the national income accounts isgross domesticnational income accounts is gross domestic product, or GDP.17 of 31GDP P d ti d I2-1 Aggregate Output•There are three ways of defining GDP:GDP: Production and Incomeyg1. GDP is the value of the final goods and services produced in the economy during a given periodthe economy during a given period. A final good is a good that is destined for final consumption.Anintermediate goodis a good used in theAn intermediate goodis a good used in the production of another good.18 of 31GDP P d ti d I2-1 Aggregate OutputThere are three ways of defining GDP:GDP: Production and IncomeThere are three ways of defining GDP:2. GDP is the sum of value added in the economy during a given period.Vl dddlth l f fi ’Value addedequals the value of a firm’s production minus the value of the intermediate goods it uses in production.gp19 of 31GDP P d ti d I2-1 Aggregate OutputThere are three ways of defining GDP:GDP: Production and IncomeThere 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 20061960 2006Labor income 66% 64%Capital income 26% 29%Indirect taxes 8% 7%20 of 312-1 Aggregate OutputNildRlGDP•Nominal GDPis the sum of the quantities of final goodsNominal and Real GDPNominal GDPis the sum of the quantities of final goods produced multiplied by their current price.•Nominal GDP increases over time because:•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 312-1 Aggregate OutputNildRlGDPYQuantity fCPrice fNominal Real GDP Nominal and Real GDPYearof Cars of carsGDP (in 2000 dollars)1999 10 $20,000 $200,000 $240,0002000 12 $24,000 $288,000 $288,000To construct real GDP multiply the number of cars in each2001 13 $26,000 $338,000 $312,000To construct real 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 effectreal GDP in chained (2000) dollarseffect, real GDP in chained (2000) dollars.22 of 312-1 Aggregate OutputNildRlGDPNominal and Real GDPFi 21From 1960 to 2006 nominal Nominal and Real U.S. GDP, Since 1960Figure 2 -1From 1960 to 2006, nominal GDP increased by a factor of 25. Real GDP increased by a factor of about 4.5. 23 of 312-1 Aggregate OutputNildRlGDPThe terms nominal GDP and real GDP each have many synonyms:Nominal and Real GDP– Nominal GDP is also called dollar GDP or GDP in current dollars.– Real GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, or GDP in 2000 dollars.– GDP will refer to real GDP, and Ytwill denote real GDP in year t.–Nominal GDP and