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Macroeconomics I Notation Guide

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15 views8 pages

Macroeconomics I Notation Guide

notacao economica

Uploaded by

amanciofilipe31
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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MACROECONOMICS I

2020/2021

2nd Year
Undergraduate degrees in Economics and MAEM

A QUICK GUIDE TO NOTATION

Author:
Luís F. Costa

21 October 2021
A QUICK GUIDE TO NOTATION

By Luís F. Costa

NOTATION is always a source of confusion for students as it changes with


course, book, chapter or even with equation. The problem is that there
no standard notation in Economics and there are not enough letters in
the alphabet(s). That is why I wrote this quick guide for the
Macroeconomics I course.

THE BASIC MODEL IN THE COURSE

A
• a from eq. Y = a .N , is a technological parameter that gives us the marginal (and
average) product of labour in the short-run production function; measured in
m.u./l.u.; there is another magnitude with the same notation (we use a different
font here).
• a from eq. NX = NX + a.R − m.Y , is a behavioural parameter that gives us the
sensitivity of net exports to competitiveness; measured in m.u.; there is another
magnitude with the same notation.

( )
• A   C + ( I + b. +e1 ) + G + c. TR − T + NX  is an exogenous variable that gives us
 
the autonomous expenditure; measured in m.u.

( )
• AF   C + ( I + b. +e1 ) + G + c. TR − T  is the same as A , but for a closed
 
economy.

B
• b from eq. I = I − b.r , is a behavioural parameter that gives us the (absolute value
of the) sensitivity of investment to the real interest rate; measured in m.u.×u.t.
• BP is an endogenous variable that gives us the balance of payments (excepting
reserve assets); measured in m.u.

C
• c from eq. C = C + [Link] , is a behavioural parameter that gives us the (private)
marginal propensity to consume of disposable income; measured as a pure
number.
• C is an endogenous variable that gives us private consumption; measured in m.u.
1
Macroeconomics I Quick Guide to Notation 2

• C from eq. C = C + [Link] , is a behavioural parameter that gives us the autonomous


consumption; measured in m.u.
• c.m.u. stands for “current money units,” e.g. euros, dollars, etc. at current prices.
• ci from eq. CI = [Link] , is a behavioural parameter that gives us the currency
coefficient; measured as a pure number; sometimes it is represented as c and there
is another magnitude with the same notation.
• CI is an endogenous variable that gives us the amount of currency (bank notes
and coins); measured in c.m.u.; sometimes it is represented as C, but there is
another magnitude with the same notation.

D
• D is an endogenous variable that gives us aggregate expenditure; measured in
m.u.
• DE is an endogenous variable that gives us the amount of deposits; measured in
c.m.u.; sometimes it is represented as D, but there is another magnitude with the
same notation.

E
• e is an endogenous variable that gives us the nominal exchange rate (index) based
on direct quotes; measured as a pure number; notice there another magnitude with
the same notation in superscript.
• e [“e” in superscript] is a mark meaning the expectation for the variable at its left;
it is not an exponent; notice there another magnitude with the same notation in
normal font.
• Ex is an endogenous variable that gives us exports of goods and services;
measured in m.u.
•  [Greek letter “epsilon”] from eq.  e =  −  .u , is a behavioural parameter that
gives us the sensitivity of expected (by workers) real wages to the unemployment
rate; measured in m.u./l.u.

2
Macroeconomics I Quick Guide to Notation 3

F
• F(•) from eq. Y = F ( N , ) , is the general formulation for the short-run production

function; we use more often its specific form Y = a.N .

G
• G is an endogenous variable that gives us government consumption (or
government final spending); measured in m.u.
• G from eq. G = G , is an exogenous variable (a policy instrument) that gives us
government consumption (or government final spending); measured in m.u.
•  [ (1+z)./a, Greek letter “gamma”] from eq.  =  e −  . ( u − u p ) , is a behavioural

parameter that gives us the slope of the Phillips curve; measured as a pure number.

