[00:17] I expect that there will be many fun
[00:19] lectures in the sense that we're going
[00:20] to have you know we're going to be
[00:21] discussing a little more exactly at the
[00:24] right time in which that issue is an is
[00:26] an important issue at least as D in the
[00:30] newspapers and you know we live in we
[00:32] are going through a very interesting
[00:34] time for microeconomist inflation is
[00:37] unusually high something needs to be
[00:39] done about that er um we still have
[00:43] problems on the supply side of the
[00:45] economy as a result of CO as a result of
[00:48] the slow reopening of
[00:50] China um we have a war going on which is
[00:54] affecting also the price of energy and
[00:56] it's particularly impacting Europe and
[01:00] all these things are the situation is
[01:01] very fluid all of them can change at at
[01:04] any moment and uh and policy makers are
[01:08] s therefore paying very close attention
[01:10] to all these things it's not a normal
[01:12] time if you're a policy maker
[01:14] macroeconomist microeconomist policy
[01:17] maker uh you you are not sleeping a lot
[01:20] on these days and so so I expect that we
[01:23] will have plenty of time to discuss
[01:26] interesting things and analyze them um
[01:30] at a slightly higher level than you can
[01:32] do at this moment now I also told you in
[01:36] the previous in the introduction that
[01:38] that this particular
[01:40] lecture is not going to be of that kind
[01:44] you know it's going to be very boring in
[01:46] the sense that you know we need to start
[01:48] with definitions and and and I don't
[01:50] know who likes definitions I don't it's
[01:52] very boring now there is an interesting
[01:56] or a curious side of the definitions
[01:58] we're going to discuss which which is
[02:00] that if you were taking 1401
[02:03] microeconomics many of the concepts
[02:05] we're going to describe require no
[02:06] definition they're obvious I mean if you
[02:08] I ask you for output of a factory that
[02:10] produces cars it's pretty obvious that
[02:12] it's a number of cars if I ask you for
[02:14] the prices of those cars is pretty
[02:16] obvious what the price of a car is not
[02:19] so for macro because if I ask you what
[02:21] is the output of the US economy well
[02:24] there's millions of goods and services
[02:26] are produced at the same time so so what
[02:28] do we mean by output a single measure of
[02:31] output or if I ask you about the price
[02:33] level or the inflation the rate at which
[02:35] that price level is changing well what
[02:37] are we talking about it's very easy to
[02:39] see where the price of a car is going up
[02:41] but if we're mixing sort of millions of
[02:44] different goods and services then it's a
[02:47] little harder and that's the reason we
[02:48] need this lecture because it's it's a
[02:50] little harder than 1401 and we need to
[02:52] Define basic things but they have a
[02:54] trick because you're suming apples and
[02:56] oranges not only apples and oranges
[02:59] apples oranges health services financial
[03:02] services all of them in in one piece and
[03:05] so so it's a little trickier and that's
[03:07] the reason we need this boring lecture
[03:09] we need to go through
[03:11] that slightly trickier definition of
[03:14] output prices and so
[03:19] on
[03:21] ER okay so let me let me start with the
[03:24] most basic thing aggregate output at the
[03:27] end of the day when where the econom is
[03:28] in a recession or not and so we don't
[03:31] like it or we do like it depends on what
[03:34] is happening to Output is output growing
[03:36] at the pace it used to grow is it
[03:38] growing less or it's declining well
[03:41] that's very important for macro and to
[03:44] understand the health of an economy the
[03:45] microeconomic health of an economy but
[03:47] we need to start by defining what we
[03:50] mean by
[03:51] output and because it's a tricky thing
[03:54] to do when you're adding so many apples
[03:56] oranges Financial Services ER
[03:59] entertainment and lots of things that
[04:02] are very different H it wasn't there we
[04:05] didn't have a good way of doing that in
[04:07] fact the national accounts as we know
[04:09] them in the US is something that we have
[04:12] since the post-war period in in the late
[04:14] 40s that we develop the technique the
[04:17] approach to come up with a measure of
[04:19] our output before that we had measures
[04:22] proxies you know industrial production
[04:24] is very high I meaning we're producing
[04:26] lots of cars stuff like that and
[04:27] somebody but something systematic like
[04:30] we have today is a pretty recent uh
[04:33] thing okay we call that NEPA the
[04:36] national income and product
[04:39] account income and product that's going
[04:42] to be very important for macro as you'll
[04:44] see in a minute um so the main measure
[04:47] of aggregate output is what we call
[04:49] gross domestic product or simply GDP you
[04:53] hear GDP that means output of an economy
[04:57] why is gross and not net you're not
[04:58] going to worry about that in this course
[05:01] okay but that's you hear
[05:03] GDP most microeconomist wouldn't say
[05:06] output they would say GDP it's very
[05:07] short it's efficient and so on well
[05:09] that's what it means it's the output of
[05:11] an economy but how do we Define it as I
