Economics 215 Intermediate Macroeconomics Introduction

What is Macroeconomics Studies of economies at aggregate level: world, nation, region, etc. Economic decision makers are representatives of a broader class (consumers, banks, firms, etc.)

Why study aggregate economy? Classes of agents similar in important ways. Their behavior generates aggregate movements. Aggregate markets important to explain, foreign exchange, credit, energy. Single national policy-makers: central bank, treasury. Feedback when large number of agents act together.

How is Intermediate Different from Principles Main subjects  Long-term Growth Productivity Capital Accumulation vs. Technology driven growth  Exchange Rates Long-term exchange rate fundamentals Business cycles in small open economy  Macroeconomic Dynamics Savings and Investment Trade and Budget Deficits

Concepts you should know GDP, Nominal and Real Price level and Inflation Interest Rates, Nominal and Real Variables are often studied in the form of time series: A set of observations indexed by time.

GDP: Output Nominal GDP (PY t ) – the total value of goods produced in a given period measured in current prices. Real GDP (Y t ) – the total value of goods produced in a given period measured in the prices prevailing in some base year.

Expenditure Categories in Hong Kong: 2001

Income Distribution

Production Sectors of Hong Kong

P: Price level Deflator (P t ) ratio of nominal GDP to real GDP (weighted average of the prices of goods produced using current expenditures as weights). CPI (CPI t ) cost of a fixed market basket of consumer goods relative to the cost in a base year (weighted average of the prices of goods consumed using fixed expenditures as weights). Inflation: Growth rate of price level

Inflation: HK GDP Deflator

Interest Rates Nominal Interest Rate (1+i t ): Number of $ a borrower will pay you in one year if they borrow $1 today. Real Interest Rate (1+r t ): Number of goods a borrower will pay you in one year if they borrow 1 good today.  Gross Nominal interest at the time of a loan divided by gross inflation over course of a loan.  Net real interest rate approximated by net nominal rate minus net inflation rate.

HK Real Interest Rate

Time Series Million HK $

Growth Real GDP tends to grow over time. Growth Rate Growth compounds across time

Series with Exponential Growth

Natural Log Empirical economists often study (natural) logarithms of series Study y t = ln Y t Natural log is a logarithm with Euler’s constant, e as base. Natural logarithm is a mathematical function that takes a straight line and turns it into a concave Most importantly, natural logarithm takes an exponential growth function and turns it into a straight line.

Natural Log of a Straight Line

Exponential to straight line

Properties of Natural Logarithm 1. If 2. If 3. If Log of exponential growth function is linear function of time

GDP vs. Log GDP

Small changes in X imply % changes in ln(X) If x = ln(X) and X changes by a small amount dX, then x changes by Growth Rates: Between two periods of time Y changes by an amount ΔY = Y t – Y t-1. Then

Continuous vs. Discrete Growth

GDP Growth GDP displays exponential, but uneven, growth. Macroeconomists split GDP into two parts: 1) trend; and 2) cycle 1. Trend – smooth, expositional growth 2. Cycle – Deviations of Actual GDP from Trend

Calculating Trend Developed Economies: Ln(GDP) is a linear function of time. Estimate linear regression of ln(GDP) on constant and time. Emerging Markets: Tend to experience slowing growth. Estimate linear regression of ln(GDP) on constant, trend, trend 2.

Log Trend & Log Cycle

HK GDP – Trend and Cycle

Calculating Cycles Gap (output gap) between actual ln(GDP) and trend ln(GDP). Small difference between two natural logs can be interpreted as a % difference. Output gap is the % deviation of GDP from trend. Output gap is variable and persistent but does not permanently grow or shrink over time.

Output Gap

Output Gap & Unemployment

Statistics Standard deviation of the output gap to measure the volatility of the output gap. Correlation to measure the movement of one stationary time series with one another. Auto-correlation measures the persistence of stationary time series.

Point Elasticities Elasticity: The % change in one variable caused by % change in another variable. Given x = ln(X), y = ln(Y) and y = δ x  (dy/dx) = δ  dy = (dY/Y), dx = (dX/X)  So δ can be interpreted as the elasticity of X with respect to Y

Main Sources of Hong Kong Statistics There are two main sources of macroeconomic statistics. 1. Census and Statistics Department: National Income Accounts, CPI, Interest Rates, Employment, etc. See Frequently Requested Statistics 2. Hong Kong Monetary Authority: Money and Banking Statistics See Monthly Statistical Bulletin