Managerial Macroeconomics Dr.Benjarong Suwankiri & Dr.

Pimnara Hirankasi

Sovereign Bond Crisis in Europe Recession and QE policy in America American Fiscal Cliff Japans Abenomics Cyprus Bank Crisis Inflation and Soft Landing in China

National Income: Low Economic Growth Rate Employment Opportunity: High Unemployment Rates Cost of Living: High Inflation Rate Trade Surplus: Low Exchange Rate (Undervalued currencies) Income disparity: Rich gets richer, poor gets poorer

Gross Domestic Product (GDP) Gross National Product (GNP) GDP (Purchasing Power Parity)
Thailands GDP : 2007-2011
USD mn
Gross Domestic Product (GDP) Gross National Product (GNP) GDP (Purchasing Power Parity)

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

2007

2008

2009

2010

2011

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. For an economy as a whole, income must equal expenditure because:
Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

MARKETS Spending Revenue FOR GOODS AND SERVICES Firms sell Goods Goods and Households buy services and services sold bought

FIRMS Produce and sell goods and services Hire and use factors of production

HOUSEHOLDS Buy and consume goods and services Own and sell factors of production

Factors of production Wages, rent, and profit

Labor, land, MARKETS and capital FOR FACTORS OF PRODUCTION Households sell Income Firms buy = Flow of inputs and outputs = Flow of dollars

Copyright 2004 South-Western

Gross domestic product (GDP) is a measure of

the income and expenditures of an economy. It is the total Market value of all final goods and services produced within a country in a given period of time.
1,000,000

USD mn

Nominal GDP by country

Indonesia Malaysia Philippines Singapore Thailand

800,000 600,000 400,000 200,000 0

Vietnam

2007

2008

2009

2010

2011

2012

Nominal or real?

GDP includes all items produced in the economy and sold legally in markets. What Is Not Counted in GDP?

GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs.

GDP (Y) is the sum of the following:

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Y = C + I + G + NX

Consumption (C):

The spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):

The spending on capital equipment, inventories, and structures, including new housing.

10

Government Purchases (G):

The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services.

Net Exports (NX):

Exports minus imports.

11

Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices.
2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 USD mn

Nominal

Real

* 2012 estimate by IMF

India

Vietnam

Singapore

Malaysia

Thailand

Myanmar*

Real GDP at 2000constant price

12

An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator. The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

13

Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP as follows:

Real GDP20XX

Nominal GDP20XX 100 GDP deflator20XX

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GDP is the best single measure of the economic well-being of a society. GDP per person tells us the income and expenditure of the average person in the economy. Higher GDP per person indicates a higher standard of living. GDP is not a perfect measure of the happiness or quality of life, however.

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Some things that contribute to well-being are not included in GDP.

The value of leisure (e.g. Gross National Happiness). The value of a clean environment (e.g. Happy Planet Index). The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

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Gross Domestic Product (GDP) at Purchasing Power Parity (PPP)

GDP country Rank
Australia
47 22

Switzerland

58
52

PPP Norway
70
source : CIA World Factbook

100

Norminal

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GNP is the total income earned by a nations permanent residents. It differs from GDP by including income that citizens earn abroad and excluding income that foreigners earn here.
GDP GNP

Kazakhstan

Nigeria

Ireland

Iraq

Philippines

Venezuela

Hong Kong

18

Hong Kong Brunei Singapore Australia

24 20

6 5 3

PPP per capita Norminal per capita

10 10

5 8 4 4 3 2 2 1 1

Srwitzerland
Norway Qatar Luxembourg

Source : http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

19

Green GDP is an index of economic growth with the environmental consequences of that growth factored in. Green GDP=Traditional GDPenvironmental/ecological costs

20

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. It is used to monitor changes in the cost of living over time. When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

21

Fix the Basket Find the Prices Compute the Baskets Cost Choose a Base Year and Compute the Index

22

Compute the inflation rate: The

inflation rate is the percentage change in the price index from the preceding period.

CPI in Year 2 - CPI in Year 1 Inflation Rate in Year 2 = 100 CPI in Year 1

23

1 Year ago
100

100

Today (inflation = ?)

100

100

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Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. There are two important differences between the indexes that can cause them to diverge. The GDP deflator reflects the prices of all goods and services produced domestically, whereas... the consumer price index reflects the prices of all goods and services bought by consumers.

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The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

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3.0 2.0 1.0

Japans Deflator & CPI

GDP Deflator 2005p %yoy CPI 2005p %yoy

0.0
-1.0 -2.0 -3.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2011

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

6.0 5.0 4.0 3.0

Indias Deflator & CPI

GDP Deflator 2005p %yoy CPI 2005p %yoy

2.0
1.0 0.0 -1.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2011

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

27

Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times.

