Overview & Growth Facts

Global Macro Analysis

Dongling Su
SUFE

1
 Course Logistics

▶ Contact info and office hours on syllabus

▶ Self-contained lecture notes will be posted on Canvas in
advance of each class. I will not provide copies of these
notes in class, so please print them out if you would like
to follow along.
▶ Recommended Textbook: Advanced Macroeconomics by
David Romer, 4th Edition. Suggested readings from this
textbook will be posted on Canvas.

2
 Course Requirements

Attendance: 20% of grade

Cold-calling in class
Midterm: 40% of grade
In class, see syllabus for date
Final Exam: 40% of grade
Time, date, and location to be determined

3
Lecture 1 Content Starts Here

4
 What is Macroeconomics?
Big Picture Issues
Economy-wide or aggregate output, income, consumption, employ-
ment, investment, interest rates, stock markets, exchange rates, un-
employment, financial crises,....
Micro Foundations
The behavior of individual people and firms which make up the
economy ultimately governs aggregates, so we will study their micro-
level choices as a means to an end.
Great Depression
Huge economic slump spurred interest in macro within the field of
economics starting in the 1930s.
Two Main Topics
- Economic Growth
- Business Cycle Fluctuations
5
 Growth and Cycle

Figure: Trends and Cycles of GDP for U.S. (Jones, 2016)

▶ Finance: events at frequencies of day, weeks, months ..

▶ Business cycles: events at quarters, up to roughly 8 years
▶ Growth: frequencies of more than 10 years 6
Two Main Topics, Many Questions

We will touch on each of the following questions in this

course, using a combination of theory and data.
Economic Growth: first part of course
- Why are some countries rich and other countries poor?
- What determines the long-run growth rate of a country?

Business Cycle Fluctuations: second part of course

- How do individuals choose their consumption and savings?
- How do firms choose investment for the future?
- What happens during booms and recessions?
- Is there a role for monetary policy in stabilizing prices and output?
- What determines unemployment?
- What happened during the financial crisis and Great Recession?

7
 How Macro Works
A Fundamental Challenge
The entire economy is a complicated system, and you can’t easily
run experiments to get at underlying mechanisms.
Models
So macroeconomists build mathematical models of the economy and
test their implications for the observed data. These models serve as
laboratories for policy and investigation. We’ll cover some of the
classic models of growth and business cycles in this course.
Simplification is Required
If you want realism, look out the window.
You Should Question Me
If you don’t like an assumption, ask about it. And point out typos!

8
Figure: Back cover of Journal of Political Economy (2020),
Volume 128, Issue 1

9
The Bull by Pablo Picasso

Figure: Pablo Picasso, The Bull, 1945 10

 What is GDP?

The gross domestic product (GDP, “output,” or “income”) is the total

income or the total value of all final goods and services produced in an
economy.
Some Context
- GDP concept developed in the aftermath of the Great Depression
- GDP remains the most widely used measure of the development or the
standard of living in an economy
- The Bureau of Economic Analysis (BEA) estimates GDP in the US as
part of the National Income Accounts. In 2019, US GDP was $21.4 trillion.
- The world bank reports that the GDP in China was $14.7 trillion.

11
 More about What is GDP?

Two convenient transformations in our analysis:

1. Divide by population.
GDP
GDP per capita = GDP per person =
Population
2. Take natural logarithms.
dx
d ln(x) = ≈ Percent change in x
x
Beware! Economists (including me) write “log” not “ln.”

12
 What is GDP?
Two challenges for estimating GDP.
Changing Prices
1. Nominal or current dollar GDP in time t uses prices from t.

2. Real or constant dollar GDP in time t uses prices held fixed in

some prior base year.
▶ We care more about real GDP (news papers, macro
analysis reports, etc.). Reflect more directly about the
changes in supply/demand.

3. GDP deflator = Nominal GDP/Real GDP

Changing Products
The US economy in 1900 produced steamships, but now the US
economy produces jet airliners instead. Macroeconomists must ad-
just for the changing composition (quality) of production.
13
 Why Do We Care?
Definitions...
It measures the total income earned by input factors, and equiva-
lently, it also measures how many goods/services are produced.
On a Philosophical Level...
Presumably we care about some very broad notion of human welfare
rather than GDP. But GDP is measurable and objective, and it serves
as a macroeconomist’s starting point. (not sufficient, but necessary)
A Proxy for Other Good Things
In order to consume more, an economist’s usual notion of improved
welfare, a nation must typically produce more. However, GDP is a
proxy for more than just consumption. If a country’s level of GDP
is higher in the data, we typically see higher levels of other objective
indicators of development as well.

