EC114 Introductory Macroeconomics Applications Lecture, Week 1

Who Am I?

• James Reade, j.j.reade@reading.ac.uk, HumSS 191.

• Office hours: 14:30–16, Tuesdays, 11–12:30 Fridays.
• Twitter: jjreade, hashtags #EC114 #pleasebemyfriend
  • Tumblr? jjreade there also.

• Dropbox: Slides, audio, etc will be made available via links/folder share.

Who are you?

• 168 students from:
  • 20 different countries
  • 13 different programmes

• Male dominated: 65% of you have the Y chromosome.

• UK dominated: 74% of you are British…
  • … but everybody is welcome!
  • Consequence of the Coalition’s policies on immigration?
  • Just 3% from the wider EU suggesting perhaps not…?
• None of you have the same full name…
  • …but 14 of you share a surname
• Can you all download Socrative Student App on your phone?
  • Navigate to room yVmAQCjIMw (that’s capital i).

Administration: Ground Rules

1. You’re adults. I’ll treat you that way.
   • Nothing is compulsory, everything is up to you.
2. Hence: Please don’t talk in my lecture.
   • Respect your fellow student and me.
3. Please try and find out information before emailing me.
   • But if you can’t find it, by all means email!
4. No handouts.
   • Slides will be available online Monday of each week.
   • Prepare accordingly…

Administration

• Lectures:
  • Thursdays 2-3pm: URS LLT, Applications Lecture.
    • Apply concepts covered previous week to real life.
  • Friday 9-11am: URS LLT, Core Lecture.
    • Main sessions: We’ll cover core material here.

• Textbook: Miles, Scott and Breedon 3e, `Macroeconomics’.

• Classes:
  • Classes run weeks 3–5, 7–11.
  • Pattern:
    • Core material, Friday lecture (week \(x\)).
    • Application, Thursday lecture (week \(x+1\)).
    • Further application, Tuesday class (week \(x+2\)).
  • Task for week 3: http://rpubs.com/jjreade/ec114_class1

Outline

• Rough syllabus with chapters:

  • Week 1: Chapters 1–3: What is Macro, National Accounts, the ``Supply Side’’.
  • Week 2: Chapters 4–5: Growth
  • Week 3: Chapter 7: Unemployment.
  • Week 4: Chapters 8–9: Trade and Globalisation.
  • Week 5: Forecast Competition II, and Settlers???
  • Week 7: Chapter 10: Consumption and Investment.
  • Week 8: Chapter 11: Business Cycles.
  • Week 9: Chapters 12–14: Money, Prices, Monetary and Fiscal Policy.
  • Week 10: Chapters 17–18: Banking, Debt and (Sovereign) Default.
  • Week 11: Chapters 19–21: Exchange Rates.
• Unable to cover chapters in full detail.

• Reading all the chapters will be beneficial.

Applications Lectures

Applications Lectures

• There’s a general election coming…

1. Can you legally vote in the General Election?

2. Who do you think you will vote for?
   1. Conservatives
   2. Liberal Democrats
   3. Labour
   4. Ukip
   5. Green

Applications Lectures

Applications Lectures

Applications Lectures

• Idea: Apply what previously learnt in core lecture.
• Week 2: GDP measurement and the General Election.
• Week 3: Growth/Unemployment numbers (benefits culture)..
• Week 4: Guest Lecture: Joe Grice, Chief Economist at the ONS.
• Week 5: Revision.
• Week 7: Guest Lecture: John Redwood, Conservative MP.
• Week 8: Trade and globalisation (immigration)
• Week 9: Guest Lecture: Sam Juthani, Labour candidate for Henley.
• Week 10: Monetary policy (poss. guest lecture)
• Week 11: Sovereign default

Seen this?

