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reading notes for mankiw's macro

reading notes for mankiw's macro



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Published by matthieutc
notes on Mankiw's macroeconomics book
notes on Mankiw's macroeconomics book

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Published by: matthieutc on Feb 03, 2008
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Notes from Mankiw's Macroeconomics 5th edition (2001)Some parts of this document were taken directly from the book. All rightsreserved.# DEFINITIONS-------------* GDP = PIB = C + I + G + NXwhere C = consumptionI = investmentG = gov expendituresNX = net exportsreal GDP = GDP at constant pricesGNP = GDP + factor payments from abroad - factor payments to abroad :: totalincome earned by residents of a nationGNI = GNP :: GNI calculates the GNP by summing income, not output valueGDP deflator = nominal GDP / real GDP :: an indicator of what's happening to thelevel of pricesNNP = GNP - depreciationNotes:- There is 'investment' only when new goods are added to the economy, like whenbuilding a house from scratch.- Used goods are not counted toward the GDP: they are not an addition to theeconomy.- When inventories get bigger even if the goods are not sold, it is stillcounted toward the GDP.- For intermediary goods, we only count the added value at each step, orequivalently, the value of the final good.- Some goods which aren't traded need to be imputed a value, such as the renthomeowners would pay themselves.* CPICPI is an indicator of the level of prices, using the change in price of a basketof goods.Different from the GDP deflator for 3 reasons:- the GDP deflator reflects the level of all prices, not just those bought byconsumers- the GDP deflator includes only domestic goods, the change in price of importsis not reflected- the CPI is calculated with a fixed set of goods, substitution from one productto another or new products arenot accounted for* Unemployment rate = # of unemployed / labor force * 100where labor force is all the workers and those looking for a job or on atemporary layoff. Discouraged workersare not counted, neither are retirees and full-time students.Okun's law :: the unemployment is negatively related to the GDP growthPercentage Change in Real GDP = 3% - 2*Change in the Unemployment Rate# GENERAL EQUILIBRIUM MODEL---------------------------This is clasical/neoclassical theory, aka the general equilibrium modelThe production depends on the quantity of the factors of production and on
productivity (the ability to go frominput to output).MV = PT or MV = PYwhere M = moneyV = velocityP = typical priceT = # of transactions(PT) = the amount of money that changes handsY = C + I + GAssumptions:- money is neutral, does not affect real variables- velocity of money is constant- long run :: prices are flexible- capital, labor and thus ouput, is fixed- the competitive firm is a price taker, it takes the price of inputs, outputs,and wages as given. It will thenchoose the quantity of each to maximize profits- savings = Y - C - G = I- the role of money is ignored- no trade with other countries- full employment- capital stock and labor force are fixed- ignored the role of short-tun sticky pricesConsequences:- to maximize profits, the competitive firm must hire until the marginal productof labor equals the real wage(the wage in terms of the firm's output)- the competitive firm does the same for capital :: rent or buy more until themarginal product of capital equalsthe real rental price (the price in terms of the firm's output)- if we assume constant returns to scale, then economic profit for thecompetitive firm is nil- each factor of production is paid its marginal productivity :: this is howoutput is distributed in this model- at the equilibrium interest rate, the demand for goods and services equals thesupply- at the equilibrium interest rate, households’ desire to save balances firms’desire to invest, and thequantity of loanable funds supplied equals the quantity demanded- when gov purchases increase with no tax bump, the purchases are financed withbonds and it crowds outinvestment. Consumption is increased because disposable income is larger- a tax cut has the same effects as an increase in gov purchases- investment can be stoked by new technology or milder tax laws- investment depends negatively on the real interest rate- the money supply determines the nominal value of output- the central bank has complete control over inflation (quantity of moneytheory)# IN THE OPEN ECONOMY---------------------Y = C + I + G + NX
where NX = net exportsNational income accounts :: S - I = NX :: net capital outflow (net foreigninvestment) = trade balancereal exchange rate = nominal exchange rate * ratio of price levelsAssumptions:- the economy is small and does not affect the world interest rateConsequences:- if the world interest rate is higher than what would prevail in the closedeconomy, the economy experiencesa trade surplus- if the world interest rate is lower than what would prevail in the closedeconomy, the economy experiences a tradedeficit- starting from balanced trade, a change in fiscal policy that reduces nationalsaving leads to a trade deficit- an increase in the world interest rate due to a fiscal expansion abroad leadsto a trade surplus- The real exchange rate is related to net exports. When the real exchange rateis lower, domestic goods areless expensive relative to foreign goods, and net exports are greater- The trade balance (net exports) must equal the net capital outflow, which inturn equals saving minusinvestment. Saving is fixed by the consump tion function and fiscal policy;investment is fixed by theinvestment function and the world interest rate- at the equilibrium real exchange rate, the supply of dollars available fromthe net capital outflow balancesthe demand for dollars by foreigners buying our net exports- when savings drop from an increase in G or a tax cut, or when investment isstoked by a tax credit, NX falls too- a protectionist trade policy raises the real exchange rate. Despite the shiftin the net-exports schedule,the equilibrium level of net exports is unchanged. This lowers the amount oftrade.Notes:- (quote) Yet trade deficits are not always a reflection of economic malady.Whenpoor rural economies developinto modern industrial economies, they sometimes finance their high levels ofinvestment with foreignborrowing. In these cases, trade deficits are a sign of economic development.For example, South Korea ranlarge trade deficits throughout the 1970s, and it became one of the successstories of economic growth.Thelesson is that one cannot judge economic performance from the trade balancealone. Instead, one must look atthe underlying causes of the international flows# UNEMPLOYMENT--------------Summary:- The natural rate of unemployment is the steady-state rate of unemployment. It

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