Macroeconomics (1103)

Lecturers: Catia Batista and Pedro Brinca

Macroeconomics (1103)
Lecturers:
Catia Batista, catia.batista@novasbe.pt
Lectures: Wednesdays, 12h3014h00, Room A13
Fridays, 12h3014h00, Room A13
Office Hours: Tuesdays 11h00, Office 365
Pedro Brinca, pedro.brinca@novasbe.pt
Lectures: Tuesdays, 16h0017h30, Room ISEGI
Thursdays, 16h0017h30, Room A13
Office Hours: Tuesdays 11h00, Office 346

Macroeconomics (1103)
Teaching Assistants:
Jos Ricardo Sequeira jose.sequeira@novasbe.pt
Office Hours:
Friday, 2:30pm, Room 026A
Marco Antnio Monteiro Franco 20717@novasbe.pt
Office Hours:
Thursdays, 12:30pm, Room 026
Rui Mascarenhas rui.mascarenhas@novasbe.pt
Office Hours:
Thursdays, 6pm, Room 026

Course Webpage

Course Webpage: moodle - access at http://moodle.novasbe.pt/

Password for self-enrolment: macro

Main Textbook
The main textbook for the course is:
Robert J. Barro, Macroeconomics: A Modern Approach (1st edition),
2008, South-Western, distributed by Cengage.
Available at library under call number E.021-096
Additional Readings: Are listed in syllabus. Will also be provided in class
and in the moodle course webpage.

Final Grade
Class Participation 20%
Midterm Exam

30%

Final Exam

50%

Class Participation:
1) Students answers to the problem sets are left in a box with their TAs name,
available at the Nova SBE buildings reception on Tuesdays until 11am.
2) For each tutorial, students will be required to discuss problem sets given in
advance.
3) Participation in lectures is also taken into account.
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Course Description
an introduction to macroeconomics: the study of the behavior of the
economy as a whole;
focus on aggregate variables: total production, unemployment, credit and
savings, money, and inflation;
also focus on dynamic behavior of those aggregate variables: economic
growth, business cycles;
approach of the course is based on microeconomic foundations: move
from the individual maximization problems to the aggregate or
macroeconomic problems that the economy faces as a whole.
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Course Outline
Section 1: Introduction to Macroeconomics
Main Reading: Barro, chapters 1 and 2.
Section 2: Economic Growth
Main Reading: Barro, chapters 3, 4 and 5.
Section 3: Economic Fluctuations
Main Reading: Barro, chapters 6, 7, 8 and 9.

Course Outline
Section 4: Money, Inflation and Interest Rates
Main Reading: Barro, chapters 10, 11, 15 and 16.
Section 5: Fiscal Policy
Main Reading: Barro, chapters 12, 13 and 14.
Section 6: (Time permitting) Open Economy
Main Reading: Barro, chapters 17 and 18.

Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics;
2. Some Macroeconomic Facts;
3. Measuring Economic Activity:
- National Income and Product Accounting (NIPA);
- Gross Domestic Product (GDP);
- Price Level.
Reading: Barro, Chapters 1 and 2.

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1. The Approach to Macroeconomics

Why do different economies grow at different rates?
Why does the economy fluctuate?
What is the cause of inflation?
How does government policy affect the economy?
How does international trade affect the economy?

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1. The Approach to Macroeconomics (Cont.)

Endogenous variables are the ones that we want the model to explain.
Exogenous variables are the ones that a model takes as given and does
not attempt to explain.
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1. The Approach to Macroeconomics (Cont.)

Economic Models and Empirical Testing
New Classical vs. Keynesian Models
New Classical Models

Keynesian Models

microeconomic foundations no microeconomic foundations

market clearing

disequilibrium situations may occur

price flexibility

some prices do not adjust immediately

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2. Some Macroeconomic Facts

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2. Some Macroeconomic Facts

- Growth rate of real GDP for year t  Y t " Y t"1 /Y t"1  Y t /Y t"1 " 1
[Multiply by 100 to get the growth rate of real GDP in percent per year.]

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2. Some Macroeconomic Facts

Inflation rate for year t  P t " P t"1 /P t"1  P t /P t"1 " 1

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3. Measuring Economic Activity:

National Income and Product Accounting (NIPA)
Output, or production, in real-world economies is typically measured by real
gross domestic product (GDP).
Gross Domestic Product:
measure of the market value of all the final goods and services newly
produced within a specified countrys borders during a specified period of
time (usually one year or one quarter).
NOTE
Flow variable:
measures value of goods produced per unit of time, such as a year.

