Unformatted text preview:

CHAPTER 2 Measuring the Macroeconomy 2 1 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Questions What key data do macroeconomists look at How are key macroeconomic data estimated and calculated What is the difference between nominal and real values How are stock market values related to interest rates 2 2 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Questions How are interest rates related to the price level and the inflation rate How is unemployment related to total production What is right and what is wrong with the key measure of economic activity real GDP 2 3 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Importance of Data Economists use quantitative data to examine and understand behavior prices quantities values Data can be used in two ways make quantitative forecasts test economic theories 2 4 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Most Important Macroeconomic Data real GDP the unemployment rate the inflation rate the interest rate the level of the stock market the exchange rate 2 5 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Table 2 1 The Six Key Economic Variables 2 6 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate The nominal exchange rate is the relative price of two different currencies determined in the foreign exchange market Example 1 00 equals 1 20 1 00 equals 0 83 2 7 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate Domestic exporters earn foreign currency when they export products need to trade the foreign currency for dollars Foreign producers earn dollars when U S residents import their products need to trade the dollars for foreign currency 2 8 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Figure 2 1 The Market for Foreign Exchange 2 9 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate The real exchange rate is the nominal exchange rate adjusted for changes in the value of the currency depends on the nominal exchange rate and the price level 2 10 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate Example 1 nominal exchange rate changes from 1 20 1 00 to 2 40 1 00 price level doubles real exchange rate is unchanged Example 2 nominal exchange rate remains at the same level 1 20 1 00 price level doubles real exchange rate falls by half 2 11 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate Example 3 nominal exchange rate increases from 1 20 1 00 to 2 30 1 00 price level remains the same real exchange rate doubles 2 12 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate To calculate the real exchange rate you need three pieces of information price level in the home country P price level abroad P nominal exchange rate e P e P 2 13 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate There are many different currencies in the world many different exchange rates Economists construct an exchange rate index to represent the exchange rate each country receives a weight equal to its share of total U S trade 2 14 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Exchange Rate The exchange rate index is by averaging each country s current exchange rate relative to its exchange rate in the base year 1992 Index 100 all countries 2 15 Current exchange rate 1992 share of trade 1992 exchange rate Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Figure 2 2 The Exchange Rate Index 1992 1998 2 16 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market The most representative index of the U S stock market is the Standard and Poor s Composite Index S P 500 The most commonly discussed index of the U S stock market is the DowJones Industrial Average 2 17 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market Stock market averages are in nominal terms must divide by some measure of the price level to get the real value of the stock market The real value of the stock market is a sensitive indicator of the relative optimism or pessimism of investors can forecast future investment spending 2 18 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market Investors face a choice between holding stocks and holding bonds stocks are shares of ownership of a corporation entitles you to a portion of the company s profits bonds are debts that the corporation owes you pays periodic interest payments and returns principal to you at maturity 2 19 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market Rates of return for bonds the rate of return is the interest rate r for stocks the rate of return is the ratio of earnings per share Es to the price paid Ps Stocks are risky investors may require a risk premium s 2 20 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market Investors will hold only stocks if Es s r Ps Investors will hold only bonds if Es s r Ps 2 21 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market Investors will hold both stocks and bonds if Es s r Ps This means that the value of a stock is equal to s E s P s r 2 22 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market How can we measure Es newspaper reports what the firm s accountants have calculated Ea investors are interested in some long run average of expected future earnings Es need an estimate of the relationship between Ea and Es 2 23 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved Figure 2 3 Calculating the Value of a Basket of Stocks 2 24 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Stock Market provides information on the current level of profits earnings whether investors are optimistic or pessimistic the current cost of capital attitudes toward risk 2 25 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Interest Rate is the price at which purchasing power can be shifted from the future into the present is not a single lump sum but an ongoing stream of payments made over time is a flow variable 2 26 Copyright 2002 by The McGraw Hill Companies Inc All rights reserved The Interest Rate There is a large number of different


View Full Document

SIUE ECON 302 - CHAPTER 2

Download CHAPTER 2
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view CHAPTER 2 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view CHAPTER 2 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?