H
• h from eq. L = k .Y − h.i , is a behavioural parameter that gives us the (absolute
value of the) sensitivity of liquidity demand to the nominal interest rate; measured
in m.u.×u.t.
• H [ CI + RE] is an endogenous variable that gives us central bank money (or
high-powered money); measured in c.m.u.
• H from eq. M s = mm. H , is an exogenous variable (a policy instrument) that gives
us central bank money (or high-powered money); measured in c.m.u.

I
• i [t] is an endogenous variable that gives us the nominal interest rate on
government bonds (in domestic currency) bought in this period (t) and maturing in
the next (t+1); measured in u.t.-1.
• I is an endogenous variable that gives us (private) investment; measured in m.u.
• i* is an endogenous variable that gives us the nominal interest rate on foreign
government bonds (in foreign currency); measured in u.t.-1.

• i * is an exogenous (external) variable that gives us the nominal interest rate on


foreign government bonds (in foreign currency); measured in u.t.-1.
• Im is an endogenous variable that gives us imports of goods and services;
measured in m.u.

3
Macroeconomics I Quick Guide to Notation 4

K
• k from eq. L = k.Y − h.i , is a behavioural parameter that gives us the sensitivity of
liquidity demand to output (or income); measured as a pure number.
• K is an endogenous pre-determined variable that gives us the stock of fixed capital
at the beginning of the period; measured in m.u.
• K* is an endogenous variable that gives us the optimum level stock of fixed capital
at the beginning of the period; measured in m.u.
•  [Greek letter “kappa”] from eq.  e =  −  .u , is a behavioural parameter that
gives us the autonomous expected real wage; measured in m.u./l.u.

L
• L [ Md/P] is an endogenous variable that gives us the demand for liquidity (i.e.
real money balances) by the non-banking sector at the end of the period; measured
in m.u.; there is another magnitude with the same notation (this is the one in eq.
L = k.Y − h.i ).
• L is an exogenous (demographic) variable that gives us labour force; measured in
l.u.; there is another magnitude with the same notation (this is the one in eq.
u  ( L − N ) / L , we use a different font here).
• l.u. stands for “labour units,” e.g. 106 workers.

•  [ (1+z)./(a2.L), Greek letter “lambda”] from eq. P = Pe . 1 +  . (Y − Y p ) , is a

behavioural parameter that gives us the speed of adjustment of the actual capital
stock to the optimum one; measured as a pure number.

• m from eq. NX = Ex + a.R − m.Y , is a behavioural parameter that gives us the


marginal propensity to import; measured as a pure number.
• M is an endogenous variable that gives us the amount of money (i.e. nominal
money balances) held by the non-banking sector at the end of the period; measured
in c.m.u.
• M from eq. M s = M , is an exogenous variable (a policy instrument) that gives us
money balances at the end of the period; measured in c.m.u.
• m.u. stands for “(real) money units,” e.g. 109 euros of a basis year.

4
Macroeconomics I Quick Guide to Notation 5

• mm [  M s / H ] is the multiplier effect of central-bank money on the money


supply; measured in c.m.u.
• Md is an endogenous variable that gives us the money demand by the non-
banking sector at the end of the period; measured in c.m.u.
• Ms is an endogenous variable that gives us the money supply by the banking
sector at the end of the period; measured in c.m.u.

N
• N [ (1 − u).L] is an endogenous variable that gives us the employment level;
measured in l.u.
• Np [ (1 − up).L] is an endogenous variable that gives us the natural (i.e. long-run)
employment level; measured in l.u.
• NX [ Ex − Im] is an endogenous variable that gives us the trade (goods and
services) balance (or net exports); measured in m.u.

P
• P is an endogenous variable that gives us the domestic aggregate price level of
final goods and services; measured as a pure number (in fact, measured in
c.m.u./m.u.).
• P* is an exogenous (external) variable that gives us the foreign (i.e. of the rest of
the world) aggregate price level of final goods and services; measured as a pure
number.
•  [t  (Pt − Pt-1)/Pt-1, Greek letter “pi”] is an endogenous variable that gives us the
inflation rate in the period (t); measured as a pure number.