14
 GDP and Life Expectancy

Italy
Spain
France
●
●

80
UK
●
●
US
●
Mexico
●
Life expectancy, Years

China
Brazil
●
●
70

Indonesia Russia
● ●

India
●
60

Malawi South Africa

● ●
50

0 1 2 3 4 5
GDP per person, Log

Note: Figure data from 2007 drawn from Jones and Klenow (2015) “Beyond GDP? Welfare across Countries and
Time.” GDP per person is the logarithm of real per capita GDP. Life expectancy is the sum over each possible age
level, in years, of the probability of surviving to that age. Underlying data from Penn World Tables and World Health
Organization. 15
 GDP and Inequality

Inequality, Standard deviation of log consumption

0.9
Brazil
China
● ●

Mexico
●

0.8 Malawi
●
0.7

India
● US
●
Indonesia
●
0.6

UK
Spain
●
Russia ●
● Italy
●
0.5

France
●
0.4

0 1 2 3 4 5
GDP per person, Log

Note: Figure data from 2007 drawn from Jones and Klenow (2015) “Beyond GDP? Welfare across Countries and
Time.” GDP per person is the logarithm of real per capita GDP. Inequality is the standard deviation of the natural
logarithm of consumption within a nation. Underlying data from Penn World Tables and household surveys.
16
 More about What is GDP?
The gross domestic product (GDP, “output,” or “income”) is the total
income or the total value of all final goods and services (intermediate
inputs) produced in an economy (GNP) over a specific period of time
(stock).
Three Equivalent Methods
▶ Production approach:
▶ Value-added for production activities = value of output -
value of intermediate goods
▶ How goods/services are produced; industry compositions
▶ Income approach:
▶ wages, rental costs, corporate profits, etc
▶ How value of goods/services are distributed among
factors of inputs
▶ Expenditure approach: popular in news papers
▶ Y = C + I + G + EX
▶ How goods/services are used; demand-side variations 17
 Why the Three Methods
Equivalent?

Suppose you go to see a dentist, which costs you $100. The

dentist helps you by replacing the broken tooth with an
artificial one. The artificial tooth is produced by a worker and
sold to the dentist at $20. What is the GDP?
You can not simply add up the numbers. Need to avoid double
counting.
▶ Production approach: 20 + 80
▶ Income approach: 20 + 80
▶ Expenditure approach: 100

18
 GDP in China
▶ Mainly the production approach; complemented by the
income approach
▶ Due to data coverage, availability of statistics (time)
▶ Mainly market activitities, but also include some
nonmarket production (agri., housing service)
▶ Publications: quarterly for production approach (15 days
after the quarter), annual frequency for expenditure
approach (Jan next year) =⇒ use other data with higher
frequency to infer
▶ Revisions: Jan next year, due to more data availability;
accounting methods, economic census, industry
classifications; national GDP v.s. regional GDP
▶ Current/cumulative: more consistent since 2015
▶ See Chang et al. (2016, NBER macro annual) and Qilin
Li (2019, Handbook of macro data analysis)
19
 GDP in China
For quarterly GDP data:
▶ The first year: Y1 , Y2 , Y3 , Y4
▶ The second year: Y5 , Y6 , Y7 , Y8
Three types of growth rate you often see in news papers:
▶ Year-on-year: simple way to remove seasonality
Y5 − Y1
Y1
▶ Quarter-on-quarter: more up to date, seasonability
removed first
Y5 − Y4
Y4
▶ Quarter-on-quarter annualized rate:
 4
Y5 − Y4 Y5 − Y4
1+ −1≈4×
Y4 Y4
▶ CHN: NBS-SA since 2011, but not commonly used so far 20
 Some Growth and Income Facts

Fact 1: Growth is a recent phenomenon in human history.

Fact 2: Income varies substantially across countries.
Fact 3: Europe and US diverged in the 1800s, followed by
recent Asian growth miracles.
Fact 4: Growth disasters are possible.
Fact 5: Frontier economies exhibit stable long-term growth.

21
The Hockey Stick

22
 Some Growth and Income Facts

Fact 1: Growth is a recent phenomenon in human history.

Fact 2: Income varies substantially across countries.
Fact 3: Europe and US diverged in the 1800s, followed by
recent Asian growth miracles.
Fact 4: Growth disasters are possible.
Fact 5: Frontier economies exhibit stable long-term growth.

23
 Income Varies Substantially
across Countries

US shows 50 times higher income than Ethiopia in 2000!

