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Macroeconomics Measurements Thomas Chaney Sciences Po Thomas Chaney (Sciences Po) Macroeconomics Measurements 1 / 33

Housekeeping issues Instructor: Thomas Chaney (myself) Email: thomas.chaney@gmail.com Office: C401a (28 rue des Saints Peres) Office hours: TBD Thomas Chaney (Sciences Po) Macroeconomics Measurements 2 / 33

Housekeeping issues Teaching Assistant: Thomas Bourany: thomas.bourany@sciencespo.fr Class material: https: //sites.google.com/site/thomaschaney/teaching/macro Class communications: my website/ta Thomas Chaney (Sciences Po) Macroeconomics Measurements 3 / 33

Additional material No required Textbook. Optional recommendations: Barro, Macroeconomics, MIT Press. Doepke, Lehnert, Sellgren, Macroeconomics, UCLA 2011. Economics blogs: Brad Delong Steve Levitt Greg Mankiw John Cochrane Paul Krugman Thomas Chaney (Sciences Po) Macroeconomics Measurements 4 / 33

Grading 30% midterm exam (13 Oct) / 40% final exam / 30% problem sets Thomas Chaney (Sciences Po) Macroeconomics Measurements 5 / 33

Grading 30% midterm exam (13 Oct) / 40% final exam / 30% problem sets 5 Psets. Thomas Chaney (Sciences Po) Macroeconomics Measurements 5 / 33

Grading 30% midterm exam (13 Oct) / 40% final exam / 30% problem sets 5 Psets. Only electronic format. Posted online at the beginning of the semester. Teams of 2 students max. No copying! (automated plagiarism detection). Solutions posted right after the due date. Thomas Chaney (Sciences Po) Macroeconomics Measurements 5 / 33

Grading 30% midterm exam (13 Oct) / 40% final exam / 30% problem sets 5 Psets. Only electronic format. Posted online at the beginning of the semester. Teams of 2 students max. No copying! (automated plagiarism detection). Solutions posted right after the due date. Pset grading: grade/20 (curved). Late/missing pset: 0/20 (no excuse). Re-grade: written request, and full re-grade. Thomas Chaney (Sciences Po) Macroeconomics Measurements 5 / 33

TA sessions answer questions about the class. answer questions about new pset. give hints about new pset. go over technical parts of the class/psets. Thomas Chaney (Sciences Po) Macroeconomics Measurements 6 / 33

Topics 1 Measurements (1 week) [boring yet necessary stuff] 2 Growth (3 weeks) [Michael Kremer 1993, Bob Solow 1956] 3 Business Cycles (2 week) [Bob Lucas 2003] 4 Overlapping Generations model (2 weeks) [Paul Samuelson 1958] 5 Banks runs (2 weeks). [Diamond and Dybvig 1983] Thomas Chaney (Sciences Po) Macroeconomics Measurements 7 / 33

What is GDP? GDP is an aggregate measure of the total production of a country (or City, or region, or group of countries). It is both a simple idea, but very complex to measure. Thomas Chaney (Sciences Po) Macroeconomics Measurements 8 / 33

US GDP over 200 years Figure: Real U.S. GDP per capita (2005 $US), 1800-2010. Source: http://www.google.com/publicdata Thomas Chaney (Sciences Po) Macroeconomics Measurements 9 / 33

Useful mathematical tricks Exponential growth rate on a log-log scale: X t+1 = (1 + γ) X t X t = (1 + γ) t X 0 ln (X t ) = ln (X 0 ) + t ln (1 + γ) ln (X 0 ) + γt For mental calculations, the following approximations are very useful: ln 2 0.7 ln (1 + γ) γ 0 γ 2 10 = 1024 1000 Thomas Chaney (Sciences Po) Macroeconomics Measurements 10 / 33

1/9/13 World Development Indicators and Global Development Finance - Google Public Data Explorer +Thomas Search Images Maps Play YouTube News Gmail Drive Calendar More US, Japan and France: Convergence? Search public data or change visualization Thomas Chaney 0 Share GDP per capita (constant 2000 US$) - Log? $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 201 Data from World Bank Last updated: Oct 31, 2012 2012 Google - Help - Terms of Service - Privacy - Disclaimer - Discuss Figure: Real GDP/capita ($US 2000): US, Japan and France, 1965-2012. Source: http://www.google.com/publicdata Thomas Chaney (Sciences Po) Macroeconomics Measurements 11 / 33