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10 Years ago

Today

29

The term business cycle or economic cycle refers to the fluctuations of economic activity (business fluctuations) around its long-term growth trend.
4.0 3.0 2.0 1.0 0.0 -1.0

US GDP growth rate

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2007 2008 2009 2010 2011 2012 2013

-2.0
-3.0 -4.0 -5.0

%yoy

%qoq

30

The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession).
Eurozones GDP growth rate

6.0 4.0 2.0 0.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 -2.0 -4.0 -6.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 %yoy %qoq_sa

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These fluctuations are often measured using the real GDP. Despite being termed cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

32

A number of types of business cycles, in the traditional sense of a fluctuation within a regular period have been proposed. The main types of business cycles enumerated by Joseph Schumpeter.

33

In 1860, French economist Clement Juglar identified the presence of 8 to 11 year cycles. In Business Cycles, Schumpeter suggested this cycle be named after Juglar. These cycles are made up of four stages, each linked to the variation in prices, production and interest rates.

34

expansion = increase in production and prices , and low interests rates. crisis = stock exchanges crash and bankruptcies of several companies occur. recession = decrease in price and in output, high interests rates. recovery= stocks recover thanks to the fall in prices and incomes.

35

USs GDP growth rate

4.0 3.0 2.0 1.0 0.0 -1.0

C R E e r x c i p e s o a s i v n s e r i o n

-2.0
-3.0 -4.0 -5.0

%yoy

%qoq

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2005

2006

2007

2008

2009

2010

2011

2012

2013

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A recession is a contraction phase of the business cycle, or "a period of reduced economic activity.
8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 %yoy %qoq_sa Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2007 2008 2009 2010 2011 2012 2013

Japans GDP growth rate

37

The U.S. based NBER defines a recession more specifically as "a significant decline in economic activity spread across the economy, lasting more than a few months. A sustained recession may become a depression.
25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0

US GDP in Great Depression (1930s)

38

A recession has many attributes that can occur simultaneously and can include declines in coincident measures of overall economic activity such as employment, investment, and corporate profits.

Source: http://www.pnas.org/content/106/41/17290/F1.expansion.html

39

Recessions are the result of falling demand and may be associated with falling prices (deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant economic growth (stagflation). A severe or prolonged recession is referred to as an economic depression.

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40.0 35.0

Mexicos GDP growth & Inflation rate

30.0
25.0 20.0 15.0 10.0 5.0 0.0

GDP %yoy CPI %yoy

High Inflation

-5.0
-10.0

6.0 4.0 2.0

Japans GDP growth & Inflation rate

Deflation

0.0 -2.0

-4.0
-6.0 -8.0 GDP %yoy CPI %yoy

41

42

A significant stock market drop has often preceded the beginning of a recession. The three-month change in the unemployment rate. Index of Leading Indicators
6,000 5,000 4,000 3,000 2,000 1,000 2,319.3

Dow Jones Index: Composite Average

5,188.9 4,146.9

0
January-07 January-08 January-09 January-10 January-11 January-12 January-13

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The Index of Leading Indicators is an economic index intended to estimate future economic activity. The index is calculated based on ten key variables that have historically turned downward before a recession and upward before an expansion.
6.0
4.0 2.0 0.0 -2.0 -4.0 -6.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 Real GDP growth %yoy

Euro Growth Leading Indicator

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The index of leading indicators can provide an early warning system so that policymakers can shift toward macroeconomic stimulus when the index fails. Such an early warning system is also useful for business plans for immediate turns in the economy.

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Average number of initial applications for unemployment insurance Number of manufacturers' new orders for consumer goods and materials Speed of delivery of new merchandise to vendors from suppliers Amount of new orders for capital goods unrelated to defense Amount of new building permits for residential buildings The S&P 500 stock index Inflation-adjusted money supply (M2) Spread between long and short interest rates Consumer sentiment Average weekly hours worked by manufacturing workers

46

Green light : Very hot Yellow Red light: hot White light: stable Orange light: poor/alarmnig Red Light: very poor/very alarming

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Indicators

2012

2013

Q1 2.4
787

Q2 2.1
324

Q3 2.6
456

Q4 1.7
626

Q1 1.8
622

April 149

May 175

GDP growth (%yoy)

Nonfarm payrolls (change from previous month, th persons) Mfg PMI Non-Mfg PMI Retail sales (%yoy) Consumer Confidence Index

53.0 55.7 8.1 67.5

52.3 53.5 4.7 65.3

50.9 54.1 4.1 65.0

50.6 55.1 4.2 70.4

52.9 50.7 49.0 55.2 53.1 53.7 2.9 3.3 62.8 69.0 76.2

48