Lecture3_spring09 - Econ100B:MacroeconomicAnalysis...

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Econ 100B: Macroeconomic Analysis 1/27/2009 © 2009 Arnav Sheth. All Rights Reserved. 1 The Six Key Macroeconomic Variables Chapter 2 A Quick Recap ` Business Cycles ` Six Key Macro Variables ` Inflation ` CPI Calculation 1/27/09 2 © 2008 Arnav Sheth. All rights reserved. Business Cycles ` Fluctuations in production, employment, prices, stock markets and interest rates ` booms or expansions occur when production grows and unemployment falls ` recessions or depressions occur when production falls and unemployment rises 1/27/09 3 © 2008 Arnav Sheth. All rights reserved.
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Econ 100B: Macroeconomic Analysis 1/27/2009 © 2009 Arnav Sheth. All Rights Reserved. 2 Business Cycles Industrial Production Relative to Trend (Figure 1.3) 1/27/09 4 © 2008 Arnav Sheth. All rights reserved. Inflation ` Two measures: 1. CPI 2. GDP Deflator ` The CPI ` Is an expenditure -weighted index ` Has little meaning by itself ` Is measured using a fixed basket of goods 1/27/09 5 © 2008 Arnav Sheth. All rights reserved. Consumer Price Index (An Example) 2006 (Our Base Year) 2007 Price Expense Weight Price Beer $10 4 x 10 = $40 40/55 = .73 $8 Cigarettes $5 3 x $5 = $15 15/55 = .27 $7 ` Choose a base year – say, 2006 ` Calculate respective weights of each good for base year Total 40 + 15 = $55 .73 + .27 = 1 1/27/09 6 © 2008 Arnav Sheth. All rights reserved.
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Econ 100B: Macroeconomic Analysis 1/27/2009 © 2009 Arnav Sheth. All Rights Reserved. 3 Consumer Price Index (An Example) ` To calculate CPI for 2007, do the following: 1. Calculate the ratio of prices for focus year and base year 2. Multiply ratio with base-year expenditure weights 3. Add everything up ` Step 1 ` For beer: $8/$10 = .8 ` For cigarettes: $7/$5 = 1.4 ` Step 2 ` For beer: 0.8 x .73 = .584 ` For cigarettes: 1.4 x .27 = .378 ` Step 3 ` CPI 2007 = .584 + .378 = 0.962 1/27/09 7 © 2008 Arnav Sheth. All rights reserved. Types of Indices ` Laspeyres Index ` Fixed expenditure weights ` Does not account for substitution bias ` People switch from expensive to cheaper goods ` Tends to overstate inflation ` CPI ` Paasche Index ` Variable expenditure weights ` Accounts for substitution ` but does not account for loss in value of cheaper goods ` Tends to understate inflation ` GDP Deflator 1/27/09 8 © 2008 Arnav Sheth. All rights reserved. The Six Key Macroeconomic Variables 1. Real GDP 2. Unemployment 3. Inflation 4 Interest Rate 4. 5. Stock Market 6. Exchange Rate 1/27/09 9 © 2008 Arnav Sheth. All rights reserved.
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Econ 100B: Macroeconomic Analysis 1/27/2009 © 2009 Arnav Sheth. All Rights Reserved. 4 The Six Key Macroeconomic Variables 1. Real GDP 2. Unemployment 3. Inflation 4 Interest Rate 4. 5. Stock Market 6. Exchange Rate 1/27/09 10 © 2008 Arnav Sheth. All rights reserved. The Interest Rate ` Basically, the rate of return on loans ` Why is it important? ` Because it is the factor that determines whether people are going to invest ` Low interest rates ´ Cheaper to borrow money ´ More investment will take place ´ Economy will expand 1/27/09 11 © 2008 Arnav Sheth. All rights reserved.
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This note was uploaded on 04/08/2010 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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Lecture3_spring09 - Econ100B:MacroeconomicAnalysis...

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