Intermediate Macroeconomics
Lecture 2
The Data of Macroeconomics
?Measure of economic activity
Gross Domestic Product (GDP)
Total expenditure on domestically-produced
final goods and services
Total income earned by domestically-located
factors of production
The Data of Macroeconomics
?Calculation of GDP
1) Final goods (no intermediate goods; value added)
? 2) Domestically produced
? *Gross National Product (GNP)
Total income earned by the nation’s factors of
production,regardless of where located
3) Used goods (not included)
? 4) Inventories
sold ? GDP; go bad ? lose value
GNP v.s,GDP
0
20000
40000
60000
80000
100000
亿元
1978 1981 1984 1987 1990 1993 1996 1999
Year
GNP v.s,GDP
GNP
GDP
The Data of Macroeconomics
?Nominal v.s,Real GDP
current year price or base year’s price
Nominal =
Real =
GDP deflator = nominal GDP/real GDP
0 4 0 4PQ??
9 0 0 4PQ??
The Data of Macroeconomics
?Measure of inflation
Consumer Price
Index(CPI)
=
=
C u r r e n t p r i c e o f b a s e y e a r b a s k e t o f g o o ds * 1 0 0
B a s e y e a r p r i c e o f b a s e y e a r b a s k e t o f goods
?
?
?
?
9090
9004
QP
QP
The Data of Macroeconomics
?Example
P 90 P 04 Q 90 Q 04
Apple 1.0 2.0 1000 2000
Pear 0.8 1.5 2000 2000
Nectarine 1.5 2.5 2000 3000
Peach 1 1.5 3000 5000
Banana 1.5 1 2000 8000
The Data of Macroeconomics
? CPI vs,GDP Deflator
1) GDP includes all the G & S produced in the
economy; CPI has a basket of some G & S
2) GDP deflator includes only domestic products;
CPI includes imports,
3) GDP deflator has a weighted basket of goods;
CPI has a fixed basket (quantities won’t change)
The Data of Macroeconomics
CPI v.s,GDP Deflator
0.00E+00
5.00E-01
1.00E+00
1.50E+00
2.00E+00
2.50E+00
3.00E+00
3.50E+00
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
CPI
GDP deflator
The Data of Macroeconomics
?CPI may overstate inflation
Consumers may substitute away from more
expensive goods,
e.g,1978-1981 U.S,price rose 9.1% per year
according to the GDP deflator; according
to CPI,price rose 11.2% per year,Why?
The Data of Macroeconomics
?Measure of jobless
Population = E +U + NLF
= LF + NLF
E = the employed
U = the unemployed
NLF = not in the labor force
LF = labor force =E + U
The Data of Macroeconomics
?Okun’s Law (Arthur Okun,1928-1980,Yale)
shows the relationship between real GDP and
unemployment rate,
= 3% - 2 * u
= growth rate of real GDP
=
= change in unemployment rate
=
% GDP?
?
% GDP?
10
0
*100G D P G D PGDP ?
10uu?
u?
The Data of Macroeconomics
?Okun’s Law implies two things,
1) = 0 → = 3%
2) for every 1% ↑ in u,a roughly 2% ↓in the
growth rate of real GDP
% GDP?% u?
Stocks v.s,Flows
投资与资本存量
储蓄与财富
预算赤字与公债存量
)(1 DNIKK ??? ?
SWW ?? ?1
D E FDD gg ?? ? 1
National Income
? Now,we look at the sources & the uses of GDP
(supply) (demand)
Questions addressed in this chapter,
1) Determinants of the level of output
2) How income is distributed among factors
3) How output is allocated among alternative uses
4) What ensures that the supply of and demand for
goods are equal
Circular Flow
Markets for Factors of Production
Markets for Goods and Services
Households Firms
Financial Markets
Government T
P.S,
G.P,
income
C
G.D,
I
F.P,
R
What Determines the Total
Production of G & S
?1,Factors of Production
Labor (L)—the time people spend working
Capital (K)—the set of tools that workers use,
What Determines the Total
Production of G & S
?2,The Production Function
?b > 0
constant returns to scale
increasing returns to scale
decreasing returns to scale
1 1 1(,)Y F K L?
1 1 1(,)b Y F b K b L?