Examination Arrangements

• Week 5: Midterm exam (20%).
• Week 11: Essay (20%).
• Summer (c. May 11–12): Final exam (60%).
• Summer Exam minor tweak:
  • Section A: Definitions of listed concepts.
    • Previously definition, description and example.
  • Section B: Answer 1 (short) essay question from choice of 3.
    • No change.
  • Section C: Compulsory (short) essay question.
    • Question will be on final topic, exchange rates.

• Mock exam (with numerous example Section C Qs) will be available by Week 7.

• More course details: http://www.reading.ac.uk/modules/document.aspx?modP=EC114&modYR=1415

Economics and Modelling

Economics and Modelling

Economics and Modelling

Being at university means…

• … being willing to ask uncomfortable questions.
  • Why are things happening?
  • Why do we think what we think?
• Growing body of evidence that your peers not keen:
  • ‘Free speech is so last century’, Spectator (http://goo.gl/3pTzEz)
  • ‘The idea that in a free society absolutely everything should be open to debate has a detrimental effect on marginalised groups’, Niamh McIntyre, Independent
  • Last week’s events in Paris may have had impact?
• Much criticism of basic economic tuition at university:
  • Any restriction on what I present is due to time constraints.
  • Always happy to discuss alternative ideas.

Macroeconomics

• Definition of economics:
  • Study of allocation of scarce resources.
• Macroeconomics vs Microeconomics:
  • Micro: Individual decisionmakers (firms, consumers).
  • Macro: Economy as a whole. Aggregated entities.
  • Macro: Outcomes of all decisions of decisionmakers.
• PJ O’Rourke:

microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about money you don’t have, and macroeconomics is about money the government is out of

Macroeconomics

Macroeconomics

• Most media coverage focusses on short-run questions.

Macroeconomics

• But macroeconomics is also about longer-term issues.

Macroeconomic History in a Tweet

• Macroeconomics seeks to explain this big picture.

The Long Run in Economics

Once one starts to think [about questions of economic growth] it is hard to think about anything else

R. Lucas (Nobel Prize Winner 1995)

Chapter 2: National Accounts

• Quantity supplied/demanded important when considering individual market.
  • Underlying this is utility and profit maximisation. Welfare economics.
• On economy-wide scale, welfare concerns still paramount: How measure?
  • Focus on output produced: More produced, more needs satisfied…?
• How do we measure total economic output of an economy?
• Key Concept:
  • We measure output as Gross Domestic Product.

Gross Domestic Product

• GDP: Total value of goods and services produced.
• Need to know:
  • How much was produced (quantity).
  • What the production was worth (price).

Example: Company X

Production in 2010	Production in 2012
200 washers at £500	300 washers at £600
100 dryers at £400	100 dryers at £450

• How to value output in 2010? Price reflects economic value.
  • Total produced in 2010: \(200\times500 + 100\times400 = \pound 140,000\).
  • Value 2012 output similarly: \(300\times600 + 100\times450 = \pound 225,000\).
• How compare 2010 output to 2012 output? Has output actually risen?
  • It could be that increase in output entirely due to prices rising.¹
• Real output: Calculate in common set of prices:
  • 2012 output at 2010 prices: \(300\times500 + 100\times400 = \pound 190,000\).
  • Real growth (2010 prices): \((190000-140000)/140000=35.7\%\).

Chain Linked Prices

• Prices reflect the value society places on particular goods at particular point.
  • Preferences change and as such, prices change.
  • Different prices matter: (2012 prices) \((225000-165000)/165000=36.4\%\).

• Using a previous set of prices imposes particular set of valuations on another year.

• Problem: As prices change, consumers buy more/less of products.
  • If prices falling, people buy more. E.g. computers.
  • If old prices used, that industry over-represented in GDP and growth may be over-stated.
• Solution: Let prices gradually evolve: Chain-linked prices.
  • Take average of growth with each year as base. Yields 36.06% growth.

Real and Nominal GDP

• Nominal: Measured in current prices. Real: Measured in constant prices.