24
 Income Varies Substantially
across Countries

“I do not see how one can look at figures like these without
seeing them as representing possibilities. Is there some action a
government of India could take that would lead the Indian econ-
omy to grow like Indonesia’s or Egypt’s? If so, what, exactly?
If not, what is it about the ‘nature of India’ that makes it so?
The consequences for human welfare involved in questions like
these are simply staggering: Once one starts to think about
them, it is hard to think about anything else.”
–Robert Lucas, Nobel Laureate in Economics

25
 Some Growth and Income Facts

Fact 1: Growth is a recent phenomenon in human history.

Fact 2: Income varies substantially across countries.
Fact 3: Europe and US diverged in the 1800s, followed by
recent Asian growth miracles.
Fact 4: Growth disasters are possible.
Fact 5: Frontier economies exhibit stable long-term growth.

26
 1800s Western Divergence and
Recent Asian Miracles 1.4 Today’s Income Differences and World Economic Growth .
13

Log GDP per capita

10
Western offshoots

Western Europe
9

8
Asia

Africa
7
Latin America

6
1820 1850 1900 1950 2000

FIGURE 1.10 The evolution of average GDP per capita in Western offshoots, Western Europe, Latin
America, Asia, and Africa, 1820–2000.

A variety of evidence suggests that differences in income per capita were even smaller before
Note: From Acemoglu
1820.(2009) Introduction
Maddison to Modern
also has estimates Economic
for average Growth.
income for the same groups of countries going
back to 1000 A.D. or even earlier. Figure 1.10 can be extended back in time using these data;
the results are shown in Figure 1.11. Although these numbers are based on scattered evidence 27
 Needham’s Grand Question

▶ Why did modern science, the mathematization of

hypotheses about Nature, with all its implications for
advanced technology, take its meteoric rise only in the
West at the time of Galileo?”
▶ Why it “had not developed in Chinese civilization” which
in the previous many centuries “was much more efficient
than occidental in applying” natural knowledge to
practical needs?

28
Inequality across Countries Isn’t
Falling in the Raw Data
Density of countries

1960

1980

2000

6 8 10 12
Log GDP per capita

FIGURE 1.2 Estimates of the distribution of countries according to log GDP per capita (PPP adjusted)
in 1960, 1980, and 2000.

Density of countries (weighted by population)

Note: From Acemoglu (2009) Introduction to Modern Economic Growth.

29
 Inequality is Falling when
6 8 10 12
Log GDP per capita

Population Weighted
FIGURE 1.2 Estimates of the distribution of countries according to log GDP per capita (PPP adjusted)
in 1960, 1980, and 2000.

Density of countries (weighted by population)

1980
2000

1960

6 8 10 12
Log GDP per capita

FIGURE 1.3 Estimates of the population-weighted distribution of countries according to log GDP per
capita (PPP adjusted) in 1960, 1980, and 2000.

Note: From Acemoglu (2009) Introduction to Modern Economic Growth.

30
 Some Growth and Income Facts

Fact 1: Growth is a recent phenomenon in human history.

Fact 2: Income varies substantially across countries.
Fact 3: Europe and US diverged in the 1800s, followed by
recent Asian growth miracles.
Fact 4: Growth disasters are possible.
Fact 5: Frontier economies exhibit stable long-term growth.

31
 Growth Disasters are Possible

Argentina
GDP per person, 2005 US Dollars, Log
10.5
9.5
9.0
8.5
8.0
7.5

1950 1960 1970 1980 1990 2000 2010

Year

Note: Data from Penn World Tables. Series is the logarithm of real GDP per person in 2005 PPP-adjusted USD.
32
 But They are Not Inevitable

Argentina
GDP per person, 2005 US Dollars, Log Japan
10.5
9.5
9.0
8.5
8.0
7.5

1950 1960 1970 1980 1990 2000 2010

Year

Note: Data from Penn World Tables. Series is the logarithm of real GDP per person in 2005 PPP-adjusted USD.
33
 Middle Income Trap
(controversial)
▶ The middle income trap: a country attains a certain
income but gets stuck at that level.
▶ Introduced by the World Bank in 2007 and is defined by
them as the ’middle-income range’ countries with GNP
per capita that has remained between $1, 000 to $12, 000
at constant (2011) prices
▶ Lost its competitive edge in the export of manufactured
goods due to rising wages, but is unable to keep up with
more developed economies in the high-value-added market
▶ Low investment, slow growth in the secondary sector of
the economy, limited industrial diversification and poor
labor market conditions and, increasingly, aging
populations
▶ E.g. South Africa and Brazil? 34
 Some Growth and Income Facts

Fact 1: Growth is a recent phenomenon in human history.