1 1 1(,)b Y F b K b L?
1 1 1(,)b Y F b K b L?
What Determines the Total
Production of G & S
? Assumptions
? i,Fixed amount of input
?,
ii,Factors are fully utilized
iii,No technology improvement
→
KK?? LL
??
FF??
?? YY
What Determines the Total
Production of G&S
Fa
cto
r pr
ice
Q of factor
Factor supply
Firms’ Problem
?Maximize profit
Profit = Revenue – Cost
Profit = R- C
R = P * Q = P * Y = P * F(K,L)
C = Labor Cost + Capital Cost
C = w * L + r * K
? Profit = P * F(K,L) – w*L – r*K
Demand for Factors
?How much labor to hire and how much
capital to rent to get maximum profit?
The more factor the firm employs,the more
output it produces,
However,the more factor the firm employs,
the increase in output for this additional
unit of factor decreases --- diminishing
marginal product
Demand for Factors
?MPL & MPK
( 1,) (,)M P K F K L F K L??? ? ?
Output
L or K
F(K,L)
(,1 ) (,)M P L F K L F K L??? ? ?
Demand for Factors
Factor demand
Factor price
Q of factor
Demand for Factors
Equilibrium
factor price
Q of factor
D
S
Demand for Factors
?To maximize profit,
Real wage,
0p r o f i t??
p r o f i t R C? ? ? ? ?
()P M P L w? ? ?
0p r o f i t w P M P L? ? ? ? ?
wMPL
P?
Demand for Factors
?Try to get the real rental price
Real rental price,
0p r o f i t??
p r o f i t R C? ? ? ? ?
()P M P K r? ? ?
0p r o f i t r P M P K? ? ? ? ?
rM P K
P?
Distribution of National Income
?Economic Profit
= F(K,L) - ( MPL * L ) - ( MPK * K )
For competitive firms,economic profit = 0
? Euler’s theorem
F(K,L) = (MPL * L ) + (MPK * K)
Example
?Cobb-Douglas production function
1,What is MPL?
2,What is the relationship between labor
income and total income?
1(,)Y F K L A K L?? ???
Lecture 2
The Data of Macroeconomics
?Measure of economic activity
Gross Domestic Product (GDP)
Total expenditure on domestically-produced
final goods and services
Total income earned by domestically-located
factors of production
The Data of Macroeconomics
?Calculation of GDP
1) Final goods (no intermediate goods; value added)
? 2) Domestically produced
? *Gross National Product (GNP)
Total income earned by the nation’s factors of
production,regardless of where located
3) Used goods (not included)
? 4) Inventories
sold ? GDP; go bad ? lose value
GNP v.s,GDP
0
20000
40000
60000
80000
100000
亿元
1978 1981 1984 1987 1990 1993 1996 1999
Year
GNP v.s,GDP
GNP
GDP
The Data of Macroeconomics
?Nominal v.s,Real GDP
current year price or base year’s price
Nominal =
Real =
GDP deflator = nominal GDP/real GDP
0 4 0 4PQ??
9 0 0 4PQ??
The Data of Macroeconomics
?Measure of inflation
Consumer Price
Index(CPI)
=
=
C u r r e n t p r i c e o f b a s e y e a r b a s k e t o f g o o ds * 1 0 0
B a s e y e a r p r i c e o f b a s e y e a r b a s k e t o f goods
?
?
?
?
9090
9004
QP
QP
The Data of Macroeconomics
?Example
P 90 P 04 Q 90 Q 04
Apple 1.0 2.0 1000 2000
Pear 0.8 1.5 2000 2000
Nectarine 1.5 2.5 2000 3000
Peach 1 1.5 3000 5000
Banana 1.5 1 2000 8000
The Data of Macroeconomics
? CPI vs,GDP Deflator
1) GDP includes all the G & S produced in the
economy; CPI has a basket of some G & S
2) GDP deflator includes only domestic products;
CPI includes imports,
3) GDP deflator has a weighted basket of goods;
CPI has a fixed basket (quantities won’t change)
The Data of Macroeconomics
CPI v.s,GDP Deflator
0.00E+00
5.00E-01
1.00E+00
1.50E+00
2.00E+00
2.50E+00
3.00E+00
3.50E+00
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
CPI
GDP deflator
The Data of Macroeconomics
?CPI may overstate inflation
Consumers may substitute away from more
expensive goods,
e.g,1978-1981 U.S,price rose 9.1% per year
according to the GDP deflator; according
to CPI,price rose 11.2% per year,Why?
