Chapter 1

the crisis

From 2000 to 2007, the global economy experienced sustained expansion. The rate of
The annual average growth of global production was 4.5%.

When economists examine a country, the first two questions they ask are: what
What is the size of the country from an economic point of view? And what is its standard of living?
answer the first question, they examine production, that is, the level of production of
country as a whole. To answer the second, they examine per capita production.
When economists want to delve deeper and examine the state of health of the country, they analyze
three basic variables:
The growth of production, that is, the rate of change of production.
The unemployment rate, that is, the proportion of workers in the economy who are not
those who are employed and are looking for work.
Inflation rate, that is, the rate at which the average price of goods increases.
economy over time.

The low interest rates and the zero lower bound

Why did the Fed stop at zero? Because interest rates cannot be negative. If they do
out, no one would hold bonds and everyone would want to, instead, hold cash,
since cash pays a zero interest rate. In macroeconomics, this constraint is
It is called the zero lower bound, and it is the one that the Fed stumbled upon in December 2008.
Why low interest rates pose a potential problem? For two reasons: the
First, low rates limit the Fed's ability to respond to further challenges.
negative disturbances. If the interest rate is (close to) zero and demand returns to
to fall
little the Fed will be able to do to stimulate demand. The second is that low interest rates
interest seems to induce an excessive assumption of risks by investors.
As the yield from holding bonds is so low, investors are tempted to
to assume excessive risk to increase their returns. And excessive risk
may, in turn, cause financial crises of the kind we have just experienced.
We certainly don't want to go through another crisis like the one we just experienced.

the real incomes of workers with upper secondary education or with a level
Minor educational initiatives have fallen into practice. If economic authorities want to invest
this trend should boost growth
of productivity, limit the increase in inequality, or both. These are the
two main challenges facing economic authorities
Americans today.

China

what is achieved using PPP measures (purchasing power parity). its negative
the effect on demand was almost completely offset by the significant expansion
fiscal applied by the Chinese government, especially through a strong increase in investment
public. The result was sustained growth in demand and, therefore, production.
Chapter 2

Aggregate production.
added is the term used by macroeconomists to refer to total.
GDP: production and income
The indicator of aggregate production in national accounting is called gross domestic product.
gross, GDP for short. To understand how GDP is calculated, it is best to work
with a simple example.

Definitions of GDP

GDP is the value of the final goods and services produced in the economy.
during a certain period.
The important word here is final. We only want to account for the production of final goods.
not the one for intermediate goods.

GDP is the sum of the added value in the economy during a given
period. The term added value means exactly what it suggests. The value that a company adds.
It is the value of its production minus the value of the intermediate goods used for it.

The GDP is the sum of the incomes of the economy over a certain period.

GDP FROM THE PERSPECTIVE OF INCOME

Some income is allocated to paying workers: this component is called rent of the
work. The rest goes to the company: that component is called the capital benefits.
The reason it is called capital income is that it can be considered compensation
of the owners of the capital used in production.

GDP PROSPECTS

From the perspective of production: GDP is equal to the value of final goods and services.
produced in the economy during a certain period of time.
Also from the perspective of production: GDP is the sum of the added value in the economy.
for a certain period of time.
From the perspective of income: GDP is the sum of the incomes of the economy during a
determined period of time.

NOMINAL AND REAL GDP

The nominal GDP is the sum of the quantities of final goods produced multiplied
at its current price. This definition highlights that nominal GDP increases with
the passage of time for two reasons:
First of all, the production of most goods increases over time.
time.
Secondly, the price of most goods also rises over time.
time.

If our goal is to measure production and its evolution over time, we have

The real GDP is the sum of the production of final goods multiplied by constant prices.
place of currents).
to eliminate the effect that the rise in prices has on our measure of GDP.
If the economy only produced a final good, for example, a specific model of car, it would be easy.
calculate real GDP: we would use the price of the car in a given year and multiply it by the
number of cars produced each year.
Real GDP that appears in national accounting uses weights that reflect relative prices and
that change over time.

Nominal GDP is also called GDP at current prices.

Real GDP is also referred to as GDP expressed in goods, GDP at constant prices, adjusted GDP.
due to inflation, chained GDP in dollars (from 2009) or GDP in dollars from 2009 (if the year in which the
the real GDP equals the nominal GDP in 2009, as currently happens in the United States.
The GDP will refer to the real GDP and will represent the real GDP of year t.
Nominal GDP and the variables measured at current prices will be represented with a sign.
the dollar behind them, for example, Yt$ in the case of the nominal GDP of the annotation.