• r  t  it −  te+1  is an endogenous variable that gives us the real (ex ante) interest

rate on government bonds (in domestic currency) bought in this period (t) and
maturing in the next (t+1); measured in u.t.-1.
• R [ e.P*/P] is an endogenous variable that gives us the real exchange rate (i.e.
the competitiveness index); measured as a pure number.
• re [ rl + rx] from eq. RE = [Link] , is an endogenous variable that gives us the
reserve ratio; measured as a pure number.
5
Macroeconomics I Quick Guide to Notation 6

• RE is an endogenous variable that gives us the amount of reserves of commercial


banks in the central bank; measured in c.m.u.; sometimes it is represented as R,
but there is another magnitude with the same notation.
• rl from eq. re = rl + rx , is an exogenous variable (a policy instrument) that gives
us the legal reserve ratio; measured as a pure number.
• rx from eq. re = rl + rx , is a behavioural parameter that gives us the excess
reserves ratio; measured as a pure number; measured as a pure number.

S
• s [ 1 − c] is a behavioural parameter that gives us the (private) marginal
propensity to consume of disposable income; measured as a pure number.
• S [ Yd − C] is an endogenous variable that gives us private (i.e. households and
firms) savings; measured in m.u.
• SO [ T − (G + TR)] is an endogenous variable that gives us the budget balance
(i.e. public savings); measured in m.u.

T
• t from eq. T = T + t .Y , is an exogenous variable (a policy instrument) that gives us
the marginal (income) tax rate; measured as a pure number; notice there another
magnitude with the same notation (we use a different font here) in subscript.
• t [“t” in subscript] is a time mark meaning period t; measured as a pure number;
sometimes we simple use subscript “+1” to denote period “t+1” as in  +e1 ; notice
there another magnitude with the same notation in normal font.
• T is an endogenous variable that gives us the amount of (income) taxes; measured
in m.u.
• T from eq. T = T + t.Y , is an exogenous variable (a policy instrument) that gives
us the amount of lump-sum taxes paid by households; measured in m.u.
• TR is an endogenous variable that gives us the amount of transfers from
government to households; measured in m.u.
• TR from eq. TR = TR , is an exogenous variable (a policy instrument) that gives us
the amount of transfers from government to households; measured in m.u.
•  [Greek letter “theta”] from eq. Kt +1 = Kt +  . ( Kt*+1 − Kt ) , is a behavioural

parameter that gives us the speed of adjustment of the actual capital stock to the
6
Macroeconomics I Quick Guide to Notation 7

optimum one; measured as a pure number; there is another magnitude with the
same notation.

U
• u is an endogenous variable that gives us the unemployment rate; measured in
m.u.
• up [= (.(1 + z) − a)/(.(1 + z))] is an endogenous variable that gives us the natural
(i.e. long-run) rate of unemployment; measured as a pure number.

W
• W is an endogenous variable that gives us a nominal wage index; measured in
m.u./l.u.
•  [ W/P, Greek letter “omega”] is an endogenous variable that gives us a real
wage index; measured in m.u./l.u.

Y
• Y is an endogenous variable that gives us output or (primary) income; measured
in m.u.
• Yd [ Y − T + TR] is an endogenous variable that gives us household (in fact,
private) disposable income; measured in m.u.
• Yp [= [Link]] is an endogenous variable that gives us potential output; measured in
m.u.

Z
• z from eq. P = (1 + z ) .W / a , is a behavioural parameter that gives us the wedge of
the price index over the marginal cost index (sometimes is also called the
“markup”); measured as a pure number.

