Basic

Macro concepts and Math Refresher 1. Growth rate (gt) ln X t gt

ln X t ln X t 1 ln( X t t 1 ) = ln(

X X t X t 1 X t 1

+ 1) = ln( gt + 1) gt

2. Calculation of the percentage change Percentage change in X*Y= (Percentage change in X) + (Percent change in Y) Percentage change in X/Y= (Percentage change in X) - (Percent change in Y) Proof) d(XY)= YdX+XdY Now divide both sides by XY to obtain: d(XY)/(XY) = dX/X + dY/Y example) Nominal GDP=P*Y Let P denote the GDP deflator and Y denote real GDP. Suppose that in one year, Y is 100 and P is 2. The next year, Y is 103 and P is 2.1. We can calculate that Y rose by 3 percent, P by 5 percent. How much does the nominal GDP grow in percent? 8% 3. MPL and MPK Marginal Product of Labor (MPL) is the extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed. =w/p Marginal Product of Capital (MPK) is the extra amount of output the firm gets from one extra unit of capital, holding the amount of labor fixed. =r/p With a Cobb-Douglas production functional form, which is F(L,K)=AKaL1-a, MPK=aY/K and MPL=(1-a)Y/L. 4. Partial and total derivative Partial derivative of a function of several variables is its derivative with respect to one of those variables, with the others held constant. Total derivative of a function of several variables is its derivative with respect to those variables, in which all variables are allowed to vary. Example) F ( L, K ) Partial derivative: FL ( L, K ) = = (1 a) AK a L a L F ( L, K ) F ( L, K ) Total derivative: dF ( L, K ) = dL + dK L K

5. Unemployment Identity U = L L: labor force E: the number of employed U: the number of unemployed P: labor force population Derive this from the employment per capita E E L L (L E ) L L = = = (1 UR) P L P L P P Taking log by both sides gives: E L ln = ln(1 UR) + ln P P L E <=> UR ln ln P P S D L L 6. Accounting for the sources of economic growth Y=AF(L,K)=AKaL1-a Take log by both sides and take derivatives, ln Y = ln A + a ln K + (1 a)ln L

d ln Y = d ln A + ad ln K + (1 a) d ln L Y A K L = +a + (1 a) Y A K L Growth in output=Growth in total factor productivity (called Solow Residual)+ contribution of capital + contribution of labor Total factor productivity captures anything that changes the relation between measured inputs and measured outputs. 7. Derivation of the Phillips Curve = e -b(u-un)+s where b is a parameter measuring the response of inflation to cyclical unemployment. Inflation=expected inflation-b(cyclical unemployment)+supply shock YS=YL+a(p-pe) p=pe+1/a(YS-YL) Add supply shock p=pe+1/a(YS-YL)+s

Next, to go from the price level to inflation rates, subtract last years price level p-1, (p-p-1)=(pe-p-1)+1/a(YS-YL)+s = e +1/a(YS-YL)+s Okuns law states that the derivation of output from its natural level is inversely related to the deviation of unemployment from its natural rate, that is, S L Y Y = c ( u u n ) , YL 1/a(YS-YL)=-b(u-un) Thus, = e -b(u-un)+s