Fact 2: Income varies substantially across countries.
Fact 3: Europe and US diverged in the 1800s, followed by
recent Asian growth miracles.
Fact 4: Growth disasters are possible.
Fact 5: Frontier economies exhibit stable long-term growth.

35
 Stable Frontier Growth

Note: Data from Penn World Tables. Series is the logarithm of real GDP per person in 2017 PPP-adjusted USD.

▶ Roughly 2% per year

36
Stable Frontier Growth: Really?

Note: The data on U.S. real GDP per capita (data id: A939RX0Q048SBEA) is extracted from Fred.

▶ Roughly 2% per year

▶ Scarring effect of the crisis1
1
Even more so for the emerging coutries: cycle is trend.
37
Stable Frontier Growth: Really?

Note: Figure is copied from Soyres et al. (2024).

▶ Soyres et al. (2024): Why is the U.S. GDP recovering

faster than other advanced economies? 38
 Economic Growth in China

Note: Data from Penn World Tables. Series is the logarithm of real GDP per person in 2017 PPP-adjusted USD.

39
 Economic Growth in China

Note: Data from Chang et al. (2016).

40
 GDP in China: by sector

Figure: Figure 1.8 in Li’s book

▶ Primary sector declining

▶ Tertiary sector rising
41
 GDP in China: by expenditure

▶ Investment and household consumption similar size

▶ Large government spending
42
 GDP in US: by expenditure

▶ Investment and household consumption similar size

▶ Large government spending
43
 GDP in US: by expenditure

▶ Household consumption much larger

▶ Investment volatile (not shown here)
44
 Contributions to GDP growth
Suppose GDP for the three sectors:
▶ GDP in the first year: Y1 = Y1a + Y1m + Y1s
▶ GDP in the second year: Y1 = Y2a + Y2m + Y2s
The contribution of the service sector to GDP growth rate is
defined as
Y2m − Y1m
Y1
GDP growth rate can be decomposed into three sectors
(parts):
Y2a − Y1a Y2m − Y1m Y2s − Y1s
+ +
Y1 Y1 Y1
(Y2a + Y2m + Y2s ) − (Y1a + Y1m + Y1s )
=
Y1
Y2 − Y1
=
Y1
45
 Three Phases of GDP in China
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

Data source: Chang et al. (2016),

https://www.atlantafed.org/cqer/research/china-macroeconomy.aspx?panel=1
- 1978-2001: Fast but volatile
- 2002-2011: Continuous growth
- 2012- present: New normal, quality-focus
46
 1978-2001: Fast but volatile
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

1978-1981: decline due to gov limiting investment activities to avoid

overheating of the economy.
1982-1985: supply ↑: gov plan, household responsibility system,
labor migration; demand ↑: wage reform, investment surge
1986-1991: two periods with policies to cool down inflation 47
 1978-2001: Fast but volatile
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

1992-1993: Deng’s southern tour

1994-1997: policy to cool down inflation
1997-2001: Asian financial crisis
48
 1978-2001: Fast but volatile
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

Summary
Large policy impacts: transition periods, learning by doing
Shortage of the supply side
49
 2002-2011: Continuous growth
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

2001-2007: Export ↑, industrial production ↑, investment ↑

2008-2011: Global financial recession, export ↓, consumption ↓;
stimulus policy (4 trillion), infrastructure investment, stabilizing but
side-effects
50
 2011-present: New normal
20 20

WTO

Great Recession

Covid 19
Reform and Opening-up
15 15

10 10

%
5 5

0 0

C I G EX
-5 -5
1980 1985 1990 1995 2000 2005 2010 2015 2020

Quality-focus growth
- Weak external demand
- Supplyside reform: cut excessive industrial capacity, destocking, de-leveraging; economic structure, consumption,
urban-rural, industry; growth engine from factor inputs and investment to innovations
- Slower population growth

51
GDP in US

52
 Homework
▶ Replicate Figure 1.8 (for sector shares in China’s GDP)
and Figure 1.10 (contributions of each sector to GDP
growth) in Qilin Li’s book
▶ This helps you to understand the compositions of GDP
in China
▶ Quarterly frequency
▶ Which sector contributes most to the GDP decline in
2008 crisis
▶ Produce the similar two figures at annual frequency using
the expenditure approach: Y = C + I + G + EX
▶ Use data from Chang et al. (2016)
▶ Variable names: NominalGDP = NominalHHC +
NominalGCF+ NominalGovtC + NominalNetExports;
GDPDeflator
▶ Which part contributes most to the GDP decline in 2008
crisis
53