GDP: level versus growth rate

Positive GDP growth periods are called expansions and negative growth periods are called contractions.
they call recessions.
GDP growth in the year is calculated as (Yt−Yt−1)/Yt−1 and is expressed as a percentage.

The unemployment rate

As GDP is an indicator of aggregate activity, it is undoubtedly the most macroeconomic variable.
important. However, there are two others, unemployment and inflation.
We start with two definitions: employment is the number of people who have a job;
Unemployment is the number of people who are without work but are seeking employment.
The active population is the sum of employment and unemployment.
L=N+U
active population = employment + unemployment

The unemployment rate is the ratio between the number of unemployed people and the number
of active people:
Unemployment rate = unemployment / labor force
u=U/L

Remember that according to the definition, for a person to be considered unemployed, they must meet two
conditions: must not be employed and be looking for one; this second condition is more difficult to
evaluate.
Why does unemployment concern economists?
First of all, they are concerned about its direct impact on the well-being of the unemployed. Although the
Unemployment benefits are more generous today than during the Great Depression, unemployment still
is often accompanied by economic and psychological problems.

Secondly, economists are also concerned about the unemployment rate because
it is a signal that the economy may not be utilizing some of its resources. When
unemployment is high, many people who want to work cannot find jobs, because

The inflation rate

Inflation is a continuous rise in the general price level of the economy, called the level.
of prices. The inflation rate is the rate at which the price level rises (symmetrically,
Deflation is a continuous decrease in the price level. It corresponds to a rate of
negative inflation.

The GDP deflator

The GDP deflator is a price index that calculates the variation of the
prices of an economy in a given period using the product for that purpose
gross domestic product (GDP). The GDP deflator is used to know the part of
growth of an economy that is due to rising prices.

We have seen before that nominal GDP can increase because real GDP increases or because
prices are rising. In other words, if we see that nominal GDP increases faster than the
Real GDP, the difference must be due to a rise in prices.
This leads us to the definition of the GDP deflator. The GDP deflator in the year t, Pt, is
the ratio between nominal GDP and real GDP in the note: desep

Nominal GDP is equal to the GDP deflator multiplied by real GDP. Or, in rates of change,
The nominal GDP growth rate is equal to the inflation rate plus the growth rate.
of real GDP.

The consumer price index

consumers are interested in the average price of consumption,
that is, of the goods they consume. The two prices do not have to be the same: the
The set of goods produced in the economy is not the same as the set of goods purchased.
for consumers for two reasons:

Some of the goods included in GDP are not sold to consumers but to businesses.
(for example, machine tools), to the State or to foreigners.
Some of the goods purchased by consumers are not produced in the country but rather
they are imported from abroad.

To measure the average price of consumption or, in other words, the cost of living, macroeconomists
they examine another index, called the Consumer Price Index or CPI.
In the United States, the CPI has existed since 1917 and is published monthly (in contrast, the figures
GDP and the GDP deflator are only calculated and published on a quarterly basis.

The CPI indicates the monetary cost of a specific list of goods and services over time.
time.

The CPI should not be confused with

the IPP or producer price index
greater, what is an index of the
prices of the produced goods
in the country for the industry
manufacturer, mining, the
agriculture, fishing, forestry
and the electric companies.

The CPI and the GDP deflator vary in unison most of the time. Most of the
In recent years, the two inflation rates have differed by less than 1%.

Why does inflation concern economists?

If an increase in the inflation rate simply meant a faster rise, but

proportional, of all prices and wages —a case known as deflation
pure—, inflation would only be a small inconvenience, as it would not affect prices.
relatives.
During periods of inflation, not all prices and wages rise proportionally.
thus inflation affects income distribution, which means
that, for example, in some countries retirees receive benefits that do not increase to
same rhythm as the price level and, therefore, lose in relation to other groups
when inflation is high.

Inflation introduces other distortions. The variations in relative prices do as well.

create uncertainty, making it difficult for companies to make decisions about the future, due to
example of investment.
The production, unemployment, and the rate of
inflation: Okun's law and the Phillips curve
We have separately examined the three main dimensions of economic activity.
added: the growth of production, the unemployment rate, and the inflation rate.

Okun's law
Okun's law implies that, with sufficiently high growth, the unemployment rate
it can be reduced to very low levels. However, intuition suggests that when unemployment
it is very limited, it is likely that the economy will overheat, inducing pressures
the rise in inflation.

Intuition suggests that if production growth is high, unemployment will decrease.

and this is what really happens. This relationship was examined for the first time by the
American economist Arthur Okun, which is why it is called Okun's law.
The line has a negative slope and fits quite well to the cloud of points.
In economic terms, there is a close relationship between the two variables: a greater
Economic growth leads to a reduction in unemployment.

The Phillips curve