6. What is Macroeconomics?
• In Micro, we studied products, industries and markets.
We studied government intervention and saw that
intervention creates inefficiencies in markets. We saw
that when markets are not operating efficiently
(externalities), government intervention is needed. We
focused on specific products / companies / industries.
• In Macro, we study economic policies on the country level.
We look at overall country well-being, growth,
government spending, central banks, and national debt.
In Macro, profit is not the main goal…
7. What is Macroeconomics?
• Macroeconomics is a branch of economics that studies
how an overall economy—the market or other systems
that operate on a large scale—behaves. Macroeconomics
studies economy-wide phenomena such as inflation, price
levels, rate of economic growth, national income, gross
domestic product (GDP), and changes in unemployment.
•Macroeconomics deals with the structure, performance,
behavior, and decision-making of the whole, or aggregate,
economy.
8. What is Macroeconomics?
• Some of the key questions addressed by macroeconomics
include: What causes unemployment? What causes
inflation? What creates or stimulates economic growth?
Macroeconomics attempts to measure how well an
economy is performing, to understand what forces drive it,
and to project how performance can improve.
• Macroeconomics deals with the performance, structure,
and behavior of the entire economy, in contrast to
microeconomics, which is more focused on the choices
made by individual actors in the economy (like people,
households, industries, etc.).
10. Long Run Aggregate Supply
Where Yfe = full
employment (the
maximum producing
output for a
country)
The because, in the long-run,
LRAS is vertical
the potential output an
economy can produce
isn't related to the price
level.
13. Five main objectives in MACRO
Variable Macro objective Instrument of
measurement
Economic growth STEADY growth GDP, GNP, NNP
Employment LOW unemployment Unemployment rate
Price Stability LOW inflation rate Inflation rate (CPI)
External Stability FAVORABLE balance of
payments (trade)
Balance of payments
acct
Income distribution FAIR distribution of
income
Lorenz curve, Gini
coefficient, welfare
spending
14. Key Macro Terms
Micro
Concept
Macro Concept Key Terms in Macroeconomics
Market National economy Examines all the economic activity taking place in a country
Demand
Aggregate Demand
(AD)
The total demand for a nation’s output of goods and
services
Supply
Aggregate Supply
(AS)
The total supply of goods and services by all the industries
of a country
Price Average Price Level
An index of the average prices of goods and services over
time
Quantity GDP Total output of all the industries of a country
Decrease in
Demand
Recession A fall in total output resulting from a decrease in AD
Increase in
Demand
Inflation
An increase in the average price level resulting from an
increase in AD
Decrease in
Supply
Supply Shock
An increase in the price level and decrease in output from a
fall in AS
Increase in
Supply
Economic Growth
An increase in national output resulting from an increase in
AS
15. Two sector circular flow model
Outer Flow: factors
of production and
services
Inner Flow: money
payments and
money income
16. Two sector circular flow model
Households Firms
Goods and
Services
Factors of
production
Wages, rent,
interest,
profits
Expenditures
Product Market
Resource
Market
Output
Revenues
Costs of
production
Land, labor,
capital
17. Circular Flow Model: Market Economy
Economy is simplified to include two economic decision makers, households and
firms. Government and international trade are excluded (for now).
The inner loop is the flow of inputs and outputs. The outer loop is the flow of dollars
(payments) that results.
18. Leakages and injections
Government Sector:
Taxes are leakages
(money out of flow to govt)
Public Goods are
injections (money added
into flow by govt)
Foreign Sector:
Imports = leakage ($ out)
Exports = injection ($ in)
Banking Sector:
Savings = leakage
Investment = injection
Green arrows: injections
Red arrows: leakages
19. Three Approaches to Measuring Output (GDP)
There is a relationship between the amount of income earned, the expenditures made
and the total output. The economic activity of a nation can be measured using any of
these three methods:
The Income approach:
Wages (labor) + Interest (Capital) + Rent (Land) + Profit (Entrepreneurship)
National Income = W+I+R+P
The Output approach:
We add up the VALUE ADDED in each sector (ex/ Raw materials to car parts to
final car)
National output = Outputs of the primary sector + the secondary sector + the tertiary
sector
The Expenditure approach: We’ll use this one!
Consumption + Investment + Govt Spending + Net Exports
Total expenditures equal C+I+G+Xn
20. What is included in GDP?
GDP measures the value of the final output of goods and services in a nation in a year.
But there are some economic transactions which are not included in GDP.
GDP includes:
• GDP includes only final products and services
• GDP is the value of what has been produced within the borders of
a nation over one year, not what was actually sold.
GDP Excludes "nonproduction transactions“:
• Purely financial transactions are excluded.
