Economics Summary
Lecture 1. Intro to Macroeconomics
Macroeconomics: analyses the operation of the whole economy. Growth; unemployment; inflation;
exchange rates.
The economic problem: scarcity, choice and opportunity cost.
The earth’s resources are limited in supply, i.e. are scarce relative to our collective wants. The
problem is that our wants exceed our resources. The same applies for firms and governments. This
forces us to make choices, which are measured in terms of opportunity cost.
The main focus of economics is how societies can satisfy their wants as fully as possible given their
limited resources for providing the items which satisfy such wants. The economist is primarily
concerned with how society can best use its available resources to satisfy its given wants.
How do we allocate scarce resources among unlimited wants? What, how and for whom to produce?
Macroeconomic objectives:
- Sustainable rates of growth
- Low level of unemployment
- Low level of inflation
- Equitable distribution of income
- Balance of payment equilibrium (or surplus?)
The idea that macro economy is like a well-organized family is called the classical view. Most
economics agree that the classical view makes a lot of sense in the long-run. The idea that
government action can promote short-run stability is called the Keynesian view.
Income and expenditure
Gross Domestic Product is the market value of all final goods and services produced within a country
in a given period of time. It is our measure of the economy’s total income, often called ‘national
income’. It also measures the total expenditure on the economy’s output of goods and services
produced in the economy, and the value of the economy’s output (production) of goods and services.
Thus, GDP is also referred to as ‘output’.
For the economy as a whole, income equals expenditure, because every dollar a buyer spends is a
dollar of income for the seller. The equality of income and expenditure is an accounting identity; it
must be true that income equals expenditure.
Note: goods are valued at their market price so; all goods measured in the same units (for example
US dollars), things that don’t have a market value are excluded (for example housework you do for
yourself) and underground economy is also omitted from the official measures of GDP.
Circular flow of income:
A simple depiction of the macro economy. It illustrates GDP as spending, revenue, factor payments
and income.
Preliminaries:
- Factors of production are inputs like labour, land, capital and natural resources.
- Factor payments are payments to the factors of production (e.g., wages, rent)
,Withdrawals: Firms:
- Net saving (S) - Buy/hire factors of
- Net taxes (T) production, use them to
- Import expenditure (M) produce goods and services
- Sell goods and services
Injections:
- investment (I) Consumption of
Factor
- Government expenditure (G) domestically
Payments
- Export expenditure (X) produced goods
and services Cd
Households:
- Own the factors of production,
sell/rent them to firms for
income
- Buy and consume goods and
services
`
In this diagram the green arrows represent flows of income/payments. The red arrows represent
flows of goods and services (including services of the factors of production in the lower half of the
diagram). They have omitted the government, financial system and foreign sector.
The government: Collects taxes, buys goods and services
The financial system: Matches saver’s supply of funds with borrowers’ demand for loans.
The foreign sector: Trades goods and services, financial assets, and currencies with the country’s
residents.
The components of GDP (Y):
Y = C + I + G + NX
, Consumption (C): is total spending by households on goods and services.
Note on household costs:
- For renters, consumption includes rent payments
- For homeowners, consumption includes the imputed rental value of the house, but not the
purchase price or mortgage payments.
Investment (I): is total spending on goods that will be used in the future to produce more goods.
Includes spending on:
- Capital equipment (e.g. machines, tools)
- Structures (factories, office buildings, houses)
- Inventories (goods produced but not yet sold)
Note: ‘investment’ does not mean the purchase of financial assets like stocks and bonds.
Government Purchases (G): is all spending on the goods and services purchased by government at
the federal, state and local levels. Transfer payments, such as social security or unemployment
insurance benefits are excluded, they are not purchases of goods and services.
Net Exports (NX): export – imports. Exports represent foreign spending on the economy’s goods and
services. Imports are the portions of consumption, investment and government purchases that are
spent on goods and services produced abroad.
The ‘Net’ in ‘Net Exports’ refers to the fact that we are subtracting imports from exports.
Measuring national income
There are three ways of measuring GDP;
- The product method (or value-added method)
- The income method
- The expenditure method
The product method
- GDP = final output - imports
- The problem of double counting
- The measuring of value added
- Gross value added (GVA)
- Some qualifications
o Stocks
o Government services
o Ownership of dwellings
o Taxes and subsidies on products
The income method
- GDP = labour income + capital income
- Adding factor earnings
- Some qualifications
o Stock appreciation
o Transfer payments
o Direct taxes; taxes and subsidies on products
Lecture 1. Intro to Macroeconomics
Macroeconomics: analyses the operation of the whole economy. Growth; unemployment; inflation;
exchange rates.