[05:14] said before it's much harder than when
[05:16] you have an individual
[05:17] good by the way I will be most of the
[05:21] time I will say
[05:22] Goods but really is goods and services
[05:26] but it's very long to say goods and
[05:28] services no so whenever I say Goods I'm
[05:31] not trying to play any trick on you I
[05:33] really mean goods and services I just
[05:35] mean lazy okay and most people are lazy
[05:38] that way okay now what is the difference
[05:40] between goods and services you you're
[05:42] not going to worry a lot about that in
[05:43] this no you're not going to worry at all
[05:45] about that in this course but just to
[05:48] get a sense goods are things that you
[05:50] know that are tangible services are
[05:52] things that are not that tangible there
[05:55] are benefits that you receive from the
[05:56] task that someone else operates on you
[05:58] so you go to the to you know the medical
[06:02] center you don't come up with a piece of
[06:04] a machine to well they may lend you
[06:07] something but but you don't come out
[06:09] with an objective you come out with the
[06:11] service provided by a doctor to you okay
[06:14] and the same happens if you go to a bank
[06:16] you don't come with a ATM with you what
[06:19] you come up with is the service of
[06:21] having done a transaction or deposit or
[06:24] go on a mortgage or something like that
[06:25] it's a service if you go to a
[06:28] restaurant again you don't what you can
[06:31] what you have is an experience it's a
[06:34] people provided an experience to you
[06:36] things are a little tricky because if
[06:37] you do a take out well is that an
[06:39] experience or is really the goods so so
[06:43] if you get into those details which
[06:44] you're not going to get it gets to be
[06:46] tricky but but but just to get a
[06:49] sense on average a consumer in the US
[06:53] two third of the consumption is in
[06:56] services not in Goods it's not sort of
[06:58] the banana and so on that you buy it's a
[07:01] lot of the financial services health
[07:02] services and entertainment and things
[07:05] like that traveling that's what you
[07:07] spend most of your time having clarified
[07:11] that you can of forget that from now on
[07:14] I'm going to say Goods occasionally may
[07:16] say goods and services but I always mean
[07:18] the same okay good so um so how do we
[07:24] measure these things so well there there
[07:25] are different ways ER of of of doing
[07:28] this something happened to my slide
[07:32] there okay there we
[07:35] are um so suppose that you have a an
[07:39] economy that is very simple I don't need
[07:41] to tell you how simple this economy is
[07:43] it has just two
[07:45] firms okay suppose we have an economy
[07:48] that's very simple has two firms one
[07:51] firm produces a steel and the other one
[07:53] produces cars and the company that
[07:56] produces cars buys all the steel from
[07:58] the company no body you as a consumer
[08:00] don't buy you don't buy steel directly
[08:03] the car company buys a steel uses to
[08:05] produce a car and you buy the car okay
[08:08] so that's our simple economy and that's
[08:10] those are the the accounts of the of the
[08:12] simple economy so there you have company
[08:16] one has a revenue from sales it sells
[08:20] $100 okay so price of steel times steel
[08:24] is
[08:25] $100 the second company H uses B is Ste
[08:30] uses workers and sells
[08:34] $200 no so the question I ask you the
[08:37] first question I ask you here is well
[08:38] what is the GDP of this economy here you
[08:40] have an economy that has two goods
[08:42] needless to say a real economy is a lot
[08:43] more complicated than this but you have
[08:46] two companies and I ask you what is
[08:49] GDP so the obvious things that you could
[08:52] come up with is well I Su all the
[08:54] revenues okay so that's the obvious one
[08:57] the total GDP of these economies is 300
[09:00] that's a sensible
[09:02] answer okay at least at this moment I
[09:04] would accept that as a sensible answer
[09:06] in the quiz I wouldn't but here it's a
[09:09] sensible answer I mean well you ask me
[09:10] for what is the total output of that
[09:12] economy I sum up all the revenues on
[09:15] sales and that's
[09:19] 300 okay so so um is it
[09:24] 300 well or is it 200 I mean that's
[09:28] another you says well look only the
[09:31] final goods perhaps should count because
[09:34] you know this is the only thing that you
[09:37] as a consumer will ever see this part
[09:40] not that those are two sensible answers
[09:42] and what I'll show you in three
[09:44] different ways is that the right answer
[09:47] is 200 for that economy okay not 300 the
[09:51] right answer is
[09:53] 200 so method
[09:56] one H and all these methods are used and
[09:59] they use to check each other H to
[10:02] compute H
[10:04] GDP uh so method one is what I said here
[10:08] is final goods you said
[10:10] GDP is the value of the final goods and
[10:14] services producing the economy during a
[10:17] given period of time notice that GDP is
[10:19] a concept of a flow it's something you
[10:21] produce in a year okay that's the reason
[10:22] you say GDP of the US in 2022 was you
[10:27] know 23 23 trillion dollar is in a year
[10:31] okay it's a it's a period of time okay
[10:34] so so that's one definition and one way
[10:38] of of of er