US, Korea, China: Convergence 1/9/13 World Development Indicators and Global Development Finance - Google Public Data Explorer +Thomas Search Images Maps Play YouTube News Gmail Drive Calendar More Search public data or change visualization Thomas Chaney 0 Share GDP per capita (constant 2000 US$) - Log? $10,000 $1,000 $100 $0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 201 Data from World Bank Last updated: Oct 31, 2012 2012 Google - Help - Terms of Service - Privacy - Disclaimer - Discuss Figure: Real GDP/capita ($US 2000): US, Korea and China, 1965-2012. Source: http://www.google.com/publicdata Thomas Chaney (Sciences Po) Macroeconomics Measurements 12 / 33

US, Korea, Brazil: Convergence? 1/9/13 World Development Indicators and Global Development Finance - Google Public Data Explorer +Thomas Search Images Maps Play YouTube News Gmail Drive Calendar More Search public data or change visualization Thomas Chaney 0 Share GDP per capita (constant 2000 US$) - Log? $50,000 $10,000 $5,000 $0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 201 Data from World Bank Last updated: Oct 31, 2012 2012 Google - Help - Terms of Service - Privacy - Disclaimer - Discuss Figure: Real GDP/capita ($US 2000): US, Korea and Brazil, 1965-2012. Source: http://www.google.com/publicdata Thomas Chaney (Sciences Po) Macroeconomics Measurements 13 / 33

GDP: Gross Domestic Product GDP answers the following question: What is the value of everything that has been produced in a country over the course of a year? Thomas Chaney (Sciences Po) Macroeconomics Measurements 14 / 33

Nominal GDP: 3 equivalent definitions Def 1 Nominal GDP measures the sum of the value added of all domestic agents in a given year, measured in domestic currency (euros for France). Def 2 Nominal GDP measures the sum of all the value of final goods produced by domestic agents in a given year. Def 3 Nominal GDP measures the sum of the income of all domestic workers, and the profits generated by all domestic firms in a given year. Thomas Chaney (Sciences Po) Macroeconomics Measurements 15 / 33

Definitions Value added: value of sales minus value of intermediate inputs. Domestic: agents residing in the country (not necessarily citizens). National: citizens of the country. Agents: firms, self employed workers and government entities. Thomas Chaney (Sciences Po) Macroeconomics Measurements 16 / 33

Nominal GDP growth γ nominal t = GDP t+1 GDP t GDP t = i I t+1 p i,t+1 q i,t+1 i It p i,t q i,t i It p i,t q i,t Thomas Chaney (Sciences Po) Macroeconomics Measurements 17 / 33

Real GDP growth γ real t = i I t+1 p i,t+1 (q i,t+1 q i,t ) i It+1 p i,t+1 q i,t Note: we use the same prices (p i,t+1 ) to value quantities in both years. Thomas Chaney (Sciences Po) Macroeconomics Measurements 18 / 33

Growth over 100 years ( ) ( 1 + γt,t+100 real = 1 + γ real t ) ( 1 + γ real t+1 ) ( ) 1 + γt+99 real Thomas Chaney (Sciences Po) Macroeconomics Measurements 19 / 33

GDP deflator 1 + γ deflator t = 1 + γnominal t 1 + γt real or γ deflator t γ nominal t γ real t Thomas Chaney (Sciences Po) Macroeconomics Measurements 20 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. GDP is a flow: if people live longer, they receive more of this flow. Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. GDP is a flow: if people live longer, they receive more of this flow. GDP is a flow: no measure of accumulated wealth (only returns from this stock). No measure for the cost of effort. Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. GDP is a flow: if people live longer, they receive more of this flow. GDP is a flow: no measure of accumulated wealth (only returns from this stock). No measure for the cost of effort. No measure of health quality (same s may be worth less if one is sick). Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. GDP is a flow: if people live longer, they receive more of this flow. GDP is a flow: no measure of accumulated wealth (only returns from this stock). No measure for the cost of effort. No measure of health quality (same s may be worth less if one is sick). GDP/capita is a simple average: no measure of inequality. Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

What GDP does not measure GDP measures only legal market transactions: no black market, no home production. GDP is a flow: if people live longer, they receive more of this flow. GDP is a flow: no measure of accumulated wealth (only returns from this stock). No measure for the cost of effort. No measure of health quality (same s may be worth less if one is sick). GDP/capita is a simple average: no measure of inequality.... etc. Thomas Chaney (Sciences Po) Macroeconomics Measurements 21 / 33