Common questions

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The variable 'L' illustrates the complexity of economic notation, as it represents different economic concepts depending on the context. As the demand for liquidity, 'L' refers to real money balances demanded by the non-banking sector, with its dynamics influenced by factors like interest rates and output . When representing the labor force, 'L' quantifies the total labor units available, directly affecting employment and economic output levels . The dual use of 'L' underscores the critical importance of contextual interpretation in economic modeling, which can significantly impact analytical outcomes and policy decisions.

The real exchange rate 'R', defined as the competitiveness index, serves as a critical determinant of a country's relative price level in international markets. A lower 'R' suggests that domestic goods are cheaper compared to foreign goods, enhancing export competitiveness, boosting trade balances, and potentially leading to economic growth . Conversely, a higher 'R' can make exports less competitive, challenging external balances and economic stability. Understanding and managing real exchange rates is vital for policy interventions aimed at maintaining competitive international market positions.

The multiplier effect 'mm' quantifies the amplification of central-bank money on the overall money supply, directly linking monetary base adjustments to broader economic liquidity. By influencing the money supply, 'mm' affects interest rates, inflation, and economic growth because changes in central bank reserves lead to proportionally larger changes in total money supply through this multiplier process . Understanding 'mm' is crucial for effectively implementing monetary policy and achieving desired economic outcomes.

The parameter 'a' has dual roles in the provided economic models. In the short-run production function, 'a' represents a technological parameter that determines the marginal and average product of labor, focusing on production efficiency . In contrast, in the net exports equation, 'a' captures the sensitivity of net exports to competitiveness, affecting how changes in competitiveness influence trade balance . These dual roles highlight the versatile application of notation in economic contexts, requiring careful interpretation based on the specific model context.

The nominal interest rate on government bonds, denoted by 'i', influences macroeconomic variables such as investment, consumption, and savings. An increase in 'i' typically raises borrowing costs, discouraging investment and reducing consumption due to higher savings returns, potentially slowing economic growth . Conversely, a decrease in 'i' can stimulate investment by lowering capital costs, boosting consumption through cheaper borrowing, and ultimately promoting economic expansion. These effects demonstrate the critical role of interest rate management in monetary policy and economic stabilization efforts.

The parameter 'k' determines how responsive the demand for liquidity is to changes in economic output or income, illustrating the income elasticity of money demand. A higher 'k' suggests that as output or income increases, liquidity demand rises significantly, implying that economic expansion necessitates greater financial resources . This relationship is critical for understanding consumption patterns and setting effective monetary policies that stabilize economic activity.

The parameter 'b' represents the sensitivity of investment to the real interest rate, indicating that as the real interest rate changes, investment levels will inversely adjust based on this sensitivity. If 'b' is large, a small increase in the real interest rate will lead to a significant decrease in investment, potentially slowing down economic growth. Conversely, a small 'b' indicates that investment is less sensitive to interest rate changes, suggesting that monetary policy adjustments will have a limited effect on investment levels .

The variable 'G' serves dual roles: it denotes government consumption (an endogenous variable), reflecting actual government expenditure levels , and also acts as a policy instrument (an exogenous variable), indicating targeted government spending levels for fiscal policy objectives . These dual roles highlight the significance of 'G' in fiscal planning, where distinguishing between planned and actual government consumption is essential for assessing policy impacts on economic stability and growth.

The unemployment rate 'u' is intricately linked to real wages and worker expectations through the behavioral parameter 'ε', which captures the sensitivity of expected real wages to unemployment . As 'u' changes, workers adjust their wage expectations, which in turn affects actual wage negotiations and real wage levels. This interaction is pivotal in labor market analyses and forms the basis of many macroeconomic models that evaluate employment dynamics, wage setting, and inflationary pressures.

The parameter 'c' represents the marginal propensity to consume (MPC), which is pivotal in understanding consumer behavior because it indicates the fraction of disposable income spent on consumption. A higher 'c' value means a higher tendency for consumers to spend rather than save additional income, which can lead to increased economic growth in response to fiscal stimuli . Understanding MPC is therefore crucial in predicting consumption patterns and designing fiscal policies that encourage desired macroeconomic outcomes.

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