[10:42] of making sense of this definition is
[10:45] imagine that I give you the same economy
[10:48] with the same two factories and now all
[10:50] of a sudden I tell you you know what I'm
[10:52] going to merge the two companies so
[10:54] company the car company will buy the
[10:56] steel meal or whatever
[10:59] well if I now put together those two
[11:01] accounts now I never see the steel
[11:03] because it that's all happening inside
[11:04] the the factory and it's still the case
[11:07] that the economy would be producing 200
[11:09] Cars and all that you would see is 200
[11:12] no because I would put this thing
[11:14] together there was a steel that this
[11:16] company had purchased from that but now
[11:17] it's all inside okay so so if I put them
[11:21] together then that steel there doesn't
[11:23] appear because it's all produced inhouse
[11:26] and now GDP would be 200 well it makes
[11:28] no sense
[11:29] that just because I change the ownership
[11:32] structure of the companies that your GDP
[11:34] changes collapses from 300 to 200 if I
[11:38] only measuring final goods though I
[11:39] don't have that problem it's still 200
[11:42] doesn't matter that I have the merge
[11:44] slice and LIC in 20 or whatever so
[11:46] that's that tells you that that's we're
[11:48] going the right way here because you
[11:49] know it's it's a very robust answer that
[11:53] is you don't count intermediate output
[11:54] you only count the final goods which are
[11:56] the things that the consumer will buy
[11:59] buy the firms will buy for investment
[12:01] and things of that kind that foreigners
[12:03] will
[12:05] buy alternative method is GDP is the sum
[12:09] of value
[12:11] added in the economy during a given
[12:13] period of time what is value added the
[12:17] difference between final the final goods
[12:19] produced by a company and the
[12:21] intermediate inputs it purchased to
[12:23] produce those
[12:24] goods okay so what is the value added of
[12:28] the steel company here
[12:30] it's the answer is there but you know
[12:33] but what is the value added it's 100 how
[12:36] do I know it's 100 well because it's not
[12:38] buying any intermediate input and the
[12:40] revenue is
[12:41] 100 okay so that's the reason I get 100
[12:45] there okay 100 there's no intermediate
[12:47] input what is the value added of the car
[12:50] company well the revenue on sales is 200
[12:53] but it purchase 100 in intermediate
[12:55] inputs so the value is 200 minus 100 the
[12:59] value out of this company is 100 100
[13:01] plus 100 I get my 200 again
[13:04] yep
[13:07] consider wages to be in really good no
[13:11] that's those are not Goods those are
[13:12] factors of
[13:14] production okay so this and the same
[13:17] there are machines in that factory that
[13:19] are helping you produce things that's a
[13:21] service of the machine it's Capital
[13:23] that's not an intermediate input an
[13:24] intermediate input is another good or
[13:27] service that you buy for the the purpose
[13:29] of producing that that good
[13:33] okay so workers is not workers are
[13:36] working inside your company and so on if
[13:38] the work was if the work was produced
[13:41] was outsourced and you had another
[13:43] company that produces something that you
[13:45] use from those workers that would be an
[13:47] intermediate input but you would have to
[13:48] count the value out of the other of the
[13:50] companies you have outsourced too you
[13:53] see so that's method two two and you see
[13:56] we get exactly at 200 those two method
[13:59] methods are called production methods
[14:00] there are different ways of measuring
[14:02] the production of the economy the third
[14:04] method and the last one is an income
[14:08] method which means look all that is
[14:12] produced has to be earned by someone the
[14:15] workers the owners of capital somebody
[14:17] has to own that if the firms sell
[14:20] collectively $200 those $200 have to be
[14:23] allocated to someone someone means
[14:26] workers the owners of capital of the
[14:28] first Ms or in realistic economies the
[14:32] government you pay taxes and things of
[14:33] that kind okay we're not going to worry
[14:35] about the government for a
[14:37] while so that's an alternative method
[14:39] it's method three you just sum the
[14:42] incomes so who are the factors of
[14:44] productions here related to your
[14:45] question in this there is no government
[14:47] here no taxes so we have only workers
[14:50] and profits you the capital the owners
[14:52] of the Company wages is 80 + 70 is
[14:57] 150 profits is 20 + 30 50 150 in wages
[15:02] plus 50 in profit gives you back your
[15:05] 200 okay so those are the three ways we
[15:07] have of measuring these things and you
[15:09] see they give you exactly the same
[15:10] result now there is
[15:13] something as I as I from the
[15:15] construction of national account there
[15:16] is something interesting in what I just
[15:18] said which is look I can that production
[15:22] is the same as
[15:23] income that's going to be very important
[15:26] for macro very important for macro
[15:29] and it's totally unimportant for
[15:32] micro when you're looking at a company
[15:34] for example in micro and you're looking
[15:36] at a car company by
[15:38] itself it is true that you know the
[15:41] output of that company becomes income
[15:44] part for the owners of the company and
[15:46] part for the workers but that income
[15:49] needs not be spent in cars can spend in
[15:53] food entertainment and whatever not so
[15:56] in
[15:57] macro because what else you going to
[15:59] spend it to than in the same good that
[16:01] you're producing in the aggregate good
[16:04] so it's very interesting that's a very
[16:06] distinctive feature of micro that is not
[16:08] present in micro is that that income has
[16:10] to be spent in the same Goods if the
[16:12] econom is closed later on we're going to
[16:14] open the economy to the rest of the
[16:15] world and then you get you buy some
[16:16] Chinese goods and blah blah blah but if
[16:18] you keep it close hey you are not going
[16:21] to buy cars that's what you work on but
[16:23] you're going to have to buy it in the
[16:24] single good of the
[16:26] economy which is the sum of all the
[16:28] goods that we we consume an average
[16:30] that's going to be very
[16:32] important anyways this time is this
[16:35] stuff move in the right direction okay
[16:37] so that's that's that's that now you
[16:39] know what GDP is and the different ways
[16:41] of measuring you're going to have to
[16:44] remember that
[16:45] for for p set one and for quiz one and
[16:49] you might as well forget it for the
[16:51] future it's good that you understand the
[16:52] concept but it's different ways of
[16:53] constructing is not very
[16:55] important second thing we need to worry
[16:58] about
[16:59] is that whenever you're thinking about
[17:01] the output of an economy you're really
[17:03] trying to think about the real output
[17:05] meaning number of cars and number of
[17:06] machines and so on but you have
[17:09] inflation for example then prices of
[17:11] these things are growing and so the
[17:13] total revenue on sales is growing but
[17:16] they don't mean the same and we want to
[17:18] certainly separate these two things and
[17:20] for that reason we have a concept which
[17:22] is called nominal GDP and another one
[17:25] which is called real GDP nominal GDP is
[17:28] the simplest thing on Earth is
[17:30] essentially you know we had only one
[17:32] final goods company there which was cars
[17:34] but mind you have cars refrigerators
[17:36] many many things nominal GDP simply you
[17:39] sum all the final goods and you multiply
[17:41] them by the the current price and that
[17:44] gives you the dollar GDP that you have I
[17:46] don't know what it is in the US today
[17:48] you could check it but it's $24
[17:51] trillion a so that's it P * Q you know
[17:55] prices times quantity and you sum across
[17:57] all the final goods
[17:59] that's we have to that's one way of
[18:01] calculating thing that's nominal GDP but
[18:04] again what we really care about is we're
[18:06] going to get a lot about later on is how
[18:09] that econom is doing over time is it
[18:10] growing is it not growing nominal GDP
[18:13] can grow for two different reasons can
[18:15] grow because the economy is really
[18:18] becoming more productive is producing
[18:20] more Goods or because prices are going
[18:23] up now at this moment real nominal GDP
[18:26] is growing very fast in the US despite
[18:28] the fact that we may have recession this
[18:29] year we don't know but nobody has any
[18:32] doubt that nominal GDP will grow because
[18:34] we have lots of inflation and so you
[18:36] want to separate these two things and
[18:38] the thing that removes the inflation
[18:40] component is what we call real
[18:43] GDP and real GDP if you hear the word
[18:47] only GDP and and that was produced by
[18:50] somebody understand what he's talking
[18:51] about GDP really means real GDP okay if
[18:54] you just hear GDP people are try is
[18:57] trying to say the output of the economy
[18:59] well that's real GDP and the real GDP is
[19:03] computed many tricks but but essentially
[19:07] what you do is you consume you you you
[19:11] you also sum across all the
[19:13] goods you also Su across the goods but
[19:16] you use constant prices not the prices
[19:19] of that point in time
[19:21] necessarily okay so I'm going to give
[19:23] you a very concrete example but before
[19:25] doing that for this course we're going
[19:27] to call nominal GDP and all nominal
[19:30] variables are going to have that's what
[19:31] the textbook does they're going to have
[19:33] a dollar sign in front so that's our
[19:35] measure that's nominal GDP GDP is going
[19:38] to be Y without the dollar that's real
[19:40] GDP okay for the first part of the
[19:43] course up to quiz one we're we're going
[19:46] very we're going to worry very little
[19:47] about nominal things because we want to
[19:49] have prices completely fixed but but you
[19:51] still need to know the concept and
[19:53] that's real GDP so now let me give you
[20:01] an example so suppose you have this this
[20:05] this the simple economy we had before
[20:07] we're just going to look at final goods
[20:09] because that's what we need to look
[20:11] at to con to construct GDP and so this
[20:15] economy produces cars and supposedly
[20:17] produces 10 cars in 2011 12 cars in
[20:21] 2012 and 13 cars in in 2013 but suppos
[20:26] the price of a car is what you see there
[20:28] 20,000 24,000 and
[20:30] 26,000 nominal GDP is simply the
[20:33] product you know of this times that that
[20:36] gives you
[20:37] $200,000 12 cars times $25,000 gives you