## [1] "UKNGDP"

## [1] "GBRRGDPQDSNAQ"

Value Added

• Real world more complicated than single producer of dryers and washing machines.
  • Producers use inputs to create outputs like washers and dryers.
• Simpler example: Orange juice producer (Sunny Delight):
  • Takes 100 oranges picked by Orange Pickers Ltd for £1 per orange.
  • Creates 100 cartons of juice, sells them for £1.50.
• If count each stage, total output of economy is \(100\times1 + 100\times1.5 = 250\).
  • But this double counts the oranges.
  • Sunny Delight only added 50p of value to product.
• Hence calculation is \(100\times1 + 100\times(1.5-1) = 150\).
• In real world production chains much more complicated, principle remains.

Three Measures of Output

1. Output method: Sum value added from all sectors.

   • £100 + £50 = £150.
   • Sometimes referred to as Gross Value Added (GVA).

2. Income method: Some payments to factors of production.

   • Payments to employees, owners and shareholders of Orange Pickers Ltd and Sunny D.
   • All incomes of citizens of country referred to as Gross National Income (GNI).

3. Expenditure method: Some expenditures on final goods and services.

   • £150 spent on the Sunny Delight orange juice cartons.
   • Generally: C+I+G+NX

• All three must sum up to the same amount:

  • Gross Domestic Product (GDP) at market (current) prices.

Composition of US Output 2009

Composition of UK Output 2005

Composition of UK Output 2012

Regional Composition of UK Output 2009

Who Gets What in the Pie?? Income Method

The UK’s Labour Share, Historically

• Does it matter? Extra (interesting!) reading (goo.gl/4YR4zF)…

All Shares, Historically

• Get dataset (from ONS): http://goo.gl/zbtCE0.

GDP, Welfare, HDI and more

• Important: GDP is not measure of welfare; economists sometimes see it as proxy.

• Alternative measures exist: Human Development Index particularly popular:

  • Adds life expectancy, education and inequality to income levels.
  • Adds subjectivity, however…

• http://goo.gl/fPMQhA: Increasing correlation between HDI and GDPpc.

Cameron, Miliband and wellbeing and standards

• Around 2010, Cameron introduced ‘Gross Wellbeing’ (http://goo.gl/nWwdDO).
  • Here’s an update: ‘The Observer view on Cameron’s Wellbeing Survey: we’re all feeling happier. Especially those with plenty of money and a good education’ (http://goo.gl/DNTX96)
• Last weekend, Ed Miliband suggested an index of living standards (http://goo.gl/PKn5hG)
• ‘Cost of living crisis’ seemingly never out of the news…
  • E.g. Iain Dale’s Blog, “Cost of living crisis? What cost of living crisis?” (http://goo.gl/97YtzG)
• Week 4 (Feb 5): Joe Grice, Chief Economist at the Office for National Statistics.

Inequality and Welfare… and Respect?

• HDI introduces inequality and other subjective factors to measuring nation’s welfare.
• Does respect matter?

• Noah Smith: `Redistribute Wealth? No, Redistribute Respect.’ (goo.gl/kuuqIQ)

  • We disrespect particular (usually low paid) jobs.
  • Respect seems to be much to closely linked to how much one earns.
  • Lack of respect robs many of the poor of many opportunities.

• David Henderson: `The Economics of Respect’ (http://goo.gl/ZvFMlC):

  • Adam Smith: Wages inversely correlated to how distasteful a job is.
  • Hence if we increase respect for low-paid jobs, their pay will fall (further)…?
• Noah Smith: Such impact only at the upper end of wage scale — why?

• Henderson: Can we avoid deprivation without redistributing wealth?

Finally…

• Feedback please: http://goo.gl/forms/exWMO9Cxqn
  • Non-compulsory but helps me understand how you’re getting on.

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1. Although if the price rise reflects better quality washers/dryers, then output has increased in its value to us.↩