Macro Economics: A Simplified Detailed Edition for Students Understanding Fundamentals of Macroeconomics

Chapter 1: The Macroeconomics: Growth and Fluctuations

MACROECONOMICS STUDIES the aggregate economy - how and why the economy grows and fluctuates over time. Macro Theory provides a means by which an informed person can make predictions on the economic future.

Theory sets up simplified models which can determine the direction or movement of focus variables using (graphical models) or the numerical values of focus variables (numerical models). Econometric models can be estimated using econometrics. In most cases the only statistics needed is mean, variance and OLS. OLS models can be estimated using EXCEL, SPEAKEASY or B34S or many other systems.

Key facts:

Growth around 2.5 % for past 25 years.

Growth above average for 6 consecutive years between 1983-1988

Figure 1-1 shows 1968-1991 history, while figure 1-2 shows deviations from trend

Real gross domestic product (GDP) measures actual physical production. Figure 1-3 shows history since 1910.

Figure 1-4 Employment as a percentage of working age population

Figure 1-5 shows unemployment rate.

Figure 1-6 shows Inflation. Note 1974 and 1980 period. Look at figure

1-7.What is the relationship between inflation and interest rates?

Figure 1-8 shows that money supply seems to decline before recessions. In 1989 rate of increase slowed.

Long run growth a function of population, capital (physical & human) and technology.

Key terms: potential output or GDP, aggregate demand curve.

Assume fixed potential output, changes in prices occur after a change in aggregate demand.  What changes aggregate demand?

Assume prices are fixed. Under what conditions can changes in aggregate demand cause changes in output? Output must below potential.

WORK ANALYTICAL PROBLEM # 3 page 23. In addition to the questions asked, calculate the correlation between the actual rate of inflation and the two forecasts. Where needed, numerical problems have been solved using SPEAKEASY. SPEAKEASY is available on icarus at uic. Inspection of the SPEAKEASY code will allow the reader to see the logic of the problem. Once the logic is seen, the problem can be placed in Excel ® or other system. The b34s® MATRIX command is an alternative to SPEAKEASY. There is a free student version of B34S. B34S is also available on icarus.

:_list p1d3

LISTING OF PROGRAM P1D3

1 PROGRAM

2 YEAR=INTEGERS(1977,1995)

3 P=60.6 65.2 72.6 82.4 90.9 96.5 99.6 103.9 107.6 109.6 113.6 118.3

4 P(13)=124.0 130.7 136.2 140.3 144.5 148.2 152.4

5 INT=5.5 7.6 10 11.4 13.8 11.1 8.8 9.8 7.7 6 8.1 6.9 8.0 7.5 5.5

6 INT(16)=3.6 3.1 4.7 5.7

7 TABULATE YEAR P INT

8 J=INTEGERS(NOROWS(P)-1)

9 INF=ARRAY(NOROWS(P):)

10 FINF=ARRAY(NOROWS(P):)

11 $ THIS GETS INFLATION

12 INF(J+1)=(P(J+1)-P(J))/P(J)

13 J=INTEGERS(NOROWS(P)-3)

14 $ THIS GETS INFLATION FORECAST

15 FINF(J+3)=.5*(INF(J+1)+INF(J+2))

16 INT=INT/100.

17 TABULATE YEAR P INT INF FINF INT-INF, INT-FINF

18 FREEIF X

19 FREEIF Y

20 $ GET SERIES WITH SAME NUMBER OF OBSERVATIONS

21 X(J)=FINF(J+3)

22 Y(J)=INF(J+3)

23 TABULATE X Y

24 CORRELATE X Y

25 END

:_p1d3

EXECUTION STARTED

YEAR  P  INT  YEAR  P  INT

1977  60.6  5.5  1987  113.6  8.1

1978  65.2  7.6  1988  118.3  6.9

1979  72.6  10  1989  124  8

1980  82.4  11.4  1990  130.7  7.5

1981  90.9  13.8  1991  136.2  5.5

1982  96.5  11.1  1992  140.3  3.6

1983  99.6  8.8  1993  144.5  3.1

1984  103.9  9.8  1994  148.2  4.7

1985  107.6  7.7  1995  152.4  5.7

1986  109.6  6

YEAR  P  INT  INF  FINF  INT-INF  INT-FINF

1977  60.6  .055  0  0  .055  .055

1978  65.2  .076  .075908  0  9.2409E-5  .076

1979  72.6  .1  .1135  0  -.013497  .1

1980  82.4  .114  .13499  .094702  -.020986  .019298

1981  90.9  .138  .10316  .12424  .034845  .013758

1982  96.5  .111  .061606  .11907  .049394  -.0080708

1983  99.6  .088  .032124  .082381  .055876  .0056192

1984  103.9  .098  .043173  .046865  .054827  .051135

1985  107.6  .077  .035611  .037649  .041389  .039351

1986  109.6  .06  .018587  .039392  .041413  .020608

1987  113.6  .081  .036496  .027099  .044504  .053901

1988  118.3  .069  .041373  .027542  .027627  .041458

1989  124  .08  .048183  .038935  .031817  .041065

1990  130.7  .075  .054032  .044778  .020968  .030222

1991  136.2  .055  .042081  .051107  .012919  .0038926

1992  140.3  .036  .030103  .048057  .0058972  -.012057

1993  144.5  .031  .029936  .036092  .0010641  -.0050919

1994  148.2  .047  .025606  .030019  .021394  .016981

1995  152.4  .057  .02834  .027771  .02866  .029229

X  Y

.094702  .13499

.12424  .10316

.11907  .061606

.082381  .032124

.046865  .043173

.037649  .035611

.039392  .018587

.027099  .036496

.027542  .041373

.038935  .048183

.044778  .054032

.051107  .042081

.048057  .030103

.036092  .029936

.030019  .025606

.027771  .02834

CORRELATE X Y =  .71194

MANUAL MODE

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Chapter 2: Measuring Economic Performance: Output and Income

Gross Domestic Product => Production during a particular period of time. Can be measured as spending on goods and services, or production in different industries or income earned by different groups.

GDP = Y = C + I + G + X

X = exports – imports

C = durable goods + nondurable goods + services

I = fixed investment + inventory investment

fixed investment = nonresidential + residential

Investment is a flow of new capital added to stock of capital. Net investment = gross investment - depreciation.

Investment = (Capital stock)t – (capital