The economic problem: scarcity, choice and opportunity cost.
The earth’s resources are limited in supply, i.e. are scarce relative to our collective wants. The
problem is that our wants exceed our resources. The same applies for firms and governments. This
forces us to make choices, which are measured in terms of opportunity cost.
The main focus of economics is how societies can satisfy their wants as fully as possible given their
limited resources for providing the items which satisfy such wants. The economist is primarily
concerned with how society can best use its available resources to satisfy its given wants.
How do we allocate scarce resources among unlimited wants? What, how and for whom to produce?
Macroeconomic objectives:
- Sustainable rates of growth
- Low level of unemployment
- Low level of inflation
- Equitable distribution of income
- Balance of payment equilibrium (or surplus?)
The idea that macro economy is like a well-organized family is called the classical view. Most
economics agree that the classical view makes a lot of sense in the long-run. The idea that
government action can promote short-run stability is called the Keynesian view.
Income and expenditure
Gross Domestic Product is the market value of all final goods and services produced within a country
in a given period of time. It is our measure of the economy’s total income, often called ‘national
income’. It also measures the total expenditure on the economy’s output of goods and services
produced in the economy, and the value of the economy’s output (production) of goods and services.
Thus, GDP is also referred to as ‘output’.
For the economy as a whole, income equals expenditure, because every dollar a buyer spends is a
dollar of income for the seller. The equality of income and expenditure is an accounting identity; it
must be true that income equals expenditure.
Note: goods are valued at their market price so; all goods measured in the same units (for example
US dollars), things that don’t have a market value are excluded (for example housework you do for
yourself) and underground economy is also omitted from the official measures of GDP.
Circular flow of income:
A simple depiction of the macro economy. It illustrates GDP as spending, revenue, factor payments
and income.
Preliminaries:
- Factors of production are inputs like labour, land, capital and natural resources.
- Factor payments are payments to the factors of production (e.g., wages, rent)
,Withdrawals: Firms:
- Net saving (S) - Buy/hire factors of
- Net taxes (T) production, use them to
- Import expenditure (M) produce goods and services
- Sell goods and services
Injections:
- investment (I) Consumption of
Factor
- Government expenditure (G) domestically
Payments
- Export expenditure (X) produced goods
and services Cd
Households:
- Own the factors of production,
sell/rent them to firms for
income
- Buy and consume goods and
services
`
In this diagram the green arrows represent flows of income/payments. The red arrows represent
flows of goods and services (including services of the factors of production in the lower half of the
diagram). They have omitted the government, financial system and foreign sector.
The government: Collects taxes, buys goods and services
The financial system: Matches saver’s supply of funds with borrowers’ demand for loans.
The foreign sector: Trades goods and services, financial assets, and currencies with the country’s
residents.
The components of GDP (Y):
Y = C + I + G + NX
, Consumption (C): is total spending by households on goods and services.
Note on household costs:
- For renters, consumption includes rent payments
- For homeowners, consumption includes the imputed rental value of the house, but not the
purchase price or mortgage payments.
Investment (I): is total spending on goods that will be used in the future to produce more goods.
Includes spending on:
- Capital equipment (e.g. machines, tools)
- Structures (factories, office buildings, houses)
- Inventories (goods produced but not yet sold)
Note: ‘investment’ does not mean the purchase of financial assets like stocks and bonds.
Government Purchases (G): is all spending on the goods and services purchased by government at
the federal, state and local levels. Transfer payments, such as social security or unemployment
insurance benefits are excluded, they are not purchases of goods and services.
Net Exports (NX): export – imports. Exports represent foreign spending on the economy’s goods and
services. Imports are the portions of consumption, investment and government purchases that are
spent on goods and services produced abroad.
The ‘Net’ in ‘Net Exports’ refers to the fact that we are subtracting imports from exports.
Measuring national income
There are three ways of measuring GDP;
- The product method (or value-added method)
- The income method
- The expenditure method
The product method
- GDP = final output - imports
- The problem of double counting
- The measuring of value added
- Gross value added (GVA)
- Some qualifications
o Stocks
o Government services
o Ownership of dwellings
o Taxes and subsidies on products
The income method
- GDP = labour income + capital income
- Adding factor earnings
- Some qualifications
o Stock appreciation
o Transfer payments
o Direct taxes; taxes and subsidies on products