⮚ Public transfer payments, like welfare, Medicaid, Social Security.
⮚ Private transfer payments, like inheritance, alimony, allowance.
⮚ The sale of stocks and bonds represent a transfer of existing
assets (However, the brokers’ fees are included for services
rendered.)
• Secondhand sales are excluded.
21. Household Consumption (C):
The purchase by households of all goods and services, including:
• Non-durables:
• Durables:
• Services:
Gross Private Domestic Investment- (I)
• All final purchases of capital (machinery, tools, etc.)
• All construction (including residential).
• Changes in business inventories
The Components of GDP
The expenditure approach to measuring GDP measures the total spending on a nation’s
output by households, firms, the government and foreigners. The 4 types of spending:
22. Government Spending (on consumption goods and capital goods) - (G)
• Includes spending by: Federal, State & Local govts.
• Includes all direct purchases of resources (labor in particular).
• This entry excludes: transfer payments (welfare, Social Security…)
Net Exports- (Xn)
• All spending on goods produced in the U.S. must be included in
GDP, whether the purchase is made here or abroad.
• Often goods purchased and measured in the U.S. are produced
elsewhere (Imports).
• Therefore, net exports, (Xn) is the difference: (exports - imports)
and can be either a positive or negative number depending on
which is the larger amount.
23. What is the GDP?
If 300 million people live in the US what is the per capita GDP?
24. Nominal GDP and Real GDP
Nominal GDP measures the value of a nation’s output produced in a year,
expressed in the value of the prices charged for that year.
• What happens to nominal GDP if prices go up (inflation) but actual output
doesn’t change?
increases
• Real GDP is the actual output of a nation adjusted for changes in the price
level.
• Real GDP tells us the real information about output levels.
• Inflation: nominal GDP > real GDP
• Deflation: nominal GDP < real GDP
Real GDP = the value of a nation’s output in a particular year adjusted for
changes in the price level from a base year. Offers a more accurate measure of
actual quantity of goods and services a nation’s produces because it adjusts for
price changes.
25. Why is GDP important?
GDP is considered by economists to be the most important measure of
economic activity in nations for several reasons:
• It tells us something about the relative size of different countries' economies
• It tells us how much income a country earns in a year (assuming everything
that is produced is sold).
• GDP Per capita --
• Divide GDP by the population and we get GDP per capita, which tells us
how many goods and services the average person consumes in a
country.
• When real GDP grows more than the population, that tells us that people
on average, have more stuff than they did before.
• Are they better off? Maybe…
Real GDP is better indicator of output than nominal GDP
GDP per capita is a better indicator of the well-being of a typical
person in a nation than total GDP
26. 2.1 GDP and its Determinants
Real GDP and Real GDP per capita
A nation’s real GDP tells us the actual value of its output in a particular year, adjusted for
any changes in the price level between that year and an earlier base year. However, real
GDP does not tell us whether a nation is rich or poor. Consider the tables below:
Countries with largest
GDP
(and per-capita rank)
Total GDP, (trillions $)
Country with largest
per capita GDP
(and total GDP rank)
Per-capita GDP
($ in 2009)
1. United States (6) 14.2 1. Luxembourg (68) 105,350
2. Japan (14) 5.0 2. Norway (24) 79,089
3. China (86) 4.9 3. Denmark (29) 55,992
4. Germany (13) 3.3 4. Ireland (37) 51,049
5. France (12) 2.6 5. Netherlands (16) 47,917
Per capita GDP: Measures the total GDP of a nation divided by the total population.
• Gives a more realistic measure of how rich a nation is.
• Notice that none of the richest nations (on the right) are even in the top 15 for total
GDP
GDP
27. 2.1 GDP and its Determinants
Real GDP and Real GDP per capita
A nation’s real GDP tells us the actual value of its output in a particular year, adjusted for
any changes in the price level between that year and an earlier base year. However, real
GDP does not tell us whether a nation is rich or poor. Consider the tables below:
Countries with largest
GDP
(and per-capita rank)
Total GDP, (trillions $)
Country with largest
per capita GDP
(and total GDP rank)
Per-capita GDP
($ in 2009)
1. United States (6) 14.2 1. Luxembourg (68) 105,350
2. Japan (14) 5.0 2. Norway (24) 79,089
3. China (86) 4.9 3. Denmark (29) 55,992
4. Germany (13) 3.3 4. Ireland (37) 51,049
5. France (12) 2.6 5. Netherlands (16) 47,917
What does this slide tell you about China?
What does it tell you about Luxembourg?
What do the nations on the right have in common?