The Data of Macroeconomics
?Measure of jobless
Population = E +U + NLF
= LF + NLF
E = the employed
U = the unemployed
NLF = not in the labor force
LF = labor force =E + U
The Data of Macroeconomics
?Okun’s Law (Arthur Okun,1928-1980,Yale)
shows the relationship between real GDP and
unemployment rate,
= 3% - 2 * u
= growth rate of real GDP
=
= change in unemployment rate
=
% GDP?
?
% GDP?
10
0
*100G D P G D PGDP ?
10uu?
u?
The Data of Macroeconomics
?Okun’s Law implies two things,
1) = 0 → = 3%
2) for every 1% ↑ in u,a roughly 2% ↓in the
growth rate of real GDP
% GDP?% u?
Stocks v.s,Flows
投资与资本存量
储蓄与财富
预算赤字与公债存量
)(1 DNIKK ??? ?
SWW ?? ?1
D E FDD gg ?? ? 1
National Income
? Now,we look at the sources & the uses of GDP
(supply) (demand)
Questions addressed in this chapter,
1) Determinants of the level of output
2) How income is distributed among factors
3) How output is allocated among alternative uses
4) What ensures that the supply of and demand for
goods are equal
Circular Flow
Markets for Factors of Production
Markets for Goods and Services
Households Firms
Financial Markets
Government T
P.S,
G.P,
income
C
G.D,
I
F.P,
R
What Determines the Total
Production of G & S
?1,Factors of Production
Labor (L)—the time people spend working
Capital (K)—the set of tools that workers use,
What Determines the Total
Production of G & S
?2,The Production Function
?b > 0
constant returns to scale
increasing returns to scale
decreasing returns to scale
1 1 1(,)Y F K L?
1 1 1(,)b Y F b K b L?
1 1 1(,)b Y F b K b L?
1 1 1(,)b Y F b K b L?
What Determines the Total
Production of G & S
? Assumptions
? i,Fixed amount of input
?,
ii,Factors are fully utilized
iii,No technology improvement
→
KK?? LL
??
FF??
?? YY
What Determines the Total
Production of G&S
Fa
cto
r pr
ice
Q of factor
Factor supply
Firms’ Problem
?Maximize profit
Profit = Revenue – Cost
Profit = R- C
R = P * Q = P * Y = P * F(K,L)
C = Labor Cost + Capital Cost
C = w * L + r * K
? Profit = P * F(K,L) – w*L – r*K
Demand for Factors
?How much labor to hire and how much
capital to rent to get maximum profit?
The more factor the firm employs,the more
output it produces,
However,the more factor the firm employs,
the increase in output for this additional
unit of factor decreases --- diminishing
marginal product
Demand for Factors
?MPL & MPK
( 1,) (,)M P K F K L F K L??? ? ?
Output
L or K
F(K,L)
(,1 ) (,)M P L F K L F K L??? ? ?
Demand for Factors
Factor demand
Factor price
Q of factor
Demand for Factors
Equilibrium
factor price
Q of factor
D
S
Demand for Factors
?To maximize profit,
Real wage,
0p r o f i t??
p r o f i t R C? ? ? ? ?
()P M P L w? ? ?
0p r o f i t w P M P L? ? ? ? ?
wMPL
P?
Demand for Factors
?Try to get the real rental price
Real rental price,
0p r o f i t??
p r o f i t R C? ? ? ? ?
()P M P K r? ? ?
0p r o f i t r P M P K? ? ? ? ?
rM P K
P?
Distribution of National Income
?Economic Profit
= F(K,L) - ( MPL * L ) - ( MPK * K )
For competitive firms,economic profit = 0
? Euler’s theorem
F(K,L) = (MPL * L ) + (MPK * K)
Example
?Cobb-Douglas production function
1,What is MPL?
2,What is the relationship between labor
income and total income?
1(,)Y F K L A K L?? ???
