Transcript Prices and Quantities - Hong Kong University of Science

Macroeconomics & Finance
Introduction & Chapter
3
Macro & Finance
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Thesis: Of all the business disciplines,
macroeconomics is most closely connected with
finance.
Some business disciplines can be understood with
minimal knowledge of business cycles not finance.
Academia: Macroeconomic researchers publish in
finance journals and finance researchers publish in
macroeconomic journals.
Private Sector: Macroeconomists most likely to be
employed by commercial or investment banks.
Where’s the Connection?
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Intertemporal Decision making is central to both
disciplines.
Finance studies portfolio choices of savers (stocks,
bonds, etc.) and their implications for asset prices.
Corporate finance studies the determinants of the
borrowing choices of firms.
Savings decisions of households & investment
decisions of firms central to business cycles.
All decisions must be made now and have an impact
on the future.
Other Connections
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Macroeconomists study government fiscal policy.
Government major borrower (or saver) in financial
markets.
Macroeconomists study monetary policy. Monetary
policy determines real value of financial pay-offs.
Values of financial assets a major determinants of
decisions of consumers.
Financial theory emphasizes diversified portfolios
whose performance depends on aggregate
performance of the economy.
Language of Macroeconomics: Data
and Definitions
Chapter 3
Objectives
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Use measures of prices and quantities to
calculate economic aggregates.
Calculate the “real” aggregates.
Use measures of prices and quantities to
calculate aggregate prices.
Adjust nominal quantities into real quantities
using an arbitrary reference year.
Aggregation Problem
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Most individual economic goods have a natural
measure in terms of quantities (countable objects,
weight, volume, etc.)
Use # of domestic currency units (i.e. dollars) that
must be exchanged to purchase one unit of them as
the price.
In macroeconomics we are concerned with
measuring quantities of groups of goods that have
no natural, common unit of measure.
We must combine (aggregate) these goods in some
way.
Quantity Aggregates: Nominal
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To group a set of goods n = 1…N calculate a
weighted sum of the quantities of each good
(quantity of good n =qn)
w1q1+w2q2+……wNqN
All market goods do share one unit of measure, the
price at which they are sold (price of good n = pn).
To aggregate quantities, economists use prices as
weights.
p1q1+p2q2+……+pNqN
Commonly Used Aggregates
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Gross Domestic Product (GDP) is the output of (new) goods
and services produced within a country in a given period of
time.
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Gross National Product (GNP) is the output of (new) goods and
services produced by the nationals of a country.
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Most commonly used to measure productivity of a country.
Most useful for measuring the income of a countries residents
(since producers keep the income generated by the goods they
produce).
GDP is a measure of the production of economic goods within
the country and is measured through three methods.
Expenditure Method
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The Expenditure Method Adds up the spending on
new, final domestic goods.
Does not include spending on used goods or
intermediate goods,
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Intermediate goods which are used in the same period to
produce other goods (i.e.. Flour is an intermediate good of
Bread).
Expenditure Categories
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GDP = C + I + G + EX – IM
GDP = Consumption + Investment (including inventory
investment) + Government Consumption + Exports –
Imports
160.00%
140.00%
120.00%
100.00%
% of GDP
80.00%
60.00%
40.00%
20.00%
0.00%
Household Government
Consumption Consumption
Investment
Exports
Imports
Production Method
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Production Method – Add up all the value added of
all domestic firms.
A firm’s value added is the difference between sales
and cost of materials
GDP = T + NT
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GDP = Traded Goods + Nontraded Goods
GDP = {Agriculture + Construction + Manufacturing} +
{Utilities + Transport + Communication + FIRE + Trade
(Retail & Wholesale) + Services}
Landlord
Services
FIRE
Transport
Trade
Construction
Utilities
Manufacturing
Mining
AFF
Production Account
0.25
0.2
0.15
% of GDP
0.1
0.05
1980
2001
0
1980
Income Method
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Income Method – Adds up all the income
paid out by producers located within
domestic borders.
Conceptually, income includes payments to
labor and capital.
GDP = Worker Compensation + Net
Interest Payments + Proprietor’s Income +
Corporate Profits
Equivalence
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The expenditure method, the production
method, and the income method each
measure the same thing.
Expenditure on final goods equals the valued
added by all the firms in the production
chain.
The value added by any firm is paid out as
income either as wages or as interest or as
profits.
Example Economy
Proprietor’s
Income
Expenditure
Farmer sells $100 $100
wheat to Miller
$100
.
Miller
Miller sells $200
flour to baker
$200-$100
$100
$100
.
Baker
Baker sells $300
bread to
storekeeper
$300-$200
$100
$100
.
Storekeep Storekeeper sells $400-$300
$100
$400
Agents
Activity
Farmer
$400 bread to
customers
Value
Added
$100
Time Series
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1.
2.
Economists and government statisticians periodically
(monthly, quarterly, annually) measure a large number of
quantity aggregates.
Each series of aggregates is useful for comparing the state of
the economy across time.
If we look at some quantity aggregate over time, there are two
approaches to aggregation
Nominal Aggregation
Real Aggregation
Nominal Aggregates
Nominal Aggregate: Use the contemporary price of each
quantity as the weight at each point in time.
PQt = pt,1qt,1+pt,2qt,2+……+pt,Nqt,N
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Measures the dollars spent on goods at different points
of time.
Since number of dollars circulating in the economy
frequently changes without underlying changes in
production of goods, this can be a misleading measure.
Real Aggregates
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Real Aggregates: Use the price of each good from one fixed year
(the base year) as the weight at each point in time.
Qt = pB,1qt,1+pB,2qt,2+……+pB,Nqt,N
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Since the weight on each type of good is constant across time, this
measure captures changes in real production.
May be misleading if there are changes in relative prices of goods
over time/ changes in sectoral allocation over time.
Choose base year close to period of interest so there are fewer
sectoral shifts.
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Nominal vs. Real GDP
1400000
1200000
HK$ Million
1000000
800000
600000
400000
200000
0
65
70
75
Nominal GDP
80
85
90
95
00
Real GDP (Base Year 2000)
Quarterly GDP
500000
HK$ Million
400000
300000
200000
100000
0
1975
1980
1985
Real GDP
1990
1995
Trend Growth
2000
Business Cycles
.08
.04
.00
-.04
-.08
-.12
1975
1980
1985
1990
1995
Hong Kong Business Cycle
2000
Seasons
.10
Hong Kong Seasonal Fluctuations
.05
.00
-.05
-.10
1975
1980
1985
1990
1995
Seasonal Factors
2000
Main Sources of Hong Kong Statistics
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1.
There are two main sources of macroeconomic statistics.
Census and Statistics Department:
National Income Accounts, CPI, Interest Rates, Employment, etc.
See Frequently Requested Statistics
http://www.info.gov.hk/censtatd/eng/hkstat/index1.html
2.
Hong Kong Monetary Authority:
Money and Banking Statistics
See Monthly Statistical Bulletin
http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm