WEBVTT 00:00:00.000 --> 00:00:01.956 align:middle line:90% [SQUEAKING] 00:00:01.956 --> 00:00:03.912 align:middle line:90% [RUSTLING] 00:00:03.912 --> 00:00:06.846 align:middle line:90% [CLICKING] 00:00:06.846 --> 00:00:16.362 align:middle line:90% 00:00:16.362 --> 00:00:18.070 align:middle line:84% RICARDO J. CABALLERO: I expect that there 00:00:18.070 --> 00:00:20.380 align:middle line:84% will be many fun lectures in the sense 00:00:20.380 --> 00:00:24.010 align:middle line:84% that we're going to be discussing a little more exactly 00:00:24.010 --> 00:00:26.770 align:middle line:84% at the right time in which that issue is 00:00:26.770 --> 00:00:31.250 align:middle line:84% an important issue, at least as described in the newspapers. 00:00:31.250 --> 00:00:34.930 align:middle line:84% And, you know, we are going through a very interesting time 00:00:34.930 --> 00:00:36.310 align:middle line:90% for macroeconomics. 00:00:36.310 --> 00:00:38.210 align:middle line:90% Inflation is unusually high. 00:00:38.210 --> 00:00:41.290 align:middle line:84% Something needs to be done about that. 00:00:41.290 --> 00:00:44.980 align:middle line:84% And we still have problems on the supply side 00:00:44.980 --> 00:00:48.040 align:middle line:84% of the economy as a result of COVID, 00:00:48.040 --> 00:00:51.370 align:middle line:84% as a result of the slow reopening of China. 00:00:51.370 --> 00:00:53.890 align:middle line:84% And we have a war going on, which 00:00:53.890 --> 00:00:56.440 align:middle line:84% is affecting also the price of energy, 00:00:56.440 --> 00:00:59.270 align:middle line:84% and is particularly impacting Europe. 00:00:59.270 --> 00:01:02.420 align:middle line:84% And all these things, the situation is very fluid. 00:01:02.420 --> 00:01:05.090 align:middle line:84% All of them can change at any moment. 00:01:05.090 --> 00:01:10.360 align:middle line:84% And policymakers are, therefore, paying very close attention 00:01:10.360 --> 00:01:11.600 align:middle line:90% to all these things. 00:01:11.600 --> 00:01:12.850 align:middle line:90% It's not a normal time. 00:01:12.850 --> 00:01:19.280 align:middle line:84% If you're a policymaker, macroeconomist policymaker, 00:01:19.280 --> 00:01:21.840 align:middle line:84% you are not sleeping a lot these days. 00:01:21.840 --> 00:01:25.010 align:middle line:84% And so I expect that we will have plenty of time 00:01:25.010 --> 00:01:30.590 align:middle line:84% to discuss interesting things and analyze them 00:01:30.590 --> 00:01:33.740 align:middle line:84% at a slightly higher level than you can do at this moment. 00:01:33.740 --> 00:01:37.460 align:middle line:84% Now, I also told you in the introduction 00:01:37.460 --> 00:01:44.960 align:middle line:84% that this particular lecture is not going to be of that kind. 00:01:44.960 --> 00:01:47.480 align:middle line:84% It's going to be very boring in the sense 00:01:47.480 --> 00:01:49.560 align:middle line:84% that we need to start with definitions. 00:01:49.560 --> 00:01:51.570 align:middle line:84% And I don't know, who likes definitions? 00:01:51.570 --> 00:01:52.130 align:middle line:90% I don't. 00:01:52.130 --> 00:01:53.480 align:middle line:90% It's very boring. 00:01:53.480 --> 00:01:57.230 align:middle line:84% Now, there is an interesting, a curious side 00:01:57.230 --> 00:01:59.630 align:middle line:84% of the definitions we're going to discuss, 00:01:59.630 --> 00:02:04.067 align:middle line:84% which is that if you were taking 1401, microeconomics, 00:02:04.067 --> 00:02:05.900 align:middle line:84% many of the concepts we're going to describe 00:02:05.900 --> 00:02:07.260 align:middle line:90% require no definition. 00:02:07.260 --> 00:02:07.950 align:middle line:90% They're obvious. 00:02:07.950 --> 00:02:11.750 align:middle line:84% I mean, if I ask for an output of a factory that produces cars, 00:02:11.750 --> 00:02:14.040 align:middle line:84% it's pretty obvious that it's a number of cars. 00:02:14.040 --> 00:02:16.490 align:middle line:84% If I ask you for the prices of those cars, 00:02:16.490 --> 00:02:19.470 align:middle line:84% it's pretty obvious what the price of a car is. 00:02:19.470 --> 00:02:21.630 align:middle line:84% Not so for macro, because if I ask you 00:02:21.630 --> 00:02:24.750 align:middle line:84% what is the output of the US economy, well, 00:02:24.750 --> 00:02:26.620 align:middle line:84% there's millions of goods and services 00:02:26.620 --> 00:02:27.970 align:middle line:90% are produced at the same time. 00:02:27.970 --> 00:02:31.950 align:middle line:84% So what do we mean by output, a single measure of output? 00:02:31.950 --> 00:02:34.800 align:middle line:84% Or if I ask you about the price level or the inflation, 00:02:34.800 --> 00:02:37.380 align:middle line:84% the rate at which that price level is changing. 00:02:37.380 --> 00:02:38.740 align:middle line:90% Well, what are we talking about? 00:02:38.740 --> 00:02:41.350 align:middle line:84% It's very easy to see whether the price of a car is going up. 00:02:41.350 --> 00:02:44.880 align:middle line:84% But if we're mixing sort of millions of different goods 00:02:44.880 --> 00:02:47.948 align:middle line:84% and services, then it's a little harder. 00:02:47.948 --> 00:02:49.740 align:middle line:84% And that's the reason we need this lecture, 00:02:49.740 --> 00:02:51.870 align:middle line:84% because it's a little harder than 1401 00:02:51.870 --> 00:02:54.100 align:middle line:84% and we need to define basic things. 00:02:54.100 --> 00:02:55.920 align:middle line:84% But they have a trick because you're 00:02:55.920 --> 00:02:57.540 align:middle line:90% summing apples and oranges-- 00:02:57.540 --> 00:03:00.600 align:middle line:84% not only apples and oranges, apples, oranges, 00:03:00.600 --> 00:03:02.550 align:middle line:84% health services, financial services, 00:03:02.550 --> 00:03:04.960 align:middle line:90% all of them in one piece. 00:03:04.960 --> 00:03:06.880 align:middle line:90% And so it's a little trickier. 00:03:06.880 --> 00:03:09.190 align:middle line:84% And that's the reason we need this boring lecture. 00:03:09.190 --> 00:03:14.160 align:middle line:84% We need to go through that slightly trickier definition 00:03:14.160 --> 00:03:16.840 align:middle line:90% of output prices and so on. 00:03:16.840 --> 00:03:22.540 align:middle line:90% 00:03:22.540 --> 00:03:26.140 align:middle line:84% So let me start with the most basic thing-- 00:03:26.140 --> 00:03:27.230 align:middle line:90% aggregate output. 00:03:27.230 --> 00:03:29.860 align:middle line:84% At the end of the day when the economy is in a recession 00:03:29.860 --> 00:03:32.980 align:middle line:84% or not, and so we don't like it or we do like, 00:03:32.980 --> 00:03:35.630 align:middle line:84% it depends on what is happening to output. 00:03:35.630 --> 00:03:38.290 align:middle line:84% Is output growing at the pace it used to grow? 00:03:38.290 --> 00:03:40.670 align:middle line:84% Or is it growing less or it's declining? 00:03:40.670 --> 00:03:43.780 align:middle line:84% Well, that's very important for macro 00:03:43.780 --> 00:03:45.670 align:middle line:84% and to understand the health of an economy, 00:03:45.670 --> 00:03:47.570 align:middle line:84% the macroeconomic health of an economy. 00:03:47.570 --> 00:03:52.090 align:middle line:84% But we need to start by defining what we mean by output. 00:03:52.090 --> 00:03:55.150 align:middle line:84% And because it's a tricky thing to do 00:03:55.150 --> 00:03:57.520 align:middle line:84% when you're adding so many apples, oranges, 00:03:57.520 --> 00:04:00.670 align:middle line:84% financial services, entertainment, 00:04:00.670 --> 00:04:04.960 align:middle line:84% and lots of things that are very different, 00:04:04.960 --> 00:04:07.570 align:middle line:84% we didn't have a good way of doing that. 00:04:07.570 --> 00:04:10.870 align:middle line:84% In fact, the National accounts as we know them in the US is 00:04:10.870 --> 00:04:14.530 align:middle line:84% something that we have since the post-war period in the late 00:04:14.530 --> 00:04:17.800 align:middle line:84% '40s that we developed the techniques, the approach, 00:04:17.800 --> 00:04:20.190 align:middle line:84% to come up with a measure of aggregate output. 00:04:20.190 --> 00:04:23.680 align:middle line:84% Before that, we had measures, proxies. 00:04:23.680 --> 00:04:25.450 align:middle line:84% Industrial production is very high, 00:04:25.450 --> 00:04:28.090 align:middle line:84% meaning we're producing lots of cars, stuff like that. 00:04:28.090 --> 00:04:31.360 align:middle line:84% But something systematic like we have today 00:04:31.360 --> 00:04:34.660 align:middle line:90% is a pretty recent thing. 00:04:34.660 --> 00:04:36.340 align:middle line:90% OK we call that NIPA-- 00:04:36.340 --> 00:04:39.970 align:middle line:84% the National Income and Product Account. 00:04:39.970 --> 00:04:42.160 align:middle line:84% Income and product-- that's going 00:04:42.160 --> 00:04:46.720 align:middle line:84% to be very important for macro, as you'll see in a minute. 00:04:46.720 --> 00:04:48.910 align:middle line:84% So the main measure of aggregate output 00:04:48.910 --> 00:04:53.390 align:middle line:84% is what we call gross domestic product, or simply, GDP. 00:04:53.390 --> 00:04:56.740 align:middle line:84% You hear GDP, that means output of an economy. 00:04:56.740 --> 00:04:58.670 align:middle line:90% Why is gross and not net? 00:04:58.670 --> 00:05:01.180 align:middle line:84% You're not going to worry about that in this course. 00:05:01.180 --> 00:05:01.790 align:middle line:90% But that's it. 00:05:01.790 --> 00:05:06.560 align:middle line:84% You hear GDP, most macroeconomic wouldn't say output. 00:05:06.560 --> 00:05:07.420 align:middle line:90% They would say GDP. 00:05:07.420 --> 00:05:08.230 align:middle line:90% It's very short. 00:05:08.230 --> 00:05:09.830 align:middle line:90% It's efficient, and so on. 00:05:09.830 --> 00:05:12.340 align:middle line:84% Well, that's what it means, is the output of an economy. 00:05:12.340 --> 00:05:14.060 align:middle line:90% But how do we define It? 00:05:14.060 --> 00:05:15.730 align:middle line:84% As I said before, it's much harder 00:05:15.730 --> 00:05:18.340 align:middle line:84% than when you have an individual good. 00:05:18.340 --> 00:05:23.620 align:middle line:84% By the way, I will be, most of the time, I will say goods. 00:05:23.620 --> 00:05:26.590 align:middle line:84% But really it's goods and services. 00:05:26.590 --> 00:05:29.680 align:middle line:84% But it's very long to say goods and services. 00:05:29.680 --> 00:05:33.655 align:middle line:84% So whenever I say goods, I'm not trying to play any trick on you. 00:05:33.655 --> 00:05:35.030 align:middle line:84% I really mean goods and services. 00:05:35.030 --> 00:05:36.350 align:middle line:90% I just be lazy. 00:05:36.350 --> 00:05:39.650 align:middle line:84% And most people are lazy that way. 00:05:39.650 --> 00:05:41.960 align:middle line:84% Now, what is the difference between goods and services? 00:05:41.960 --> 00:05:44.440 align:middle line:84% You're not going to worry a lot about that in this. 00:05:44.440 --> 00:05:47.480 align:middle line:84% You're not going to worry at all about that in this course. 00:05:47.480 --> 00:05:51.730 align:middle line:84% But just to get a sense, goods are things that are tangible. 00:05:51.730 --> 00:05:54.820 align:middle line:84% Services are things that are not that tangible. 00:05:54.820 --> 00:05:56.980 align:middle line:84% They're benefits that you receive from the tasks 00:05:56.980 --> 00:05:58.550 align:middle line:84% that someone else operates on you. 00:05:58.550 --> 00:06:02.900 align:middle line:90% So you go to the Medical Center. 00:06:02.900 --> 00:06:05.680 align:middle line:84% You don't come up with a piece of a machine to-- 00:06:05.680 --> 00:06:07.450 align:middle line:84% well, they may lend you something. 00:06:07.450 --> 00:06:10.970 align:middle line:84% But you don't come out with an objective. 00:06:10.970 --> 00:06:14.420 align:middle line:84% You come out with a service provided by a doctor to you. 00:06:14.420 --> 00:06:17.070 align:middle line:84% And the same happens if you go to a bank. 00:06:17.070 --> 00:06:19.820 align:middle line:84% You don't come with an ATM with you. 00:06:19.820 --> 00:06:21.320 align:middle line:84% But you come up with is the service 00:06:21.320 --> 00:06:23.720 align:middle line:84% of having done a transaction or deposit 00:06:23.720 --> 00:06:25.980 align:middle line:84% or gotten a mortgage or something like that. 00:06:25.980 --> 00:06:27.000 align:middle line:90% It's a service. 00:06:27.000 --> 00:06:30.760 align:middle line:84% If you go to a restaurant, again, you don't-- 00:06:30.760 --> 00:06:33.180 align:middle line:90% what you have is an experience. 00:06:33.180 --> 00:06:36.480 align:middle line:84% It's people provided an experience to you. 00:06:36.480 --> 00:06:38.930 align:middle line:84% Things are a little tricky because if you do a take out, 00:06:38.930 --> 00:06:42.240 align:middle line:84% well, it's not an experience, or it's really the good. 00:06:42.240 --> 00:06:45.470 align:middle line:84% So, if you get into those details, which we're not going 00:06:45.470 --> 00:06:47.100 align:middle line:90% to get, it gets to be tricky. 00:06:47.100 --> 00:06:53.830 align:middle line:84% But just to get a sense, on average, a consumer in the US, 00:06:53.830 --> 00:06:58.240 align:middle line:84% 2/3 of the consumption is in services, not in goods. 00:06:58.240 --> 00:07:00.680 align:middle line:84% It's not the bananas and so on that you buy. 00:07:00.680 --> 00:07:03.400 align:middle line:84% It's a lot of the financial services, health services, 00:07:03.400 --> 00:07:06.670 align:middle line:84% and entertainment, and things like that, traveling. 00:07:06.670 --> 00:07:09.820 align:middle line:84% That's where you spend most of your time. 00:07:09.820 --> 00:07:13.860 align:middle line:84% Having clarified that, you can forget that. 00:07:13.860 --> 00:07:15.525 align:middle line:84% From now on, I'm going to say goods. 00:07:15.525 --> 00:07:17.400 align:middle line:84% So occasionally I may say goods and services. 00:07:17.400 --> 00:07:18.930 align:middle line:90% But I always mean the same. 00:07:18.930 --> 00:07:21.430 align:middle line:90% OK, good. 00:07:21.430 --> 00:07:24.880 align:middle line:84% So how do we measure these things? 00:07:24.880 --> 00:07:29.510 align:middle line:84% Well, there are different ways of doing this. 00:07:29.510 --> 00:07:32.970 align:middle line:84% Something happened to my slide there. 00:07:32.970 --> 00:07:35.820 align:middle line:90% OK, there we are. 00:07:35.820 --> 00:07:41.133 align:middle line:84% And so suppose that you have an economy that is very simple. 00:07:41.133 --> 00:07:43.300 align:middle line:84% I don't need to tell you how simple this economy is. 00:07:43.300 --> 00:07:46.600 align:middle line:90% It has just two firms. 00:07:46.600 --> 00:07:49.150 align:middle line:84% Suppose that we have an economy that is very simple. 00:07:49.150 --> 00:07:50.620 align:middle line:90% It has two firms. 00:07:50.620 --> 00:07:54.820 align:middle line:84% One firm produces a steel and the other one produces cars. 00:07:54.820 --> 00:07:57.310 align:middle line:84% And the company that produces cars 00:07:57.310 --> 00:07:59.770 align:middle line:84% buys all the steel from the company. 00:07:59.770 --> 00:08:03.120 align:middle line:84% You, as a consumer, don't buy steel directly. 00:08:03.120 --> 00:08:05.330 align:middle line:90% The car company buys the steel. 00:08:05.330 --> 00:08:06.640 align:middle line:90% It uses to produce a car. 00:08:06.640 --> 00:08:07.820 align:middle line:90% And you buy the car. 00:08:07.820 --> 00:08:09.710 align:middle line:90% So that's our simple economy. 00:08:09.710 --> 00:08:13.280 align:middle line:84% And those are the accounts of the simple economy. 00:08:13.280 --> 00:08:16.310 align:middle line:90% So there you have a company. 00:08:16.310 --> 00:08:18.200 align:middle line:90% One has a revenue from sales. 00:08:18.200 --> 00:08:20.920 align:middle line:90% It sells 100. 00:08:20.920 --> 00:08:25.870 align:middle line:84% So price of steel times steel is 100. 00:08:25.870 --> 00:08:35.747 align:middle line:84% The second company buys steel, uses workers, and sells 200. 00:08:35.747 --> 00:08:37.789 align:middle line:84% So the question I asked you, the first question I 00:08:37.789 --> 00:08:40.200 align:middle line:84% asked you here is, well, what is the GDP of this economy? 00:08:40.200 --> 00:08:42.255 align:middle line:84% Here you have an economy that has two goods. 00:08:42.255 --> 00:08:44.630 align:middle line:84% Needless to say, a real economy is a lot more complicated 00:08:44.630 --> 00:08:45.390 align:middle line:90% than this. 00:08:45.390 --> 00:08:47.730 align:middle line:90% But you have two companies. 00:08:47.730 --> 00:08:50.220 align:middle line:90% And I asked you, what is GDP? 00:08:50.220 --> 00:08:53.520 align:middle line:84% So the obvious things that you can come up with is, well, I 00:08:53.520 --> 00:08:55.340 align:middle line:90% sum all the revenues. 00:08:55.340 --> 00:08:57.510 align:middle line:90% OK, so that's the obvious one. 00:08:57.510 --> 00:09:00.570 align:middle line:84% The total GDP of these economies is 300. 00:09:00.570 --> 00:09:03.700 align:middle line:90% That's a sensible answer. 00:09:03.700 --> 00:09:05.380 align:middle line:84% At least at this moment, I would accept 00:09:05.380 --> 00:09:06.610 align:middle line:90% that as a sensible answer. 00:09:06.610 --> 00:09:08.030 align:middle line:90% In the quiz, I wouldn't. 00:09:08.030 --> 00:09:09.800 align:middle line:90% But here it's a sensible answer. 00:09:09.800 --> 00:09:11.290 align:middle line:84% I mean, well, you ask me for what 00:09:11.290 --> 00:09:13.130 align:middle line:84% is the total output of that economy. 00:09:13.130 --> 00:09:16.570 align:middle line:84% I sum up all the revenues and sales. 00:09:16.570 --> 00:09:20.450 align:middle line:90% And that's 300. 00:09:20.450 --> 00:09:28.200 align:middle line:90% OK, so is it 300, or is it 200? 00:09:28.200 --> 00:09:29.690 align:middle line:90% I mean, that's another-- 00:09:29.690 --> 00:09:33.050 align:middle line:84% it says, well, look, only the final goods perhaps 00:09:33.050 --> 00:09:36.860 align:middle line:84% should count because, you know, this is the only thing 00:09:36.860 --> 00:09:41.210 align:middle line:84% that you, as a consumer, will ever see is this part, not that. 00:09:41.210 --> 00:09:42.900 align:middle line:90% Those are two sensible answers. 00:09:42.900 --> 00:09:46.010 align:middle line:84% And what I'll show you in three different ways 00:09:46.010 --> 00:09:51.180 align:middle line:84% is that the right answer is 200 for that economy, not 300. 00:09:51.180 --> 00:09:54.260 align:middle line:90% The right answer is 200. 00:09:54.260 --> 00:09:58.970 align:middle line:84% So method one-- and all these methods are used, 00:09:58.970 --> 00:10:05.570 align:middle line:84% and they used to check each other to compute GDP. 00:10:05.570 --> 00:10:09.630 align:middle line:84% So method one is what I said here is final goods. 00:10:09.630 --> 00:10:14.270 align:middle line:84% You said GDP is the value of the final goods 00:10:14.270 --> 00:10:16.700 align:middle line:84% and services produced in the economy 00:10:16.700 --> 00:10:18.300 align:middle line:90% during a given period of time. 00:10:18.300 --> 00:10:20.670 align:middle line:84% Notice that GDP is a concept of a flow. 00:10:20.670 --> 00:10:22.300 align:middle line:84% It's something you produce in a year. 00:10:22.300 --> 00:10:30.220 align:middle line:84% That's the reason you say GDP of the US in 2022 was $23 trillion. 00:10:30.220 --> 00:10:31.440 align:middle line:90% It's in a year. 00:10:31.440 --> 00:10:33.900 align:middle line:90% It's a period of time. 00:10:33.900 --> 00:10:37.530 align:middle line:90% So that's one definition. 00:10:37.530 --> 00:10:44.970 align:middle line:84% And one way of making sense of this definition 00:10:44.970 --> 00:10:48.960 align:middle line:84% is imagine that I give you the same economy with the same two 00:10:48.960 --> 00:10:49.710 align:middle line:90% factories. 00:10:49.710 --> 00:10:51.720 align:middle line:84% And now all of a sudden I tell you, 00:10:51.720 --> 00:10:54.450 align:middle line:84% you know what, I'm going to merge the two companies. 00:10:54.450 --> 00:10:59.040 align:middle line:84% So company, the car company will buy the steel mill, or whatever. 00:10:59.040 --> 00:11:01.920 align:middle line:84% Well, if I now put together those two accounts, 00:11:01.920 --> 00:11:03.960 align:middle line:84% now, I never see the steel because that's all 00:11:03.960 --> 00:11:05.860 align:middle line:90% happening inside the factory. 00:11:05.860 --> 00:11:07.980 align:middle line:84% And it's still the case that the economy 00:11:07.980 --> 00:11:09.870 align:middle line:90% would be producing 200 cars. 00:11:09.870 --> 00:11:12.870 align:middle line:84% And all that you would see is 200, 00:11:12.870 --> 00:11:14.870 align:middle line:84% because I would put this thing together. 00:11:14.870 --> 00:11:17.370 align:middle line:84% There was a steel that this company had purchased from that, 00:11:17.370 --> 00:11:20.040 align:middle line:90% but now it's all inside. 00:11:20.040 --> 00:11:22.890 align:middle line:84% So if I put them together, then that steel 00:11:22.890 --> 00:11:25.920 align:middle line:84% there doesn't appear because it's all produced in-house. 00:11:25.920 --> 00:11:28.000 align:middle line:90% And now GDP would be 200. 00:11:28.000 --> 00:11:31.260 align:middle line:84% Well, it makes no sense that just because I change 00:11:31.260 --> 00:11:35.610 align:middle line:84% the ownership structure of the company, that your GDP changes, 00:11:35.610 --> 00:11:37.660 align:middle line:90% collapses from 300 to 200. 00:11:37.660 --> 00:11:39.570 align:middle line:84% If I'm only measuring final goods, 00:11:39.570 --> 00:11:41.710 align:middle line:84% though, I don't have that problem. 00:11:41.710 --> 00:11:42.630 align:middle line:90% It's still 200. 00:11:42.630 --> 00:11:45.560 align:middle line:84% Doesn't matter that I have the merge lies, and lies in 20 00:11:45.560 --> 00:11:46.400 align:middle line:90% or whatever. 00:11:46.400 --> 00:11:49.250 align:middle line:84% So that tells you that we're going the right way 00:11:49.250 --> 00:11:52.578 align:middle line:84% here because it's a very robust answer. 00:11:52.578 --> 00:11:54.620 align:middle line:84% That is, you don't count the intermediate output. 00:11:54.620 --> 00:11:56.720 align:middle line:84% You only count the final goods, which 00:11:56.720 --> 00:11:59.540 align:middle line:84% are the things that the consumer will buy, 00:11:59.540 --> 00:12:01.340 align:middle line:84% the firms will buy for investment, 00:12:01.340 --> 00:12:02.840 align:middle line:90% and things of that kind-- 00:12:02.840 --> 00:12:06.640 align:middle line:90% that foreigners will buy. 00:12:06.640 --> 00:12:09.640 align:middle line:84% Alternative method is GDP is the sum 00:12:09.640 --> 00:12:15.270 align:middle line:84% of value added in the economy during a given period of time. 00:12:15.270 --> 00:12:17.020 align:middle line:90% What is value added? 00:12:17.020 --> 00:12:19.620 align:middle line:84% The difference between the final goods 00:12:19.620 --> 00:12:22.320 align:middle line:84% produced by a company and the intermediate inputs 00:12:22.320 --> 00:12:25.660 align:middle line:84% it purchased to produce those goods. 00:12:25.660 --> 00:12:31.230 align:middle line:84% OK, so what is the value added of the steel company here? 00:12:31.230 --> 00:12:32.110 align:middle line:90% The answer is there. 00:12:32.110 --> 00:12:35.000 align:middle line:90% But what is the value of it? 00:12:35.000 --> 00:12:35.980 align:middle line:90% It's 100. 00:12:35.980 --> 00:12:37.210 align:middle line:90% How do I know it's 100? 00:12:37.210 --> 00:12:39.870 align:middle line:84% Well, because it's not buying any intermediate input 00:12:39.870 --> 00:12:42.770 align:middle line:90% and the revenue is 100. 00:12:42.770 --> 00:12:45.840 align:middle line:84% So that's the reason I get 100 there. 00:12:45.840 --> 00:12:47.117 align:middle line:90% OK, 100. 00:12:47.117 --> 00:12:48.450 align:middle line:90% There is no intermediate inputs. 00:12:48.450 --> 00:12:51.390 align:middle line:84% What is the value added of the car company? 00:12:51.390 --> 00:12:53.630 align:middle line:84% Well, the revenue on sales is 200. 00:12:53.630 --> 00:12:56.390 align:middle line:84% But it purchased 100 intermediate inputs. 00:12:56.390 --> 00:12:59.040 align:middle line:84% So the value added is 200 minus 100. 00:12:59.040 --> 00:13:01.370 align:middle line:84% The value added of this company is 100. 00:13:01.370 --> 00:13:04.160 align:middle line:84% 100 plus 100, I get my 200 again. 00:13:04.160 --> 00:13:05.600 align:middle line:90% Yeah. 00:13:05.600 --> 00:13:10.348 align:middle line:84% AUDIENCE: Would we consider the wages to be intermediate good? 00:13:10.348 --> 00:13:11.390 align:middle line:90% RICARDO J. CABALLERO: No. 00:13:11.390 --> 00:13:12.300 align:middle line:90% Those are not goods. 00:13:12.300 --> 00:13:14.430 align:middle line:90% Those are factors of production. 00:13:14.430 --> 00:13:17.970 align:middle line:90% 00:13:17.970 --> 00:13:20.240 align:middle line:84% Their machines in that factory that are helping you 00:13:20.240 --> 00:13:22.310 align:middle line:84% produce things, that's a service of the machine. 00:13:22.310 --> 00:13:23.370 align:middle line:90% It's capital. 00:13:23.370 --> 00:13:24.780 align:middle line:84% That's not an intermediate input. 00:13:24.780 --> 00:13:27.710 align:middle line:84% An intermediate input is another good or service 00:13:27.710 --> 00:13:32.010 align:middle line:84% that you buy for the purpose of producing that good. 00:13:32.010 --> 00:13:35.220 align:middle line:90% So workers, no. 00:13:35.220 --> 00:13:38.660 align:middle line:84% The workers are working inside your company and so on. 00:13:38.660 --> 00:13:42.840 align:middle line:84% If the work was produced, was outsourced 00:13:42.840 --> 00:13:45.150 align:middle line:84% and you had another company that produces something 00:13:45.150 --> 00:13:46.918 align:middle line:84% that you use from those workers, that 00:13:46.918 --> 00:13:48.210 align:middle line:90% would be an intermediate input. 00:13:48.210 --> 00:13:50.877 align:middle line:84% But you would have to count the value added of the companies you 00:13:50.877 --> 00:13:53.550 align:middle line:90% have outsourced to. 00:13:53.550 --> 00:13:56.190 align:middle line:90% So that's method two. 00:13:56.190 --> 00:13:58.320 align:middle line:90% And you see we get exactly 200. 00:13:58.320 --> 00:14:00.518 align:middle line:84% Those two methods are called production methods. 00:14:00.518 --> 00:14:02.060 align:middle line:84% There are different ways of measuring 00:14:02.060 --> 00:14:04.030 align:middle line:90% the production of the economy. 00:14:04.030 --> 00:14:06.940 align:middle line:84% The third method, and the last one, 00:14:06.940 --> 00:14:10.150 align:middle line:84% is an income method, which means, 00:14:10.150 --> 00:14:14.960 align:middle line:84% look, all that is produced has to be earned by someone-- 00:14:14.960 --> 00:14:17.150 align:middle line:84% the workers, the owners of capital. 00:14:17.150 --> 00:14:18.590 align:middle line:90% Somebody has to own that. 00:14:18.590 --> 00:14:23.170 align:middle line:84% If the firms sell collectively $200, those $200 00:14:23.170 --> 00:14:25.210 align:middle line:90% have to be allocated to someone. 00:14:25.210 --> 00:14:28.060 align:middle line:84% Someone means workers, the owners 00:14:28.060 --> 00:14:31.720 align:middle line:84% of capital of the firms, or in realistic economies, 00:14:31.720 --> 00:14:32.700 align:middle line:90% the government. 00:14:32.700 --> 00:14:34.580 align:middle line:84% You pay taxes and things of that kind. 00:14:34.580 --> 00:14:36.622 align:middle line:84% OK, we're not going to worry about the government 00:14:36.622 --> 00:14:37.890 align:middle line:90% for a while. 00:14:37.890 --> 00:14:40.890 align:middle line:84% So that's an alternative method, is method three. 00:14:40.890 --> 00:14:42.820 align:middle line:90% You just sum the incomes. 00:14:42.820 --> 00:14:44.520 align:middle line:84% So who are the factors of production 00:14:44.520 --> 00:14:46.130 align:middle line:90% here related to your question? 00:14:46.130 --> 00:14:48.310 align:middle line:84% In this, there is no government here, no taxes. 00:14:48.310 --> 00:14:52.140 align:middle line:84% So we have only workers and profits and the capital, 00:14:52.140 --> 00:14:53.580 align:middle line:90% the owners of the company. 00:14:53.580 --> 00:14:57.720 align:middle line:90% Wages is 80 plus 70, is 150. 00:14:57.720 --> 00:15:01.170 align:middle line:90% Profits is 20 plus 30, 50. 00:15:01.170 --> 00:15:06.130 align:middle line:84% 150 in wages plus 15 profit gives you back your 200. 00:15:06.130 --> 00:15:09.260 align:middle line:84% OK, so those are the three ways we have of measuring things. 00:15:09.260 --> 00:15:12.160 align:middle line:84% And you see, they give you exactly the same result. Now, 00:15:12.160 --> 00:15:15.420 align:middle line:84% there is something, as I say, from the construction 00:15:15.420 --> 00:15:17.920 align:middle line:84% of national accounts, there is something interesting in what 00:15:17.920 --> 00:15:22.720 align:middle line:84% I just said, which is, look, that production 00:15:22.720 --> 00:15:24.850 align:middle line:90% is the same as income. 00:15:24.850 --> 00:15:27.130 align:middle line:84% That's going to be very important for macro-- 00:15:27.130 --> 00:15:29.550 align:middle line:90% very important for macro. 00:15:29.550 --> 00:15:32.970 align:middle line:84% And it's totally unimportant for micro. 00:15:32.970 --> 00:15:36.150 align:middle line:84% When you're looking at a company, for example, in micro, 00:15:36.150 --> 00:15:39.270 align:middle line:84% and you're looking at a car company by itself, 00:15:39.270 --> 00:15:43.290 align:middle line:84% it is true that the output of that company 00:15:43.290 --> 00:15:46.390 align:middle line:84% becomes income, part for the owners of the company 00:15:46.390 --> 00:15:48.160 align:middle line:90% and part for the workers. 00:15:48.160 --> 00:15:52.780 align:middle line:84% But that income needs not be spent in cars. 00:15:52.780 --> 00:15:55.930 align:middle line:84% Can be spent in food and entertainment and whatever. 00:15:55.930 --> 00:15:57.963 align:middle line:90% Not so in macro. 00:15:57.963 --> 00:15:59.630 align:middle line:84% Because what else are you going to spend 00:15:59.630 --> 00:16:02.210 align:middle line:84% it to than in the same good that you're producing 00:16:02.210 --> 00:16:03.830 align:middle line:90% in the aggregate good? 00:16:03.830 --> 00:16:05.280 align:middle line:90% So it's very interesting. 00:16:05.280 --> 00:16:08.150 align:middle line:84% That's a very distinctive feature of macro 00:16:08.150 --> 00:16:10.860 align:middle line:84% that is not present in micro, is that the income has 00:16:10.860 --> 00:16:12.110 align:middle line:90% to be spent in the same goods. 00:16:12.110 --> 00:16:13.790 align:middle line:84% If the economy is closed, later on, 00:16:13.790 --> 00:16:15.720 align:middle line:84% we're going to open the economy to the rest of the world. 00:16:15.720 --> 00:16:18.053 align:middle line:84% And then you buy some Chinese goods and blah blah, blah. 00:16:18.053 --> 00:16:22.550 align:middle line:84% But if you keep it close, hey, you are not going to buy cars. 00:16:22.550 --> 00:16:23.550 align:middle line:90% That's what you work on. 00:16:23.550 --> 00:16:24.967 align:middle line:84% But you're going to have to buy it 00:16:24.967 --> 00:16:27.410 align:middle line:84% in the single good of the economy, which 00:16:27.410 --> 00:16:30.240 align:middle line:84% is a sum of all the goods that we consume in average. 00:16:30.240 --> 00:16:32.940 align:middle line:84% That's going to be very important. 00:16:32.940 --> 00:16:36.900 align:middle line:84% Anyways, this time this stuff moving in the right direction. 00:16:36.900 --> 00:16:38.860 align:middle line:90% OK, so that's, that. 00:16:38.860 --> 00:16:43.420 align:middle line:84% Now you know what GDP is and the different ways of measuring. 00:16:43.420 --> 00:16:47.860 align:middle line:84% You're going to have to remember that for p set one 00:16:47.860 --> 00:16:49.390 align:middle line:90% and for quiz 1. 00:16:49.390 --> 00:16:51.510 align:middle line:84% And you might as well forget it for the future. 00:16:51.510 --> 00:16:52.630 align:middle line:84% It's good that you understand the concept, 00:16:52.630 --> 00:16:54.380 align:middle line:84% but it's different ways of constructing 00:16:54.380 --> 00:16:56.750 align:middle line:90% that's not important. 00:16:56.750 --> 00:16:59.150 align:middle line:84% Second thing we need to worry about 00:16:59.150 --> 00:17:02.900 align:middle line:84% is that whenever you're thinking about the output of an economy, 00:17:02.900 --> 00:17:05.180 align:middle line:84% you're really trying to think about the real output, 00:17:05.180 --> 00:17:08.390 align:middle line:84% meaning the number of cars and number of machines and so on. 00:17:08.390 --> 00:17:10.470 align:middle line:84% But you have inflation, for example. 00:17:10.470 --> 00:17:12.660 align:middle line:84% Then the prices of these things are growing. 00:17:12.660 --> 00:17:16.099 align:middle line:84% And so the total revenue on sales is growing. 00:17:16.099 --> 00:17:17.730 align:middle line:90% But they don't mean the same. 00:17:17.730 --> 00:17:20.217 align:middle line:84% And we want to certainly separate these two things. 00:17:20.217 --> 00:17:21.800 align:middle line:84% And for that reason, we have a concept 00:17:21.800 --> 00:17:25.369 align:middle line:84% which is called nominal GDP and another one 00:17:25.369 --> 00:17:27.109 align:middle line:90% which is called real GDP. 00:17:27.109 --> 00:17:29.600 align:middle line:84% Nominal GDP is the simplest thing on Earth. 00:17:29.600 --> 00:17:33.420 align:middle line:84% It's essentially we have only one final goods company there 00:17:33.420 --> 00:17:34.310 align:middle line:90% which was carved out. 00:17:34.310 --> 00:17:36.920 align:middle line:84% Imagine you have cars, refrigerators, 00:17:36.920 --> 00:17:37.890 align:middle line:90% many, many things. 00:17:37.890 --> 00:17:40.610 align:middle line:84% Nominal GDP is simply the sum of the final goods 00:17:40.610 --> 00:17:43.830 align:middle line:84% and you multiply them by the current price. 00:17:43.830 --> 00:17:46.393 align:middle line:84% And that gives you the dollar GDP that you have. 00:17:46.393 --> 00:17:48.060 align:middle line:84% I don't know what it is in the US today. 00:17:48.060 --> 00:17:52.730 align:middle line:84% You could check it, but it's $24 trillion or something like that. 00:17:52.730 --> 00:17:54.080 align:middle line:90% So that's it. 00:17:54.080 --> 00:17:56.900 align:middle line:84% P times Q, prices times quantity. 00:17:56.900 --> 00:18:00.660 align:middle line:84% And you sum across all the final goods, as we do. 00:18:00.660 --> 00:18:02.350 align:middle line:84% That's one way of calculating things. 00:18:02.350 --> 00:18:03.720 align:middle line:90% That's nominal GDP. 00:18:03.720 --> 00:18:06.583 align:middle line:84% But again, what we really care about is 00:18:06.583 --> 00:18:08.250 align:middle line:84% we're going to care a lot about later on 00:18:08.250 --> 00:18:10.780 align:middle line:84% is how that economy is doing over time. 00:18:10.780 --> 00:18:11.500 align:middle line:90% Is it growing? 00:18:11.500 --> 00:18:12.680 align:middle line:90% Is it not growing? 00:18:12.680 --> 00:18:15.490 align:middle line:84% Nominal GDP can grow for two different reasons. 00:18:15.490 --> 00:18:18.480 align:middle line:84% It can grow because the economy is really 00:18:18.480 --> 00:18:19.790 align:middle line:90% becoming more productive. 00:18:19.790 --> 00:18:23.710 align:middle line:84% It's producing more goods, or because prices are going up. 00:18:23.710 --> 00:18:27.677 align:middle line:84% Now, at this moment, nominal GDP is growing very fast in the US, 00:18:27.677 --> 00:18:30.010 align:middle line:84% despite the fact that we may have a recession this year. 00:18:30.010 --> 00:18:30.730 align:middle line:90% We don't know. 00:18:30.730 --> 00:18:34.260 align:middle line:84% But nobody has any doubt that nominal GDP will grow because we 00:18:34.260 --> 00:18:35.620 align:middle line:90% have lots of inflation. 00:18:35.620 --> 00:18:37.870 align:middle line:84% And so you want to separate these two things. 00:18:37.870 --> 00:18:41.580 align:middle line:84% And the thing that removes the inflation component 00:18:41.580 --> 00:18:44.930 align:middle line:90% is what we call real GDP. 00:18:44.930 --> 00:18:48.410 align:middle line:84% And real GDP is you hear the word only GDP. 00:18:48.410 --> 00:18:50.870 align:middle line:84% And that was produced by somebody who understand 00:18:50.870 --> 00:18:52.370 align:middle line:90% what he's talking about. 00:18:52.370 --> 00:18:54.680 align:middle line:90% GDP really means real GDP. 00:18:54.680 --> 00:18:57.710 align:middle line:84% Just hear GDP, people are trying to say 00:18:57.710 --> 00:18:59.180 align:middle line:90% the output of the economy. 00:18:59.180 --> 00:19:01.580 align:middle line:90% Well, that's real GDP. 00:19:01.580 --> 00:19:04.910 align:middle line:90% And the real GDP is computed-- 00:19:04.910 --> 00:19:05.580 align:middle line:90% many tricks. 00:19:05.580 --> 00:19:12.350 align:middle line:84% But essentially what you do is you also sum across 00:19:12.350 --> 00:19:14.870 align:middle line:90% all the goods. 00:19:14.870 --> 00:19:18.290 align:middle line:84% You also sum across the goods, but you use constant prices, not 00:19:18.290 --> 00:19:22.100 align:middle line:84% the prices of that point in time necessarily. 00:19:22.100 --> 00:19:24.930 align:middle line:84% So I'm going to give you a very concrete example. 00:19:24.930 --> 00:19:27.560 align:middle line:84% But before doing that, for this course, 00:19:27.560 --> 00:19:30.590 align:middle line:84% we're going to call nominal GDP and all nominal variables 00:19:30.590 --> 00:19:31.340 align:middle line:90% are going to have. 00:19:31.340 --> 00:19:32.930 align:middle line:90% That's what the textbook does. 00:19:32.930 --> 00:19:35.000 align:middle line:84% They're going to have a dollar sign in front. 00:19:35.000 --> 00:19:37.400 align:middle line:90% So that's nominal GDP. 00:19:37.400 --> 00:19:40.560 align:middle line:84% GDP is going to be y without the dollar. 00:19:40.560 --> 00:19:42.140 align:middle line:90% That's real GDP. 00:19:42.140 --> 00:19:45.560 align:middle line:84% For the first part of the course up to quiz one, 00:19:45.560 --> 00:19:48.320 align:middle line:84% we're going to worry very little about nominal things 00:19:48.320 --> 00:19:50.750 align:middle line:84% because we're going to have prices completely fixed. 00:19:50.750 --> 00:19:53.330 align:middle line:84% But you still need to know the concept. 00:19:53.330 --> 00:19:55.460 align:middle line:90% And that's real GDP. 00:19:55.460 --> 00:20:02.820 align:middle line:84% So now let me give you an example. 00:20:02.820 --> 00:20:07.345 align:middle line:84% So suppose you have this, this simple economy we had before. 00:20:07.345 --> 00:20:08.970 align:middle line:84% We're just going to look at final goods 00:20:08.970 --> 00:20:14.760 align:middle line:84% because as we need to look at to construct GDP. 00:20:14.760 --> 00:20:17.670 align:middle line:84% And so this economy produces cars, and supposedly produces 00:20:17.670 --> 00:20:25.370 align:middle line:84% 10 cars in 2011, 12 cars in 2012, and 13 cars in 2013. 00:20:25.370 --> 00:20:28.740 align:middle line:84% But suppose the price of a car is what you see there, 20,000, 00:20:28.740 --> 00:20:31.360 align:middle line:90% 24,000, and 26,000. 00:20:31.360 --> 00:20:36.405 align:middle line:84% Nominal GDP is simply the product of this times that. 00:20:36.405 --> 00:20:38.960 align:middle line:90% That gives you $200,000. 00:20:38.960 --> 00:20:42.400 align:middle line:84% 12 cars times $35,000 gives you 288 and so on. 00:20:42.400 --> 00:20:44.510 align:middle line:90% That's nominal GDP. 00:20:44.510 --> 00:20:50.750 align:middle line:84% Real GDP, you have to pick which price you want to use. 00:20:50.750 --> 00:20:52.010 align:middle line:90% But only use one. 00:20:52.010 --> 00:20:53.910 align:middle line:90% And don't vary it over time. 00:20:53.910 --> 00:20:59.350 align:middle line:84% So in this particular case we picked 2012. 00:20:59.350 --> 00:21:06.100 align:middle line:84% So that means when you say GDP, real GDP at 2012, base 2012, 00:21:06.100 --> 00:21:10.160 align:middle line:84% were 2012 prices, means you're using the prices of 2012. 00:21:10.160 --> 00:21:11.180 align:middle line:90% You don't vary that. 00:21:11.180 --> 00:21:13.120 align:middle line:84% You let quantities change over time. 00:21:13.120 --> 00:21:14.810 align:middle line:90% But the prices remain fixed. 00:21:14.810 --> 00:21:23.060 align:middle line:84% So in this case, real GDP at 2012 is, 10 cars times 25,000. 00:21:23.060 --> 00:21:25.570 align:middle line:90% That gives you 240,000. 00:21:25.570 --> 00:21:29.060 align:middle line:90% 12 cars times 24,000, 288. 00:21:29.060 --> 00:21:30.080 align:middle line:90% This is interesting. 00:21:30.080 --> 00:21:32.750 align:middle line:84% For this year, nominal GDP is the same as real GDP. 00:21:32.750 --> 00:21:35.720 align:middle line:90% Why is that? 00:21:35.720 --> 00:21:36.220 align:middle line:90% An accident? 00:21:36.220 --> 00:21:38.742 align:middle line:90% 00:21:38.742 --> 00:21:41.200 align:middle line:84% AUDIENCE: Because you used the base year as the [INAUDIBLE] 00:21:41.200 --> 00:21:41.670 align:middle line:90% RICARDO J. CABALLERO: Exactly. 00:21:41.670 --> 00:21:43.570 align:middle line:90% We're using that as a base year. 00:21:43.570 --> 00:21:47.490 align:middle line:84% So nominal GDP will always be equal to real GDP 00:21:47.490 --> 00:21:48.910 align:middle line:90% at the base year. 00:21:48.910 --> 00:21:51.090 align:middle line:84% That's the year we're picking as the base 00:21:51.090 --> 00:21:54.200 align:middle line:84% because those are the prices we're using. 00:21:54.200 --> 00:21:56.220 align:middle line:90% I got about 2013. 00:21:56.220 --> 00:21:58.940 align:middle line:90% Well, is not 26,000 times 13. 00:21:58.940 --> 00:22:00.660 align:middle line:90% Is 24,000 times 13. 00:22:00.660 --> 00:22:02.160 align:middle line:90% So we get 312. 00:22:02.160 --> 00:22:04.250 align:middle line:84% And it's obvious here that real GDP is 00:22:04.250 --> 00:22:06.860 align:middle line:90% growing less than nominal GDP. 00:22:06.860 --> 00:22:08.130 align:middle line:90% Why is that? 00:22:08.130 --> 00:22:10.410 align:middle line:84% Well, because this economy has inflation. 00:22:10.410 --> 00:22:12.440 align:middle line:84% Prices are rising over time and we 00:22:12.440 --> 00:22:15.620 align:middle line:84% want to remove that when we look at the real concept. 00:22:15.620 --> 00:22:17.410 align:middle line:84% The real concept removes the price effect. 00:22:17.410 --> 00:22:20.580 align:middle line:90% 00:22:20.580 --> 00:22:22.230 align:middle line:84% There are times in which you don't 00:22:22.230 --> 00:22:24.850 align:middle line:84% want to remove all that price effect. 00:22:24.850 --> 00:22:26.850 align:middle line:84% And it happens a lot, for example, in computers. 00:22:26.850 --> 00:22:30.150 align:middle line:84% Because sometimes the increase in the price of the computer 00:22:30.150 --> 00:22:32.280 align:middle line:84% is simply because the computer is better 00:22:32.280 --> 00:22:34.270 align:middle line:84% and you want to correct for quality and so on. 00:22:34.270 --> 00:22:36.030 align:middle line:84% But again, that's not something you need 00:22:36.030 --> 00:22:37.955 align:middle line:90% to worry about in this course. 00:22:37.955 --> 00:22:43.180 align:middle line:90% 00:22:43.180 --> 00:22:44.830 align:middle line:84% Maybe some of you are deciding the pace 00:22:44.830 --> 00:22:46.390 align:middle line:90% at which you want me to move. 00:22:46.390 --> 00:22:49.810 align:middle line:84% I'm really puzzled by this stuff. 00:22:49.810 --> 00:22:51.290 align:middle line:90% This is from the book. 00:22:51.290 --> 00:22:55.780 align:middle line:84% And you see what happened in the US, with nominal and real GDP, 00:22:55.780 --> 00:22:57.870 align:middle line:90% with base year 2012. 00:22:57.870 --> 00:23:00.250 align:middle line:84% So as I said before, these two curves, 00:23:00.250 --> 00:23:02.810 align:middle line:84% one is nominal GDP, the red line. 00:23:02.810 --> 00:23:04.630 align:middle line:90% The blue line is real GDP. 00:23:04.630 --> 00:23:06.730 align:middle line:90% We're using base year 2012. 00:23:06.730 --> 00:23:08.740 align:middle line:84% So at that point, they have to be the same. 00:23:08.740 --> 00:23:12.550 align:middle line:84% And what you see very clearly there 00:23:12.550 --> 00:23:19.230 align:middle line:84% is that the blue line, real GDP, is flatter than the red line. 00:23:19.230 --> 00:23:21.420 align:middle line:90% Why is that? 00:23:21.420 --> 00:23:22.846 align:middle line:90% Why is the-- yeah. 00:23:22.846 --> 00:23:25.728 align:middle line:84% AUDIENCE: Real GDP before was lower beacuse [INAUDIBLE] GDP-- 00:23:25.728 --> 00:23:28.270 align:middle line:84% I mean this particular market probably [INAUDIBLE] inflation. 00:23:28.270 --> 00:23:29.380 align:middle line:84% RICARDO J. CABALLERO: This inflation. 00:23:29.380 --> 00:23:31.130 align:middle line:84% By the way, I do have a reference for you. 00:23:31.130 --> 00:23:32.300 align:middle line:90% So ask me after the-- 00:23:32.300 --> 00:23:34.170 align:middle line:90% OK, good. 00:23:34.170 --> 00:23:39.190 align:middle line:84% And anyway, so yeah, in the US, between 1960 and 2018, 00:23:39.190 --> 00:23:42.820 align:middle line:84% nominal GDP increased by a factor of 38, while real GDP 00:23:42.820 --> 00:23:44.420 align:middle line:90% by a factor of 5.7. 00:23:44.420 --> 00:23:45.170 align:middle line:90% Big difference. 00:23:45.170 --> 00:23:47.410 align:middle line:84% So you better be careful when you 00:23:47.410 --> 00:23:50.140 align:middle line:84% look at GDP that you are removing inflation, especially-- 00:23:50.140 --> 00:23:52.720 align:middle line:84% I mean, if you were to look in Argentina, 00:23:52.720 --> 00:23:55.210 align:middle line:84% these guys have had a recession, a chronic recession 00:23:55.210 --> 00:23:56.980 align:middle line:90% for a long time, big recession. 00:23:56.980 --> 00:24:00.160 align:middle line:84% But nominal GDP is exploding because they have 10,000% 00:24:00.160 --> 00:24:01.780 align:middle line:90% inflation. 00:24:01.780 --> 00:24:09.820 align:middle line:84% So it makes a big difference, especially over time. 00:24:09.820 --> 00:24:12.670 align:middle line:84% This is just so you get the picture, the complete picture 00:24:12.670 --> 00:24:13.280 align:middle line:90% for the US. 00:24:13.280 --> 00:24:18.280 align:middle line:84% This is GDP growth in the US since we have national accounts. 00:24:18.280 --> 00:24:22.470 align:middle line:84% And some noticeable things-- well, again, recessions. 00:24:22.470 --> 00:24:23.710 align:middle line:90% This was a big recession. 00:24:23.710 --> 00:24:28.060 align:middle line:84% Remember, we call this the Great Recession, big recession. 00:24:28.060 --> 00:24:30.570 align:middle line:90% And this is COVID. 00:24:30.570 --> 00:24:32.010 align:middle line:90% And then this is 2020. 00:24:32.010 --> 00:24:35.360 align:middle line:84% And then they bounce back in 2021 when we reopen the economy. 00:24:35.360 --> 00:24:35.920 align:middle line:90% Big growth. 00:24:35.920 --> 00:24:37.050 align:middle line:90% But that's very anomalous. 00:24:37.050 --> 00:24:38.800 align:middle line:84% I mean, it was a very weird shock. 00:24:38.800 --> 00:24:44.430 align:middle line:84% But see, these are all the shaded areas are recessions. 00:24:44.430 --> 00:24:48.210 align:middle line:84% Recessions are defined as slightly more complicated way 00:24:48.210 --> 00:24:48.790 align:middle line:90% than that. 00:24:48.790 --> 00:24:53.310 align:middle line:84% But one sort of popular way of describing recession 00:24:53.310 --> 00:24:57.180 align:middle line:84% is as an episode where you have two consecutive quarters 00:24:57.180 --> 00:24:58.210 align:middle line:90% of negative inflation. 00:24:58.210 --> 00:25:00.210 align:middle line:84% That's not the formal definition of a recession, 00:25:00.210 --> 00:25:01.740 align:middle line:90% but it's pretty close. 00:25:01.740 --> 00:25:07.780 align:middle line:84% And so that's what you have there. 00:25:07.780 --> 00:25:11.260 align:middle line:84% Another concept is unemployment rate-- 00:25:11.260 --> 00:25:12.290 align:middle line:90% the unemployment rate. 00:25:12.290 --> 00:25:13.150 align:middle line:90% So that's GDP. 00:25:13.150 --> 00:25:15.020 align:middle line:84% And in the first part of the course, 00:25:15.020 --> 00:25:16.850 align:middle line:84% we want to worry a lot about that. 00:25:16.850 --> 00:25:21.830 align:middle line:84% We're going to build a model on how to find equilibrium GDP. 00:25:21.830 --> 00:25:24.430 align:middle line:84% And we're going to see what happens with fiscal policy, 00:25:24.430 --> 00:25:27.010 align:middle line:84% with monetary policy, how does equilibrium 00:25:27.010 --> 00:25:29.980 align:middle line:84% GDP, macroeconomic output, changes 00:25:29.980 --> 00:25:33.040 align:middle line:84% with different forms of policies or when consumers 00:25:33.040 --> 00:25:34.875 align:middle line:90% get scared or stuff like that. 00:25:34.875 --> 00:25:39.010 align:middle line:90% 00:25:39.010 --> 00:25:40.397 align:middle line:84% What about the unemployment rate? 00:25:40.397 --> 00:25:41.980 align:middle line:84% The unemployment rate is not something 00:25:41.980 --> 00:25:45.250 align:middle line:84% we want to worry a lot about until the second part 00:25:45.250 --> 00:25:46.700 align:middle line:90% of the course, after quiz 1. 00:25:46.700 --> 00:25:49.690 align:middle line:84% But still, I want to get it over with these definitions. 00:25:49.690 --> 00:25:51.590 align:middle line:90% So what is employment? 00:25:51.590 --> 00:25:53.330 align:middle line:84% It's a number of people who have a job. 00:25:53.330 --> 00:25:54.830 align:middle line:90% That's easy. 00:25:54.830 --> 00:25:59.030 align:middle line:84% Unemployment is slightly less easy because it's first of all, 00:25:59.030 --> 00:26:02.100 align:middle line:84% obviously to be unemployed, you cannot have a job. 00:26:02.100 --> 00:26:04.730 align:middle line:84% But it's not enough that you don't have a job. 00:26:04.730 --> 00:26:07.800 align:middle line:90% 00:26:07.800 --> 00:26:11.640 align:middle line:84% An unemployed person is somebody that doesn't have a job 00:26:11.640 --> 00:26:14.300 align:middle line:90% and is looking for one. 00:26:14.300 --> 00:26:19.440 align:middle line:84% And not all unemployed people look for a job. 00:26:19.440 --> 00:26:23.440 align:middle line:84% Not all non-employed people are looking for jobs. 00:26:23.440 --> 00:26:28.450 align:middle line:84% So to be unemployed, you need to not have a job 00:26:28.450 --> 00:26:30.610 align:middle line:90% and be looking for one. 00:26:30.610 --> 00:26:33.400 align:middle line:84% The labor force, what we call the labor force, 00:26:33.400 --> 00:26:37.840 align:middle line:84% is the sum of those two groups, the employed and the unemployed 00:26:37.840 --> 00:26:40.550 align:middle line:90% that would like to get a job. 00:26:40.550 --> 00:26:44.878 align:middle line:84% The unemployment rate, which is something 00:26:44.878 --> 00:26:46.420 align:middle line:84% I showed you in the previous lecture, 00:26:46.420 --> 00:26:49.660 align:middle line:84% is just a ratio of these two concepts, the unemployed 00:26:49.660 --> 00:26:51.340 align:middle line:90% over the labor force. 00:26:51.340 --> 00:26:55.330 align:middle line:84% Notice, over the labor force, not population, the labor force, 00:26:55.330 --> 00:26:57.430 align:middle line:84% which is the sum of the employed, 00:26:57.430 --> 00:27:00.970 align:middle line:84% and those that are unemployed that do not have a job 00:27:00.970 --> 00:27:02.500 align:middle line:90% and are looking for a job. 00:27:02.500 --> 00:27:09.400 align:middle line:84% And how is unemployment measured in the US? 00:27:09.400 --> 00:27:10.660 align:middle line:90% It's mostly a survey. 00:27:10.660 --> 00:27:14.050 align:middle line:90% And I have the info there. 00:27:14.050 --> 00:27:17.230 align:middle line:84% It's called the CPS, the Current Population Survey that 00:27:17.230 --> 00:27:19.210 align:middle line:90% consults lots of households. 00:27:19.210 --> 00:27:21.640 align:middle line:84% And they ask them about the employment status, 00:27:21.640 --> 00:27:24.057 align:middle line:84% whether they have been looking for a job over the last two 00:27:24.057 --> 00:27:25.030 align:middle line:90% weeks or not and so on. 00:27:25.030 --> 00:27:28.100 align:middle line:84% And that's the way we come up with the number. 00:27:28.100 --> 00:27:31.240 align:middle line:84% As I said before, those that do not have a job 00:27:31.240 --> 00:27:33.010 align:middle line:84% but are not looking for a job, they 00:27:33.010 --> 00:27:35.380 align:middle line:84% haven't been looking for a job in the last two weeks, 00:27:35.380 --> 00:27:38.220 align:middle line:84% are called not in the labor force. 00:27:38.220 --> 00:27:39.490 align:middle line:90% That's what we say. 00:27:39.490 --> 00:27:42.490 align:middle line:84% Now, these concepts are between unemployed and not 00:27:42.490 --> 00:27:47.270 align:middle line:84% in the labor force is not that clear. 00:27:47.270 --> 00:27:48.762 align:middle line:84% We look at the unemployment rate. 00:27:48.762 --> 00:27:50.470 align:middle line:84% But we also tend to look at those people, 00:27:50.470 --> 00:27:52.940 align:middle line:84% as well, because many people are simply discouraged. 00:27:52.940 --> 00:27:54.610 align:middle line:84% They would like to get a job, but they 00:27:54.610 --> 00:27:57.530 align:middle line:84% have been looking for a while and they haven't found it. 00:27:57.530 --> 00:28:01.540 align:middle line:84% And it happens that there is a lot more discouraged workers 00:28:01.540 --> 00:28:03.550 align:middle line:90% during recessions. 00:28:03.550 --> 00:28:05.233 align:middle line:84% And you're having a big recession. 00:28:05.233 --> 00:28:06.650 align:middle line:84% It's very difficult to find a job. 00:28:06.650 --> 00:28:09.120 align:middle line:84% So it's very easy to get discouraged. 00:28:09.120 --> 00:28:11.840 align:middle line:84% And so that's the reason we look at broader measures of non 00:28:11.840 --> 00:28:14.390 align:middle line:84% employment than the typical unemployment rate, 00:28:14.390 --> 00:28:16.730 align:middle line:90% because a lot of those-- 00:28:16.730 --> 00:28:18.170 align:middle line:90% not in the labor force. 00:28:18.170 --> 00:28:20.480 align:middle line:84% People do not have a job and are not looking for a job, 00:28:20.480 --> 00:28:21.540 align:middle line:90% are really discouraged. 00:28:21.540 --> 00:28:23.840 align:middle line:90% They just gave up after a while. 00:28:23.840 --> 00:28:27.538 align:middle line:84% The participation rate-- and that's 00:28:27.538 --> 00:28:29.580 align:middle line:84% a very important concept-- is something you would 00:28:29.580 --> 00:28:30.930 align:middle line:90% have ignored most of the time. 00:28:30.930 --> 00:28:32.850 align:middle line:84% It's very critical at this moment. 00:28:32.850 --> 00:28:35.490 align:middle line:84% The participation rate is the ratio 00:28:35.490 --> 00:28:40.260 align:middle line:84% of the labor force to the total population of working age. 00:28:40.260 --> 00:28:43.720 align:middle line:84% And you exclude people in prison and stuff like that. 00:28:43.720 --> 00:28:48.060 align:middle line:84% But so it's labor force, which is 00:28:48.060 --> 00:28:50.340 align:middle line:84% the sum of the employed and unemployed, 00:28:50.340 --> 00:28:54.110 align:middle line:84% divided by those that could work in principle. 00:28:54.110 --> 00:28:59.400 align:middle line:84% And that's what we call the participation rate. 00:28:59.400 --> 00:29:00.860 align:middle line:90% How do these numbers look? 00:29:00.860 --> 00:29:05.490 align:middle line:84% I showed you this picture in the previous lecture. 00:29:05.490 --> 00:29:07.440 align:middle line:84% And that's the unemployment rate. 00:29:07.440 --> 00:29:11.440 align:middle line:84% It skyrocketed during COVID, but it has declined enormously. 00:29:11.440 --> 00:29:13.590 align:middle line:84% And as I said in the previous lecture, 00:29:13.590 --> 00:29:16.020 align:middle line:84% a big issue is that the unemployment rate 00:29:16.020 --> 00:29:17.280 align:middle line:90% today is extremely low. 00:29:17.280 --> 00:29:22.350 align:middle line:84% We haven't seen levels like this since the early '60s. 00:29:22.350 --> 00:29:26.160 align:middle line:84% Unemployment rate today is at record low levels. 00:29:26.160 --> 00:29:27.930 align:middle line:90% And that's a problem. 00:29:27.930 --> 00:29:28.810 align:middle line:90% Sounds wonderful. 00:29:28.810 --> 00:29:31.782 align:middle line:84% But it's also a problem because we have an inflation problem. 00:29:31.782 --> 00:29:33.240 align:middle line:84% And those two things are connected, 00:29:33.240 --> 00:29:35.460 align:middle line:84% as you will learn later on in the course. 00:29:35.460 --> 00:29:37.750 align:middle line:84% But that's what we have right now. 00:29:37.750 --> 00:29:39.070 align:middle line:90% That's the unemployment rate. 00:29:39.070 --> 00:29:42.750 align:middle line:84% Now, the reason that employment rate is so low, 00:29:42.750 --> 00:29:44.360 align:middle line:90% there are two reasons, really. 00:29:44.360 --> 00:29:48.780 align:middle line:84% One is that there was lots of stimulus policy, fiscal policy, 00:29:48.780 --> 00:29:49.680 align:middle line:90% monetary policy. 00:29:49.680 --> 00:29:51.390 align:middle line:84% So aggregate demand and consumers 00:29:51.390 --> 00:29:55.290 align:middle line:84% were fed up with being locked out of restaurants and trips 00:29:55.290 --> 00:29:58.740 align:middle line:84% and so on for two years, decided to travel and so on. 00:29:58.740 --> 00:30:00.940 align:middle line:90% And they had lots of savings. 00:30:00.940 --> 00:30:05.680 align:middle line:84% The US consumer accumulated excess savings of $2.7 trillion. 00:30:05.680 --> 00:30:07.450 align:middle line:84% And now they're spending the stuff. 00:30:07.450 --> 00:30:10.240 align:middle line:84% China, a big reason why people expect a big bounce 00:30:10.240 --> 00:30:12.940 align:middle line:84% back is because they also had a lot of savings 00:30:12.940 --> 00:30:15.950 align:middle line:84% because they were locked up for quite some time. 00:30:15.950 --> 00:30:20.720 align:middle line:84% So as a result of that, there is lots of demand for goods. 00:30:20.720 --> 00:30:22.480 align:middle line:84% And as we learn in the next lecture, 00:30:22.480 --> 00:30:25.480 align:middle line:84% that means lots of output, as well. 00:30:25.480 --> 00:30:32.700 align:middle line:84% But the second reason is the following. 00:30:32.700 --> 00:30:35.340 align:middle line:90% 00:30:35.340 --> 00:30:38.370 align:middle line:90% It's the participation rate. 00:30:38.370 --> 00:30:41.550 align:middle line:84% People haven't come back to work in the magnitude 00:30:41.550 --> 00:30:42.570 align:middle line:90% that we expected. 00:30:42.570 --> 00:30:45.450 align:middle line:84% So that's the participation rate in the US. 00:30:45.450 --> 00:30:49.720 align:middle line:84% Remember, the participation rate is labor force over all those 00:30:49.720 --> 00:30:51.300 align:middle line:90% that could work, in principle. 00:30:51.300 --> 00:30:54.360 align:middle line:90% 00:30:54.360 --> 00:30:55.720 align:middle line:90% What do you think is this? 00:30:55.720 --> 00:30:58.560 align:middle line:84% Look at the participation rate used to be in the '60s, below 00:30:58.560 --> 00:30:59.410 align:middle line:90% '60s. 00:30:59.410 --> 00:31:01.530 align:middle line:84% And then there was a big rise in the participation 00:31:01.530 --> 00:31:03.620 align:middle line:90% rate in the US. 00:31:03.620 --> 00:31:06.287 align:middle line:84% What do you think is this due to? 00:31:06.287 --> 00:31:07.870 align:middle line:84% AUDIENCE: Women joining the workforce. 00:31:07.870 --> 00:31:10.360 align:middle line:84% RICARDO J. CABALLERO: Women joining the workforce. 00:31:10.360 --> 00:31:12.350 align:middle line:90% That's what it did. 00:31:12.350 --> 00:31:13.750 align:middle line:90% OK, that's that. 00:31:13.750 --> 00:31:16.970 align:middle line:84% Since then, since this woman did all that they had to do, 00:31:16.970 --> 00:31:17.940 align:middle line:90% we have been declining. 00:31:17.940 --> 00:31:20.990 align:middle line:90% And that's an issue. 00:31:20.990 --> 00:31:25.730 align:middle line:90% But look at what happened here. 00:31:25.730 --> 00:31:28.105 align:middle line:84% Lots of people exit the labor force during COVID. 00:31:28.105 --> 00:31:30.230 align:middle line:84% I mean, you know, they had to take care of the kids 00:31:30.230 --> 00:31:33.330 align:middle line:90% and/or the elderly. 00:31:33.330 --> 00:31:35.370 align:middle line:84% And so people withdrew from the labor force. 00:31:35.370 --> 00:31:36.720 align:middle line:90% They didn't want a job. 00:31:36.720 --> 00:31:38.190 align:middle line:90% It was also discouraging. 00:31:38.190 --> 00:31:40.070 align:middle line:84% It was very difficult to get a job. 00:31:40.070 --> 00:31:41.580 align:middle line:84% I mean, you work in a restaurant. 00:31:41.580 --> 00:31:43.710 align:middle line:84% It was impossible to get a job in a restaurant. 00:31:43.710 --> 00:31:50.450 align:middle line:84% But everyone expected this to recover to the previous level 00:31:50.450 --> 00:31:52.150 align:middle line:90% and it hasn't. 00:31:52.150 --> 00:31:55.810 align:middle line:84% So you see that the participation rate has not come 00:31:55.810 --> 00:31:58.130 align:middle line:90% back to the levels pre-COVID. 00:31:58.130 --> 00:31:59.630 align:middle line:90% It's substantially below. 00:31:59.630 --> 00:32:01.600 align:middle line:84% And that's one of the reasons, you 00:32:01.600 --> 00:32:04.120 align:middle line:84% know, that restaurants complain that they don't have workers 00:32:04.120 --> 00:32:07.540 align:middle line:84% and so on and so forth, is that many people haven't come back 00:32:07.540 --> 00:32:09.210 align:middle line:90% to the labor force. 00:32:09.210 --> 00:32:11.080 align:middle line:84% We thought this was going to be temporary. 00:32:11.080 --> 00:32:13.780 align:middle line:84% Now, there is a concern that a lot of that is really permanent. 00:32:13.780 --> 00:32:18.710 align:middle line:84% People that decided that life at home wasn't that bad after all. 00:32:18.710 --> 00:32:22.810 align:middle line:84% Less income, but they spend more time with the kids or whatever. 00:32:22.810 --> 00:32:26.080 align:middle line:90% And that's an issue. 00:32:26.080 --> 00:32:30.150 align:middle line:84% And that's a big reason behind the low unemployment rate. 00:32:30.150 --> 00:32:32.580 align:middle line:84% And the fact that we have all this inflation 00:32:32.580 --> 00:32:35.310 align:middle line:90% has to do with everyone. 00:32:35.310 --> 00:32:38.610 align:middle line:84% In particular, the Fed miscalculated the bounce back 00:32:38.610 --> 00:32:40.310 align:middle line:90% of the participation rate. 00:32:40.310 --> 00:32:45.150 align:middle line:90% 00:32:45.150 --> 00:32:46.920 align:middle line:84% So as I said before, we're not going 00:32:46.920 --> 00:32:50.460 align:middle line:84% to look at labor market issues until the second part 00:32:50.460 --> 00:32:52.840 align:middle line:90% of the course, after quiz one. 00:32:52.840 --> 00:32:54.320 align:middle line:90% And the same is for inflation. 00:32:54.320 --> 00:32:56.112 align:middle line:84% We're not going to look at inflation issues 00:32:56.112 --> 00:33:00.880 align:middle line:84% until the second part of the course because to connect them, 00:33:00.880 --> 00:33:02.617 align:middle line:90% I mean, they are connected. 00:33:02.617 --> 00:33:04.450 align:middle line:84% And we're not going to look at labor markets 00:33:04.450 --> 00:33:08.285 align:middle line:84% until sort of eight lectures from now or so. 00:33:08.285 --> 00:33:10.660 align:middle line:84% But this is an important variable and certainly something 00:33:10.660 --> 00:33:12.670 align:middle line:84% you're facing every single day in the newspapers 00:33:12.670 --> 00:33:14.980 align:middle line:90% and so on-- the inflation rate. 00:33:14.980 --> 00:33:17.890 align:middle line:84% So by inflation, when you hear inflation, 00:33:17.890 --> 00:33:21.010 align:middle line:84% that typically means the sustained rise 00:33:21.010 --> 00:33:23.223 align:middle line:90% in the general level of prices. 00:33:23.223 --> 00:33:24.640 align:middle line:84% So it's not that the price of cars 00:33:24.640 --> 00:33:27.762 align:middle line:84% went up relative to the price of hotels, or now down relative 00:33:27.762 --> 00:33:28.720 align:middle line:90% to the price of hotels. 00:33:28.720 --> 00:33:31.370 align:middle line:84% It's that on average, prices are rising. 00:33:31.370 --> 00:33:33.250 align:middle line:84% That's what we call an inflation. 00:33:33.250 --> 00:33:37.630 align:middle line:90% 00:33:37.630 --> 00:33:41.020 align:middle line:84% We're going to call the price level BT. 00:33:41.020 --> 00:33:43.510 align:middle line:84% And there are many different price levels, as you see. 00:33:43.510 --> 00:33:46.720 align:middle line:84% So the inflation rate, when you hear the inflation rate, 00:33:46.720 --> 00:33:51.160 align:middle line:84% is the rate of change of that price level. 00:33:51.160 --> 00:33:53.938 align:middle line:84% An episode of deflation, the opposite 00:33:53.938 --> 00:33:55.480 align:middle line:84% of what we're experiencing now, where 00:33:55.480 --> 00:33:58.450 align:middle line:84% we're experiencing inflation, is when that inflation rate 00:33:58.450 --> 00:34:00.360 align:middle line:90% is negative. 00:34:00.360 --> 00:34:03.670 align:middle line:84% Japan most prominently has experienced something like that 00:34:03.670 --> 00:34:07.500 align:middle line:84% not now, but experienced it for on and off for the last three 00:34:07.500 --> 00:34:08.760 align:middle line:90% decades or so. 00:34:08.760 --> 00:34:11.842 align:middle line:90% And so what is the price level? 00:34:11.842 --> 00:34:13.300 align:middle line:84% There are many ways of defining it. 00:34:13.300 --> 00:34:15.610 align:middle line:84% And there are many different price levels. 00:34:15.610 --> 00:34:19.840 align:middle line:84% A very popular one is what is called the GDP deflator, 00:34:19.840 --> 00:34:21.850 align:middle line:90% and it's the one you see. 00:34:21.850 --> 00:34:24.100 align:middle line:84% It's never mentioned in the newspapers. 00:34:24.100 --> 00:34:26.420 align:middle line:84% But we economists tend to look at the deflator. 00:34:26.420 --> 00:34:29.920 align:middle line:84% The deflator is nothing else than the ratio of nominal GDP 00:34:29.920 --> 00:34:31.570 align:middle line:90% to real GDP. 00:34:31.570 --> 00:34:34.540 align:middle line:84% Another one is far more popular and more relevant for you as 00:34:34.540 --> 00:34:37.820 align:middle line:84% consumers, is what we call the consumer price index. 00:34:37.820 --> 00:34:39.820 align:middle line:90% That's the CPI. 00:34:39.820 --> 00:34:41.870 align:middle line:90% The CPI, that's what it is. 00:34:41.870 --> 00:34:45.860 align:middle line:84% So you calculate the rate of inflation from the CPI. 00:34:45.860 --> 00:34:47.139 align:middle line:90% You calculate the same way. 00:34:47.139 --> 00:34:51.370 align:middle line:84% But you use a CPI there instead of the GDP deflator. 00:34:51.370 --> 00:34:55.442 align:middle line:90% Now, it turns out that-- 00:34:55.442 --> 00:34:56.650 align:middle line:90% obviously confused with this. 00:34:56.650 --> 00:34:59.470 align:middle line:84% It turns out that these two measures are sort of 00:34:59.470 --> 00:35:00.910 align:middle line:90% pretty well aligned. 00:35:00.910 --> 00:35:02.500 align:middle line:84% There are differences that may be 00:35:02.500 --> 00:35:04.360 align:middle line:84% interesting at some specific point in time. 00:35:04.360 --> 00:35:06.580 align:middle line:84% But they tell you more or less the same picture. 00:35:06.580 --> 00:35:08.710 align:middle line:84% In particular, there is absolutely no doubt 00:35:08.710 --> 00:35:11.030 align:middle line:84% that we have an inflation problem these days. 00:35:11.030 --> 00:35:13.760 align:middle line:84% You can be as selective as you want with the price index 00:35:13.760 --> 00:35:16.560 align:middle line:84% you want to use and people are getting very selective. 00:35:16.560 --> 00:35:20.780 align:middle line:90% Now we have CPI excluding-- 00:35:20.780 --> 00:35:23.570 align:middle line:84% Well, one thing that makes a lot of sense 00:35:23.570 --> 00:35:25.860 align:middle line:84% is to exclude the most volatile goods. 00:35:25.860 --> 00:35:28.760 align:middle line:84% So typically, the CPI, we use is called 00:35:28.760 --> 00:35:32.420 align:middle line:84% Core CPI, which removes energy and food, which 00:35:32.420 --> 00:35:33.510 align:middle line:90% are very volatile prices. 00:35:33.510 --> 00:35:35.885 align:middle line:84% You don't want the thing to be moving all over the place. 00:35:35.885 --> 00:35:38.660 align:middle line:84% But now we're also beginning to remove shelter 00:35:38.660 --> 00:35:41.580 align:middle line:84% because shelter inflation is very high and sticky and so on. 00:35:41.580 --> 00:35:43.470 align:middle line:84% So people can get to be very selective. 00:35:43.470 --> 00:35:46.050 align:middle line:84% But no matter how you look at the thing, we have a problem. 00:35:46.050 --> 00:35:48.900 align:middle line:90% There is no way around that. 00:35:48.900 --> 00:35:51.027 align:middle line:90% So that's the way we look. 00:35:51.027 --> 00:35:52.610 align:middle line:84% Again, we're not going to look-- we're 00:35:52.610 --> 00:35:55.400 align:middle line:84% going to talk a lot about this problem, of course. 00:35:55.400 --> 00:35:56.930 align:middle line:90% But we need to build tools. 00:35:56.930 --> 00:36:00.782 align:middle line:84% And we're going to get there in about nine lectures from now. 00:36:00.782 --> 00:36:02.240 align:middle line:84% Nine lectures from now, we're going 00:36:02.240 --> 00:36:06.270 align:middle line:84% to be able to talk about what is going on with models. 00:36:06.270 --> 00:36:09.560 align:middle line:84% I mean, you can talk whenever you want, but with models, 00:36:09.560 --> 00:36:12.837 align:middle line:84% OK, so those are the concepts I wanted to discuss today. 00:36:12.837 --> 00:36:14.420 align:middle line:84% Those are the definitions, some relief 00:36:14.420 --> 00:36:16.080 align:middle line:90% that we got over this stuff. 00:36:16.080 --> 00:36:21.530 align:middle line:84% Let me just show you, because we have five minutes or so, 00:36:21.530 --> 00:36:24.900 align:middle line:84% equivalent numbers for other places around the world. 00:36:24.900 --> 00:36:25.480 align:middle line:90% That's China. 00:36:25.480 --> 00:36:28.510 align:middle line:90% 00:36:28.510 --> 00:36:29.540 align:middle line:90% That's China. 00:36:29.540 --> 00:36:30.838 align:middle line:90% That's GDP growth for China. 00:36:30.838 --> 00:36:32.380 align:middle line:84% And there are several things that you 00:36:32.380 --> 00:36:34.460 align:middle line:90% can see for this GDP series. 00:36:34.460 --> 00:36:37.340 align:middle line:84% The first is that it was very high. 00:36:37.340 --> 00:36:39.627 align:middle line:84% These numbers look a lot on average. 00:36:39.627 --> 00:36:40.960 align:middle line:90% That's a lot higher than the US. 00:36:40.960 --> 00:36:43.240 align:middle line:84% When I showed you the US, the rate of growth 00:36:43.240 --> 00:36:46.630 align:middle line:84% was moving around 2%, 1.5%, blah, blah, blah, occasionally 00:36:46.630 --> 00:36:47.840 align:middle line:90% recessions and so on. 00:36:47.840 --> 00:36:48.740 align:middle line:90% This is China. 00:36:48.740 --> 00:36:52.660 align:middle line:84% Look, you had numbers like 10% or so. 00:36:52.660 --> 00:36:53.680 align:middle line:90% That's interesting. 00:36:53.680 --> 00:36:57.130 align:middle line:84% We want to know why is that you can have so much difference 00:36:57.130 --> 00:36:59.175 align:middle line:90% in different countries. 00:36:59.175 --> 00:37:00.550 align:middle line:84% And that's what we're going to do 00:37:00.550 --> 00:37:01.910 align:middle line:90% in the third part of the course. 00:37:01.910 --> 00:37:03.790 align:middle line:84% When we look at growth, we're going 00:37:03.790 --> 00:37:06.490 align:middle line:84% to look at these kind of factors, what can give you 00:37:06.490 --> 00:37:08.560 align:middle line:90% sustained rate of growth? 00:37:08.560 --> 00:37:10.750 align:middle line:84% Sustain, I mean, for a long period of time 00:37:10.750 --> 00:37:13.560 align:middle line:90% higher than in another country. 00:37:13.560 --> 00:37:17.400 align:middle line:84% The main factor, just to preview what will happen, 00:37:17.400 --> 00:37:24.380 align:middle line:84% is simply that China was a lot poorer than the US 00:37:24.380 --> 00:37:25.260 align:middle line:90% at the beginning. 00:37:25.260 --> 00:37:27.830 align:middle line:84% And when you're poorer and you put your act together, 00:37:27.830 --> 00:37:30.810 align:middle line:84% you can grow a lot faster than the rest. 00:37:30.810 --> 00:37:33.090 align:middle line:90% Now China is slowing down. 00:37:33.090 --> 00:37:35.910 align:middle line:84% Aside from COVID, it's very clear for quite some time 00:37:35.910 --> 00:37:40.440 align:middle line:84% that they have been worried because clearly GDP growth is 00:37:40.440 --> 00:37:41.970 align:middle line:90% declining. 00:37:41.970 --> 00:37:45.580 align:middle line:84% And they're terrified about that. 00:37:45.580 --> 00:37:48.570 align:middle line:84% And many of the things that are happening with China 00:37:48.570 --> 00:37:51.480 align:middle line:84% have to do with the fear associated 00:37:51.480 --> 00:37:54.270 align:middle line:84% to a slowdown in the rate of growth 00:37:54.270 --> 00:37:59.210 align:middle line:84% when they are still quite poor in per capita terms. 00:37:59.210 --> 00:38:02.440 align:middle line:84% So a lot of what happens in China has to do with that. 00:38:02.440 --> 00:38:05.480 align:middle line:90% 00:38:05.480 --> 00:38:08.730 align:middle line:84% If you look at Japan, look at Japan. 00:38:08.730 --> 00:38:12.710 align:middle line:84% Japan also grew very fast in the '60s. 00:38:12.710 --> 00:38:16.010 align:middle line:84% You see this very fast rate of growth. 00:38:16.010 --> 00:38:17.840 align:middle line:90% Then it began to slow down. 00:38:17.840 --> 00:38:19.400 align:middle line:90% And boom, here it collapsed. 00:38:19.400 --> 00:38:24.200 align:middle line:84% They have a massive crash in financial markets, equities 00:38:24.200 --> 00:38:24.740 align:middle line:90% and land. 00:38:24.740 --> 00:38:27.630 align:middle line:84% The price of land was enormous in Japan at this time. 00:38:27.630 --> 00:38:30.567 align:middle line:90% They had a big financial bubble. 00:38:30.567 --> 00:38:32.900 align:middle line:84% For those of you that know Japan-- or if you don't know, 00:38:32.900 --> 00:38:33.560 align:middle line:90% doesn't matter. 00:38:33.560 --> 00:38:35.870 align:middle line:84% The imperial park in Tokyo, which 00:38:35.870 --> 00:38:38.990 align:middle line:84% is a park that is much smaller than Central Park or whatever, 00:38:38.990 --> 00:38:41.270 align:middle line:84% the value of that land at some point in time 00:38:41.270 --> 00:38:45.440 align:middle line:84% was the same as the value of the entire state of California. 00:38:45.440 --> 00:38:47.120 align:middle line:90% That's an order of magnitude. 00:38:47.120 --> 00:38:48.330 align:middle line:90% It was not for sale. 00:38:48.330 --> 00:38:51.020 align:middle line:84% But, you know, in terms of location, times, price. 00:38:51.020 --> 00:38:53.090 align:middle line:90% But that bubble crash. 00:38:53.090 --> 00:38:57.620 align:middle line:84% And since then, Japan has never been able to recover its mojo. 00:38:57.620 --> 00:39:00.290 align:middle line:84% It has been sort of growing at a very low rate 00:39:00.290 --> 00:39:02.460 align:middle line:90% for a very long period of time. 00:39:02.460 --> 00:39:04.430 align:middle line:84% And one of the things that scares China 00:39:04.430 --> 00:39:07.400 align:middle line:90% is that this may happen to them. 00:39:07.400 --> 00:39:09.050 align:middle line:84% Because this happened to Japan when 00:39:09.050 --> 00:39:10.380 align:middle line:90% they were already quite rich. 00:39:10.380 --> 00:39:13.220 align:middle line:84% Japan was pretty poor after the war, naturally. 00:39:13.220 --> 00:39:15.630 align:middle line:84% And they grew very fast in the '60s. 00:39:15.630 --> 00:39:18.750 align:middle line:84% But then they had this issue, financial bubble and so on. 00:39:18.750 --> 00:39:21.080 align:middle line:84% They crashed and had never been able to recover. 00:39:21.080 --> 00:39:26.780 align:middle line:84% And China is worried that this slowdown happens to them 00:39:26.780 --> 00:39:30.540 align:middle line:84% before they have reached the level of income per capita 00:39:30.540 --> 00:39:34.960 align:middle line:84% that Japan reached when that happened. 00:39:34.960 --> 00:39:36.960 align:middle line:84% There are common factors behind the two of them, 00:39:36.960 --> 00:39:38.380 align:middle line:90% as well-- demographic factors. 00:39:38.380 --> 00:39:41.250 align:middle line:84% Demographics are very negative for both of them, 00:39:41.250 --> 00:39:43.480 align:middle line:84% which naturally will slow down the rate of growth. 00:39:43.480 --> 00:39:45.060 align:middle line:84% We're going to look at that later on. 00:39:45.060 --> 00:39:48.150 align:middle line:90% This is inflation in Japan. 00:39:48.150 --> 00:39:51.450 align:middle line:84% You see, most countries had high inflation around there 00:39:51.450 --> 00:39:56.710 align:middle line:84% because the price of oil, we had massive oil shocks and so on. 00:39:56.710 --> 00:39:58.440 align:middle line:90% So inflation was pretty high. 00:39:58.440 --> 00:40:01.680 align:middle line:84% But the problem of Japan has been the opposite. 00:40:01.680 --> 00:40:06.210 align:middle line:84% Since the bubble crash in the late '80s, early '90s, they have 00:40:06.210 --> 00:40:11.010 align:middle line:84% had very low inflation, even deflation. 00:40:11.010 --> 00:40:12.720 align:middle line:90% And that's been a big problem. 00:40:12.720 --> 00:40:16.590 align:middle line:84% Part of the reason why they have had so low growth 00:40:16.590 --> 00:40:19.470 align:middle line:84% is because they have been in this deflationary trap. 00:40:19.470 --> 00:40:23.880 align:middle line:84% And then something you will look at later on in the course, when 00:40:23.880 --> 00:40:26.400 align:middle line:84% you have deflation, it's very difficult 00:40:26.400 --> 00:40:29.470 align:middle line:84% to use monetary policy to get out of a recession. 00:40:29.470 --> 00:40:32.900 align:middle line:84% And that's the reason they keep getting stuck there. 00:40:32.900 --> 00:40:34.920 align:middle line:84% So that's all I wanted to say for today. 00:40:34.920 --> 00:40:37.907 align:middle line:84% And I'm relieved again that this lecture is behind us. 00:40:37.907 --> 00:40:40.490 align:middle line:84% In the next lecture, we're going to introduce the first model. 00:40:40.490 --> 00:40:45.260 align:middle line:84% We're going to look at is how to determine equilibrium GDP 00:40:45.260 --> 00:40:50.240 align:middle line:84% and how that depends on a variety of things, including 00:40:50.240 --> 00:40:51.440 align:middle line:90% fiscal policy-- 00:40:51.440 --> 00:40:54.950 align:middle line:84% not monetary policy, that will happen later-- 00:40:54.950 --> 00:40:59.390 align:middle line:84% but how scared you are, consumers' preferences 00:40:59.390 --> 00:41:01.470 align:middle line:90% and fears and so on. 00:41:01.470 --> 00:41:02.370 align:middle line:90% So that's the plan. 00:41:02.370 --> 00:41:06.400 align:middle line:84% So unless there are any questions about this-- 00:41:06.400 --> 00:41:08.280 align:middle line:90% No. 00:41:08.280 --> 00:41:10.940 align:middle line:90% I'll see you next Monday. 00:41:10.940 --> 00:41:21.000 align:middle line:90%