MACROECONOMICS

Prof. Liubov Zharova

lubov.zharova@uacu.edu.ua
Observations, theories and models
In recent years the prices of residential housing have been
rising at the same time as conventional mortgage interest
rates have been low and falling relative to earlier time
periods

The mortgage rate-house price model can also be illustrated using simple algebra.
describes average house price PH in terms of a constant PH0 and the mortgage rate MR.
PH = PH0 −bMR
The negative sign in the equation defines the inverse relationship between house prices and
mortgage rates suggested by the model. A fall in the mortgage rate MR would cause an increase
in the average house price PH.
Variables, data and index numbers
• Variables – measures that can take on
different values (economic theories and models explain the
causal relationships between variables)

• Data – recorded values of variables (Sets of data also

help to test our models or theories, but first need to pay attention to the
economic logic involved in observations and modeling)
– Correlation or Coincidence

• Time-series – a set of measurements made

sequentially at different points in time
Variables, data and index numbers
• High (low) frequency data – series with short
(long) intervals between observations.
Variables, data and index numbers
• cross-section data record the values of
different variables at a point in time
Variables, data and index numbers
• Cross-section data – values for different
variables recorded at a point in time.
• Repeated cross-section data – cross-section
data recorded at regular or irregular intervals.
• Longitudinal data – follow the same units of
observation through time.
Variables, data and index numbers
• Index number – value for a variable, or an
average of a set of variables, expressed
relative to a given base value.
• Percentage change = (change in values)/original value × 100

The key characteristics of indexes

are that they are not dependent
upon the units of measurement of
the data in question, and they are
interpretable easily with reference
to a given base value
 Variables, data and index numbers
• Composite index
numbers – a weighted
average of the
component price
indexes
For example, if oil accounts for 60
percent of fuel use, natural gas for
25 percent, and coal for 15 percent,
the price index for fuel could be
computed as follows:
Fuel price index = (oil
index×0.6)+(natural gas
index×0.25)+(coal index×0.15)
Variables, data and index numbers
• Other composite price indexes
– Consumer price index – the average price level for consumer goods
and services
– Inflation (deflation) rate – the annual percentage increase (decrease)
in the consumer price index

– Real price index – a nominal price index divided by the consumer price
index, scaled by 100.
– Nominal price index – the current dollar price of a good or service
 Dynamic of average wage in 2018-2019

Jan Feb March April May Jun July Aug Sept Oct Nov Dec

2018, Real wage, % to 2017 2019, Real wage, % to 2018

2018 Nominal wage, UAH 2019 Nominal wage, UAH
 Testing economic models & analysis

• PH = PH0 −bMR

• House prices = f (mortgage rate, incomes,

supply of housing offered on the market,
population growth, . . .)
 Ethics, efficiency and beliefs
Positive economics
studies objective or scientific
explanations of how the economy
functions. Its aim is to understand and
generate predictions about how the
economy may respond to changes and
policy initiatives. In this effort
economists strive to act as detached
scientists, regardless of political
sympathies or ethical code. Personal
judgments and preferences are
(ideally) kept apart.
Normative economics
offers recommendations based partly on
value judgments.
While economists of different political
persuasions can agree that raising the
income tax rate would lead to a general
reduction in the number of hours worked,
they may yet differ in their views on the
advisability of such a rise. One may believe
that the additional revenue that may come in
to government coffers is not worth the
disincentives to work; another may think
that, if such monies can be redistributed to
benefit the needy or provide valuable
infrastructure, the negative impact on the
workers paying the income tax is worth it.
 Case (1)
• An examination of a country’s recent international trade
flows yields the data in the table below.
a) Based on an examination of these data do you think the
national income and imports are not related, positively
related, or negatively related?
b) Draw a simple two dimensional line diagram to illustrate your
view of the import/income relationship. Measure income on
the horizontal axis and imports on the vertical axis.
 Case (2)

• The average price of a medium coffee at Coffee

Shop in each of the past ten years is given in the
table
a) Construct an annual ‘coffee price index’ for the 2005 time
period using 2006 as the base year.
b) Based on your price index, what was the percentage
change in the price of a medium coffee from 2006 to 2013?
c) Based on your index, what was the average annual
percentage change in the price of coffee from 2010 to
2013?