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How good is GDP as a measure of domestic

welfare?
1. No Consideration of Changes in Income Distribution;
2. Non-Market Goods (except for Government Services) are excluded from
GDP: household production, underground economic activity, etc;
3. No Value Assigned to Leisure Time;
4. Quality Changes in Goods are Not Accounted For;
5. Quality of Living Aspects (such as Environmental Quality, Political
Freedom or Social Justice) are Omitted.

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How Do We Measure GDP in Reality?

The starting point of macroeconomic measurement is the so-called
fundamental identity:

Total Production  Total Expenditure  Total Income

1. Production/Value-Added Approach: look at firms production
2. Income Approach: where firms spend their revenues
3. Expenditure Approach: where households spend income

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Expenditure Approach
GDP  C  I  G  X " M
C : Personal Consumption Expenditures
I : Gross Private Domestic Investment
G : Government Purchases of Goods and Services
X " M : Net Exports (Exports minus Imports)

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Income Approach:

Income Earned by Factors of Production

GDP  Labor Income  Interest  Rental Income 
 Corporate Profits  Net Taxes  Depreciation

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Relationship between GDP and National Income

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Value-Added Approach

GDP 

Value " Added

all firms

Value " Added  Revenue " Cost of Intermediate Goods

(Excludes Intermediate Goods and Services to Avoid Double Counting

Problem)

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Real GDP vs. Nominal GDP

Calculating Real GDP: Multiply each years quantity of output of each
good by the price of the good in a base year.
GDP in constant dollars
Chain-weighted real GDP
Nominal GDP: Y  Q P
Real GDP: Y  Q P 0
 The distinction between real and nominal GDP suggests a measure of
the price level (P), defined to be the average of the prices of an
economys goods and services.

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How do we measure an economys general price

level?
in practice, price level measured by index of average prices;
index number expresses value of some entity (such as price or GDP) at a
given period of time in absolute number form but related to a base period
set arbitrarily to 100;
what do we actually mean by price?
[ Implicit GDP Price Deflator
[ Consumer Price Index (CPI)
[ Producer Price Index (PPI)

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Implicit GDP Price Deflator

(nominal GDP)/(implicit price level)  real GDP
or
implicit price level  (nominal GDP)/(real GDP)

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Consumer Price Index: CPI

A price index calculated as the current cost of a fixed basket of consumer
goods divided by the cost of the basket in the base period.
Calculating the CPI
1. Find cost of CPI basket at base period prices
2. Find cost of CPI basket at current period prices
3. Calculate the CPI for the base period and the current period

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A simplified calculation of CPI

1) Base year: 2008
Oranges: 10 @ $1.00  $10
Haircuts: 5 @ $25.00  $125
Cost of CPI basket in 2008: $135
2) Current year: 2009
Oranges: 10 @ $2.00  $20
Haircuts: 5 @ $30.00  $150
Cost of CPI basket in 2009: $170

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3) CPI Calculation
CPI
CPI
CPI

Cost of CPI Basket in Current Year

100

Cost of CPI Basket in Base Year


in base year (2008)  $135
$135
in current year (2009)  $170
$135

100
 126

MEANING:
26% price increase from 2008 to 2009

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The Actual CPI Basket - Main Categories

December 2002

% weight in CPI

Housing

41%

Transportation

17%

Food and beverages

16%

Medical care

6%

Recreation

6%

Education and communication 6%

Apparel

4%

Other goods and services

4%

Source: US Department of Commerce Bureau of Economic Analysis

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Problems with the CPI:

1. CHANGES IN QUALITY
Quality Change Bias
2. NEW GOODS
New Goods Bias
3. WHICH GOODS DO YOU PRICE?
Commodity Substitution Bias
4. WHICH PRICES ARE RELEVANT?
Outlet Substitution Bias

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Inflation Rate
The measured rate of inflation between any two periods is just the growth
rate (in percentage terms) in a price index between those two periods
=t 

P t " P t"1
100
P t"1

This definition represents the statistic that is reported when we hear stories
about the rate of inflation in the press, or in the news.

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Section 1: Introduction to Macroeconomics

1. Thinking About Macroeconomics;
2. Some Macroeconomic Facts;
3. Measuring Economic Activity:
- National Income and Product Accounting (NIPA);
- Gross Domestic Product (GDP);
- Price Level.
Reading: Barro, Chapters 1 and 2.

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