[20:41] 288 and so on that's nominal
[20:43] GDP real
[20:45] GDP you have to
[20:48] pick which price you want to use but
[20:51] only use one and don't vary it over time
[20:54] okay so in this particular case we pick
[20:57] 2012
[20:59] okay so that means when you say GD real
[21:01] GDP at 20 2012 2012 base 2012 or at 2012
[21:06] prices means that you're using the
[21:08] prices of 2012 you don't bury that you
[21:11] let quantities change over time but the
[21:13] prices remain fixed so in this case real
[21:16] GDP at
[21:17] $22 is you know is 10 cars times 25,000
[21:22] that give you 240,000
[21:25] 12 cars time 24,000 28
[21:29] this is interesting for this year
[21:30] nominal GDP is the same as real GDP why
[21:32] is
[21:34] that it's an
[21:40] accident exactly we're using that's a
[21:43] base year so that's nominal GDP will
[21:45] always be equal to real GDP at the base
[21:48] year that's the Year we're picking as
[21:50] the base know because those are the
[21:51] prices we're
[21:53] using I what about 2013 well is is not
[21:57] 26,000 * 13 is 24, 1013 so we get 312
[22:02] and it's obvious here that real GDP is
[22:04] growing less than nominal GDP why is
[22:07] that well because this economy has
[22:09] inflation prices are rising over time
[22:12] and we want to remove that when we want
[22:13] to look at the real concept the real
[22:16] concept removes the price
[22:19] effect there are times in which you
[22:22] don't want to remove all that price
[22:24] effect and it happens a lot for example
[22:26] in computers because sometimes the
[22:28] increase in the price of the computer is
[22:30] simply because the computer is better
[22:32] and and you want to correct for quality
[22:33] and so on but again that's not something
[22:35] you need to worry about in this course
[22:42] okay maybe some of you deciding the pace
[22:44] which you want me to move I'm really
[22:46] puzzled by this stuff here this is this
[22:50] is from the book and you see what
[22:52] happened in in the US with nominal and
[22:55] real GDP with base year 2012 so as I
[22:58] said before these two curves one is
[23:00] nominal GDP the red line the blue line
[23:03] is real GDP we're using Bas year 2012 so
[23:06] at that point they have to be the same
[23:09] and what you see very very clearly there
[23:12] is that a the Blue Line real GDP is
[23:17] flatter than the red line why is
[23:20] that why is it
[23:27] yeah is inflation see yeah by the way I
[23:29] do have a reference for you so ask me
[23:31] after the okay
[23:33] good um anyway so yeah in the US between
[23:37] 1916 and 2018 real nominal GDP increased
[23:40] by a factor of 38 while real GDP by a
[23:43] factor of 5.7 big difference so so you
[23:45] better be careful when when you look at
[23:47] GDP that you are removing inflation
[23:49] especially in I mean if you were to look
[23:51] in
[23:52] Argentina these guys have had a
[23:53] recession a chronic recession for a long
[23:55] time big recessions but nominal GDP is
[23:58] explo clothing because they have 10,000%
[24:00] inflation so so so it makes a big
[24:05] difference especially over
[24:09] time this is just so you get the picture
[24:11] the complete picture for the US this is
[24:13] a GDP growth in the US since we have
[24:16] national accounts okay and some
[24:19] noticeable things well again
[24:21] recessions this was a big recession
[24:23] remember we call this the Great
[24:25] Recession big recession and well this is
[24:29] covid and then this is 2020 and then
[24:32] they bounce back in 2021 when we reopen
[24:34] the economy big growth but that's very
[24:36] anomalous I mean that's a very weird
[24:38] shock okay but that's a you see these
[24:41] are all the shaded areas are
[24:43] recessions recessions are defined in a
[24:46] slightly more complicated way than that
[24:48] but one sort of er popular way of
[24:52] describing ression is as episode where
[24:55] you have two consecutive quarters of
[24:57] negative inflation that's not the formal
[24:59] definition of res but it's pretty close
[25:01] okay and so so that's that's what you
[25:05] have
[25:06] there another concept is an employment
[25:10] rate the unemployment rate so that's GDP
[25:13] and we're going to the in the first part
[25:14] of the course we want to worry a lot
[25:16] about that we're going to build a model
[25:18] on how to find equilibrium H GDP okay
[25:22] and we're going to see what happens with
[25:23] fiscal policy with monetary policy how
[25:25] how does equilibrium GDP macroeconomic
[25:28] EIC output changes with different forms
[25:31] of policies or when consumers get scared
[25:33] or stuff like that
[25:38] okay what about the unemployment rate
[25:40] the unemployment rate is not something
[25:41] we want to worry a lot about until the
[25:44] second part of the course after quiz one
[25:46] but I still I want to get over with
[25:48] these
[25:48] definitions so what is employment is a
[25:51] number of people who have a job that's
[25:53] easy unemployment is slightly less easy
[25:57] because it's first of all obviously to
[25:59] be an employee you don't have to have a
[26:00] you cannot have a job so but it's not
[26:03] enough that you don't have a
[26:06] job is an
[26:08] unemployed person is somebody that
[26:10] doesn't have a job and is looking for
[26:13] one
[26:16] okay not all unemployed people look for