Beyond GDP/capita 1/9/13 us- income- distribution- 2010-1210x7201.gif (1210 720) Figure: US income distribution (2010). Thomas Chaney (Sciences Po) Macroeconomics Measurements 22 / 33

1/9/13 upload.wikimedia.org/wikipedia/commons/a/a6/incomeinequality7.svg Beyond GDP/capita Source: Pilketty and Saez 2008. Figure: US Income growth by quantile, WWII-2010. Thomas Chaney (Sciences Po) Macroeconomics Measurements 23 / 33

Beyond GDP/capita 50% 45% Top 10% Income Share 40% 35% 30% Excluding capital gains 25% Including capital gains 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Figure: Top decile income share in the US, 1917-2008. FIGURE 1 Source: Piketty and Saez, The JELTop 2011. Decile Income Share, 1917-2008 Source: Table A1 and Table A3, col. P90-100. Income is defined as market income (and excludes government transfers). Thomas Chaney In 2008, top (Sciences decile includes Po) all families with Macroeconomics annual income above $109,000. Measurements 24 / 33

Beyond GDP/capita Share of total income accruing to each group 25% 20% 15% 10% 5% 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Top 1% (incomes above $368,000 in 2008) Top 5-1% (incomes between $153,000 and $368,000) Top 10-5% (incomes between $109,000 and $153,000) Figure: Top decile income share in the US, 1917-2008. FIGURE 2 Decomposing the Top Decile US Income Share into 3 Groups, 1913-2008 Source: Piketty and Saez, JEL 2011. Source: Piketty and Saez (2003), series updated to 2008. Income is defined as market income including capital gains. Thomas Chaney Top 1% denotes (Sciences the Po) top percentile (families Macroeconomics with annual income above $368,000 in 2008) Measurements 25 / 33

Beyond GDP/capita Top 0.01% Income Share 6% 5% 4% 3% 2% Including capital gains Excluding capital gains 1% 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Figure: Top 0.01% income share in the US, 1917-2008. FIGURE 3 Source: Piketty and Saez, The JELTop 2011. 0.01% Income Share, 1913-2008 Source: Piketty and Saez (2003), series updated to 2008. Thomas Chaney (Sciences Po) Macroeconomics Measurements 26 / 33

Beyond GDP/capita Fig. 1. The top decile income share in France, 1900 1998. Source: Author s computations based on income tax returns (see App. table A1, col. P90 100, and Piketty [2001a, app. B, table B14, pp. 620 21]). Figure: Top decile income share in France, 1900-1998. Source: Piketty and Saez, QJE 2003. Thomas Chaney (Sciences Po) Macroeconomics Measurements 27 / 33

Decomposition of GDP Y = C + I + G + NX Y : aggregate GDP C: consumption of goods and services (70% of GDP). I : business, residential and inventory investment (15%). G: government spending (20%). NX : net exports, i.e., exports minus imports (-5%). Thomas Chaney (Sciences Po) Macroeconomics Measurements 28 / 33

Consumption price index (CPI) INSEE defines a typical consumption basket of goods. Each month, INSEE collects data on the prices of the goods in that basket. cost of basket in month t CPI t = 100 cost of basket in base period Inflation rate: 1 + π t = CPI t+1 CPI t CPI t Thomas Chaney (Sciences Po) Macroeconomics Measurements 29 / 33

Categories of the CPI Good or Service September 2012 CPI Value (1982-4 = 100) College Tuition and Fees 706 Medical Care Services 445 Medical Care 419 Services 272 Energy 258 Food 234 All Items 231 Housing 223 Transportation 224 Apparel 127 Durables 112 Toys 53 Televisions 5 Thomas Chaney (Sciences Po) Macroeconomics Measurements 30 / 33

Categories of the population Employed: working at a paid job. Unemployed: not employed but looking for a job. Labor force: employed plus unemployed. Not in the labor force: not employed, not looking for work. Thomas Chaney (Sciences Po) Macroeconomics Measurements 31 / 33

Unemployment Unemployment rate: Labor force participation rate: u = U U + E p = U + E Pop Thomas Chaney (Sciences Po) Macroeconomics Measurements 32 / 33

Unemployment and non-employment Figure: Unemployment rate ( ) U U+E and non employment rate ( ) Pop E Pop. Thomas Chaney (Sciences Po) Macroeconomics Measurements 33 / 33