GDP
28. G&S produced
within a
country’s
borders
By foreign
companies in
the US
GDP vs GNP
GDP GNP
G&S
produced
By US
companies
in the US
G&S produced
by a country’s
residents
By US
companies in
foreign
countries
Gross National Product (GNP): Measures the total value of output
produced in a year by the factors of production provided by a nation.
• Differs from GDP: GNP focuses on ownership but GDP focuses on location.
• Measuring economic activity of the nation? Which seems more accurate?
29. GDP vs GNP
GDP GNP
G&S
produced
By US
companies
in the US
G&S
produced
By foreign
companies
in the US
G&S
produced
By US
companies
in foreign
countries
Gross Domestic Product: Economists and investors are more
concerned with GDP than with GNP because it provides a more
accurate picture of a nation’s total economic activity regardless of
country-of-origin, and thus offers a better indicator of an economy’s
overall health.
31. GNP vs. NNP
Net National Product: uses GNP and subtracts “capital
consumption”
Capital consumption is the production that goes toward
replacing worn out capital goods (fixing and repairing
machinery, etc.)
GNP may be overestimating national production.
32. GDP may overestimate environmental well-
being:
• Adds negative social behaviors and transactions
• Under-reports the loss of natural resources
Green GDP: This is an under-used measure of
economic activity which subtracts from real GDP the
losses to the environment and biodiversity resulting
from economic growth.
• Places a monetary value on environmental degradation and
subtracts this from the nation’s GDP
• Trying to include the loss of well-being in the country
33. Robert F. Kennedy on GDP:
• “We will find neither national purpose nor personal satisfaction in a mere continuation of
economic progress, in an endless amassing of worldly goods. We cannot measure national
spirit by the Dow Jones Average, nor national achievement by the Gross National Product.
For the Gross National Product includes air pollution, and ambulances to clear our
highways from carnage. It counts special locks for our doors and jails for the people who
break them. The Gross National Product includes the destruction of the redwoods and the
death of Lake Superior. It grows with the production of napalm and missiles and nuclear
warheads…. It includes… the broadcasting of television programs which glorify violence to
sell goods to our children.
• “And if the Gross National Product includes all this, there is much that it does not
comprehend. It does not allow for the health of our families, the quality of their education,
or the joy of their play. It is indifferent to the decency of our factories and the safety of our
streets alike. It does not include the beauty of our poetry, or the strength of our marriages,
the intelligence of our public debate or the integrity of our public officials… the Gross
National Product measures neither our wit nor our courage, neither our wisdom nor our
learning, neither our compassion nor our devotion to our country. It measures everything,
in short, except that which makes life worthwhile….”
34. GDP under/overestimates well-being:
• Ignores life expectancy
• Ignores black market activity
• Ignores unpaid output (surplus inventory)
• Adds market transactions, ignoring quality
• Ignores composition of output
• Ignores quality of life measures
• Ignores distribution of income
• Ignores purchasing power (PPP)
• PPP: Purchasing Power Parity – the same good should cost the same from
one country to another
37. World Bank classifications
• Low income economies
• Bangladesh, Chad, Sudan, Vietnam, India
• Lower middle income economies
• Algeria, Belarus, China, Colombia, Iran, Tunisia, West Bank and
Gaza, Jordan, Egypt
• Upper middle income economies
• Argentina, Brazil, Chile, Russian Federation, Poland, Turkey,
Venezuela, Lebanon
• High income countries
• US, UK, France, Sweden, Virgin Islands, Japan, Canada, Cyprus,
Puerto Rico, Israel, Kuwait, Saudi Arabia
38. The Business Cycle
Changes in a nation’s GDP over time can be illustrated in a simple economic model
known as the business cycle. There are multiple stages to a nation’s business cycle
• A recession:
• 6 months or more with GDP
falling; unemployment up and
prices down (different from a
growth “slowdown”)
• A recovery:
• GDP increases up to matching
previous level; unemployment
falls and prices rise
• An expansion:
• GDP grows beyond previous level
Long-run Growth Trend: Notice that despite the short-term fluctuations, the economy
tends to grow over time
39. The Business Cycle
Possible causes of the business cycle: There are several theories regarding WHY
countries grow at such volatile rates over time.
-- War / excess spending on political events
-- Future expectations (affecting spending)
-- Major tech or product innovations
-- Other countries’ economies
-- Exchange rates
Decrease in GDP versus a decrease in GDP growth rate:
• The growth rate of an economy refers to the percentage change in GDP between two
periods of time. When an economy is approaching a peak in its business cycle, the
rate of growth has begun to fall.
• When a recession begins, the actual output of an economy decreases. This means
the growth rate has become negative.
40. Compare Two Countries
• Macroeconomic (World Development) Indicators - Great B
ritain
PDF of Country Classifications
Mapped: The Greenest Countries in the World
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