[26:18] your job not all non-employed people are
[26:21] looking for
[26:22] jobs okay so un to be unemployed you
[26:26] need to not have a job and be looking
[26:29] for one the labor force what we call the
[26:32] labor force is the sum of those two
[26:34] groups the employed and the unemployed
[26:37] that would like to get a
[26:39] job
[26:41] okay the unemployment rate which is
[26:44] something I showed you in the previous
[26:45] lecture is just a ratio of these two
[26:48] concepts the unemployed over the labor
[26:50] force notice over the labor force not
[26:53] population the labor force which is a
[26:55] sum of the employed and those that are
[26:58] unemployed that do not have a job and
[27:01] are looking for a job
[27:05] okay how how is an employment measure in
[27:09] the US is mostly a survey and I have the
[27:11] the the info there it's called the CPS
[27:15] the current population survey that
[27:17] consults lots of households and they ask
[27:20] them about the employment status whether
[27:21] they have been looking for a job over
[27:23] the last two weeks or not and so on and
[27:25] that's the way we come up with with the
[27:27] number as as I said before H those that
[27:30] do not have a job but are not looking
[27:32] for a job they haven't been looking for
[27:33] a job in the last two weeks are called
[27:36] not in the labor force that's that's
[27:38] what we say now these concepts are
[27:41] between an employed and not in the labor
[27:44] force is it's not not that clear we we
[27:47] we look at the employment rate but we
[27:49] also tend to look at those people as
[27:50] well because many people are simply
[27:52] discouraged they would like to get a job
[27:54] but they have been looking for a while
[27:56] and they haven't found it and it it
[27:58] happens that there is a lot more
[27:59] discouraged workers during recessions
[28:03] and when you're having a big recession
[28:05] it's very difficult to find a job so
[28:06] it's very easy to get discourage and so
[28:09] that's the reason we look at broader
[28:10] measures of non-employment than the
[28:12] typical unemployment rate because a lot
[28:15] of
[28:15] those not in the labor force people that
[28:18] do not have a job and are not looking
[28:19] for a job are really discouraged they
[28:21] just give up after a while
[28:24] okay the participation rate and that's a
[28:27] very important concept something you
[28:29] would have ignored most of the time is
[28:31] very critical at this moment the
[28:33] participation rate is the ratio of the
[28:35] labor force to the total population of
[28:39] working age and you exclude people you
[28:41] know in prison and stuff like that but
[28:43] but a so it's label force is which is
[28:48] the sum of the employed and the
[28:49] unemployed divided by those that could
[28:51] work in
[28:53] principle okay and that we call that's
[28:56] what we call the participation rate
[28:59] how do these numbers look I showed you
[29:01] this picture in the previous uh lecture
[29:05] and that's the unemployment rate it
[29:08] skyrocketed during covid but it has
[29:10] declined enormously and as I said in the
[29:12] previous lecture a big issue is that the
[29:15] unemployment rate today is extremely low
[29:17] we haven't seen levels like this since
[29:18] the early
[29:20] 60s okay the unemployment rate today is
[29:24] at record low levels and that's a
[29:26] problem some wonderful but it's also as
[29:29] a problem because we have an inflation
[29:31] problem and those two things are
[29:32] connected as you will learn later on in
[29:34] the course okay but that's what we have
[29:37] right now that's the unemployment rate
[29:39] now the reason the unemployment rate is
[29:41] so low there are two reasons really one
[29:45] is that there was lots of stimulus
[29:47] policy fiscal policy monetary policy so
[29:49] aggregate demand and consumers that were
[29:51] fed up of being locked out of
[29:54] restaurants and trips and so on for two
[29:56] years you know decided to travel and so
[29:57] on so so and they had lots of
[30:00] savings the the US consumer accumulated
[30:03] excess saving of $2.7 trillion and now
[30:06] they're spending this time China a big
[30:08] reason why people expect a big bounce
[30:10] back is because they also had a lot of
[30:12] savings because they were locked up for
[30:14] for quite some time so so as a result of
[30:18] that there's lots of demand for goods
[30:20] and as you're going to learn in the next
[30:22] lecture that means lots of output as
[30:24] well H but the second H reason
[30:30] is the
[30:34] following is the participation rate okay
[30:38] people haven't come back to work in the
[30:41] magnitudes that we expected so that's a
[30:43] participation rate in the US remember
[30:46] participation rate is labor force over
[30:49] all those that could work in principle
[30:51] okay ER what do you think is this look
[30:55] at the participation rate used to be in
[30:57] the 6 below 60s and then there was a big
[31:00] rise in the participation rate in the
[31:02] US what do you think is this due
[31:05] to women joining work women yeah joining
[31:09] the workforce that's what it
[31:11] did okay that's that since then since
[31:15] just women did all that they had to do
[31:16] sort of we have been declining and that
[31:18] that's that's an issue but ER but look
[31:24] at what happened here lots of people
[31:26] exit the labor force during covid I mean
[31:28] you know they had to take care of the
[31:29] kids and and and or or the elderly and
[31:33] so people withdrew from the labor force
[31:35] they didn't want a job it was also
[31:37] discouraging it was very difficult to
[31:38] get a job for iag you work in a
[31:41] restaurant it was impossible to get a
[31:42] job in a restaurant so but everyone
[31:46] expected this to recover to the previous
[31:50] level and it hasn't okay so you be you
[31:53] see that the participation rate has not
[31:55] come back to the levels preo is
[31:58] substantially below and that's one of
[32:00] the reasons you know that restaurants
[32:02] complain that they don't have workers
[32:04] and so on so forth is that many people
[32:06] haven't come back to a labor force we
[32:09] thought this was going to be temporary
[32:11] now there's a concern that a lot of that
[32:12] is really permanent people decided that
[32:15] you know life at home wasn't that bad
[32:17] after all less income but but they spend
[32:20] more time with the kids or whatever and
[32:23] so H ER and that's an issue and that
[32:26] that's a big reason behind
[32:28] the low unemployment rate and the fact
[32:30] that we have all this inflation has to
[32:33] do with everyone in particular the fed
[32:36] miscalculated the bounce back of of the
[32:39] participation
[32:42] rate
[32:44] good so as I said before we're not going
[32:46] to look at labor market issues until
[32:49] sort of the second part of the course
[32:50] after quiz one and the same is for
[32:53] inflation we're not going to look at
[32:54] inflation issues until the second part
[32:57] of of the course because to connect them
[33:00] I mean I they are connected and we're
[33:02] not going to look at Labor markets until
[33:05] sort of a lecture from now or so okay
[33:08] but let's look at but this is an
[33:09] important variable and certainly
[33:10] something you're facing every single day
[33:11] in the newspapers and so on the
[33:13] inflation rate so by inflation when you
[33:16] hear inflation that typically means the
[33:19] sustained rise in the general level of
[33:22] prices so it's not that the price of
[33:24] cars went up relative to the price of
[33:25] hotels or now down price hotel is that
[33:29] on average prices are rising that's what
[33:31] we call an inflation
[33:34] inflation um so we're going to call the
[33:38] price level PT and there are many
[33:41] different price levels all you see so
[33:43] the inflation rate when you hear the
[33:45] inflation rate is the rate of change of
[33:48] that price
[33:50] level an episode of
[33:52] deflation the opposite of what we're
[33:54] experiencing now where we're exper
[33:56] inflation is when that inflation rate is
[33:59] negative Japan most prominently has
[34:02] experienced something like that not now
[34:04] but experienced it for on and off for
[34:06] the last three decades or so um so what
[34:11] is the price level there are many ways
[34:12] of defining it and then there many
[34:14] different price levels a very popular
[34:16] one is what is called the GDP deflator
[34:20] and it's the one you see Le you is never
[34:22] mentioned in the newspapers okay but we
[34:24] economists tend to look at the deflator
[34:26] the deflator is nothing else than the
[34:27] ratio of nominal GDP to real GDP another
[34:31] one is far more popular and more
[34:33] relevant for you as consumers is what we
[34:35] call the Consumer Price Index that's the
[34:38] CPI you hear CPI that's what it is so
[34:42] it's it's it's it's you calculate the
[34:44] rate of inflation from the CPI you
[34:45] calculate the same way but you use a CPI
[34:48] there instead of the GDP deflator now it
[34:52] turns
[34:53] out H that obviously confused with it it
[34:57] turns out that these two measures are
[34:58] sort of pretty well aligned okay there
[35:01] are differences that may be interesting
[35:02] at some specific point in time but they
[35:04] tell you more or less the same picture
[35:06] in particular there is absolutely no
[35:08] doubt that we have an inflation problem
[35:10] these days you can be as selective as
[35:12] you want with the price index you want
[35:13] to use and people are getting very
[35:15] selective now we have CPI
[35:18] excluding
[35:20] ER well one thing that that makes a lot
[35:23] of sense is to exclude the most volatile
[35:25] Goods so typically the CPI we we use
[35:28] what called core CPI which removes
[35:30] energy and food which are very volatile
[35:33] prices you don't want the thing to be
[35:34] moving all over the place but now we're
[35:36] also beginning to remove shelter because
[35:38] shelter inflation is very high and
[35:40] sticky and so on so so people can get to
[35:42] be very selective but no matter how you
[35:44] look at the thing we have a problem okay
[35:47] that there's no way around that so
[35:49] that's the the way again we're not going
[35:51] to look we're going to talk a lot about
[35:53] this problem of course but we need to
[35:56] build tools and and we're going to get
[35:58] there in about nine lectures from now
[36:00] okay nine lectures from now we're going
[36:02] to be able to talk about what what is
[36:03] going on in with Ms I mean you can talk
[36:06] whenever you want but with
[36:08] Ms okay so that those are the concepts I
[36:11] wanted to discuss today those are the
[36:13] definitions and relief that we got over
[36:15] this stuff let me just show you we have
[36:17] five minutes or
[36:19] so
[36:20] er equivalent numbers for other places
[36:24] around the world that's
[36:25] China okay
[36:28] that's China That's GDP growth for China
[36:31] and there are several things you can see
[36:32] from for this GDP series the first is
[36:36] that it was very high this these numbers
[36:38] look a lot on average it's a lot higher
[36:40] than the US when I show you the US you
[36:42] know the rate of growth was moving
[36:43] around 2% one and a half perc blah blah
[36:45] blah occasionally recessions and so on
[36:47] this is China look you had you know
[36:50] numbers like 10% or so that's
[36:52] interesting we want to know why is that
[36:55] you can have so much difference in
[36:57] different countries okay and and that's
[37:00] what we're going to do in the third part
[37:01] of the course when we look at growth
[37:03] we're going to look at these kind of
[37:05] factors what can give you sustained rate
[37:07] of growth sustain I mean for a long
[37:10] period of time higher than in another
[37:12] country the the main factor just to
[37:16] preview what will happen is is
[37:19] H is simply that China was a lot poorer
[37:23] than the us at the beginning and when
[37:25] you're poorer and you put your act
[37:27] together you can grow a lot faster than
[37:29] the rest now China is slowing down aside
[37:33] from covid it's very clear for quite
[37:35] some time that they have been worried
[37:37] because clearly GDP growth is
[37:41] declining okay and and and they're
[37:44] terrified about that and and and many of
[37:46] the things that are happening with China
[37:48] have to do with the fear Associated to
[37:52] uh slow down in the rate of growth when
[37:54] they are still quite poor in per
[37:58] terms okay so that's a lot of what
[38:01] happens in China has to do with
[38:04] that if you look at Japan look at Japan
[38:08] Japan also grew very fast in the 60s
[38:12] okay you see this very fast rate of
[38:15] growth then it began to slow down and
[38:18] pom here collapse they have a massive
[38:20] crash in the in in in financial markets
[38:23] equities and land the price of land was
[38:26] enormous in Japan at this time it had a
[38:27] big Financial
[38:29] bubble you know for those of you that
[38:31] know Japan or if you don't know it
[38:32] doesn't matter there's a the Imperial
[38:34] Park in Tokyo which is a park that is
[38:36] much smaller than Central Park or
[38:38] whatever the value of that land at some
[38:40] point in time was the same as the value
[38:42] of the entire State of California okay
[38:45] that's the order of magnitude it was not
[38:47] for sale but you know in terms of
[38:49] location times price but that's that
[38:52] bubble crash and since then Japan has
[38:55] never been able to recover its modu okay
[38:57] it has been sort of growing at a very
[38:59] low rate for a very long period of time
[39:02] and one of the things that scares China
[39:04] is that this may happen to them because
[39:08] this happened to Japan when they were
[39:09] already quite Rich Japan was pretty poor
[39:11] after the war naturally and they grew
[39:13] very fast in the 60s but then they had
[39:16] this issue Financial bubble and so on
[39:18] they crashing had never been able to
[39:20] recover and China is worried that you
[39:23] know that this slowdown happens to them
[39:25] ER before they have acquire reached sort
[39:28] of the level of income per capita that
[39:31] Japan reach when that
[39:34] happened they common factors behind the
[39:36] two of them as well demographic factors
[39:38] demographics are very negative for both
[39:40] of them and which naturally will slow
[39:42] down the rate of growth we're going to
[39:43] look at that later this is inflation in
[39:47] Japan H you see sort of the most
[39:49] countries had high inflation around
[39:51] there because the the were the price of
[39:54] oil they with massive oil shocks and so
[39:56] on so inflation was pretty high but the
[39:58] problem of Japan has been the opposite
[40:01] since the bubble crash in the late 80s
[40:04] early 990s they have had very low
[40:07] inflation
[40:09] H even deflation and that's been a big
[40:12] problem part of the reason why they have
[40:15] had so low growth is because they have
[40:17] been in this deflationary trap and then
[40:19] you something you will will look at
[40:21] later on in the course when when you
[40:23] have deflation it's pretty it's very
[40:26] difficult to use monetary policy to get
[40:27] out of a recession and that's the reason
[40:30] they keep getting a stack
[40:32] there so that's all I wanted to say for
[40:34] today and I'm relief again that this
[40:36] lecture is behind us in the next lecture
[40:38] we're going to introduce the first model
[40:40] what we're going to look at is is H is
[40:43] how to determine equilibrium GDP and how
[40:45] that depends on on the a variety of
[40:49] things including fiscal policy not
[40:51] monetary policy that will happen later
[40:54] um but uh how scared you are consumers
[40:58] preferences and fears and so on so
[41:01] that's the plan so unless there are any
[41:03] questions about
[41:05] this
[41:07] no so see you next Monday