Introduction to Macroeconomics (ECO1104)
,Chapter 1: Ten Principles of Economics
Scarcity: the limited nature of society’s resources; unlimited wants so must allocate resources
Economics: study of how society manages its scarce resources
Ten Principles of Economics
1. People face trade-offs (trade-offs between efficiency and equity)
i. Efficiency: the property of society getting the most it can from its scarce resources
ii. Equity: the property of distributing economic prosperity fairly among the members of
society
2. The cost of something is what you give up to get it
i. Opportunity cost: cost of something you give up to get it; value of the best alternative
(note: not all forgone opportunities)
3. Rational people think at the margin
i. Rational: idea that given available opportunities, an individual will pick the option that
best fits their interests and objectives (individuals acts in their own self-interest);
those who systematically and purposefully do the best they can to achieve their
objectives
ii. Marginal: rational people at the margin; they only make decisions if marginal benefits
outweigh marginal costs
iii. Marginal change: small incremental adjustments to the original plan
4. People respond to incentives
i. Incentives: inducing people to act by changing their trade-offs; something that
induces a person to act
a. Positive incentives: encourages behaviour
b. Negative incentives: discourages behaviour
5. Trade can make everyone better
i. Trade allows people and societies to specialize which results in a greater variety of
goods services
6. Markets are usually a good way to organize economic activities
i. Market: interaction of things being produced with value; the results of self-interested
individuals
ii. Invisible hand: describes the decisions of firms and households (in self-interest) that
collectively guide markets and advance the economy )markets organize economic
activity)
iii. Market economy: economy allocates resources through the decentralized decisions
of many firms and households as they interact in markets for goods and services
iv. Unitary actor assumption: group of people acting together is an individual
7. Governments can sometimes improve market outcome
i. Though generally good and markets are not always most efficient (market failures,
market power, externalities etc.); markets can fail to produce an efficient outcome
8. A country’s standard of living depends on its ability to produce goods and services
i. Standard of living: income per capita
ii. Productivity: quantity of goods and services per worker hour
■ Relationship with productivity and income: growth in productivity results in a
growth of income which results in an increased standard of living (related not
caused)
9. Prices rise when governments print too much money
i. Increase in quantity of money erodes value of money, which leads to rising prices
ii. Inflation: increase in the overall level of prices
10. There is a short run tradeoff between inflation and unemployment
i. In the longer run, this relationship falls apart
,Chapter 2: Thinking Like and Economist
Theory of observation: economists collect data to examine trends
Simplifying assumption: simplify the world around us with patterns
Models: Circular Flow Diagram
Goods and
Land, labour
services
and capital
Inco Households Spen
to be bought
me ding
Markets for Markets for
the factors goods
of and
production services
Wages,
Reve
rent Firms
nue
and profit
Purchased Goods and
land, labour services Flow of
and capital to be sold goods
Subsidies Flow of
Public Tax Households and
money
Sector payments and Firms services
(flow of
Two types of markets inputs
1. Markets for goods and services (flow of money/output) and
a. Households: buy goods and services outputs)
b. Firms: sells goods and services
2. Markets for factors of production (inputs)
a. Households: provides and sell factors of production
b. Firms: use and buy factors of production
The Possibilities Production Frontier (PPF)
- Shows trade-offs versus opportunity cost for
PP D production alone with a given amount of resources
FA and technology
Qu C - Points on the curve are always efficient
B - Points A and B are possible and efficient
ant - Point C is possible but inefficient
ity - Point D is impossible
of Quantity of
Ou Output B
tpu
tA
Microeconomics: study of how households and firms make decisions and how they interact in
markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and
economic growth
, Positive statements: claims that attempt to describe the world as it is (facts, data, descriptive)
Normative statements: claims that attempt to prescribe how the world should be (moral judgments)
Chapter 5: Managing a Nation’s Income
Total income equals total expenditure (whole economy)
↳ Total income of everyone in economy is equal to the total spendings of everyone in economy
Gross Domestic Product (GDP): the market value of all final goods and services produced within a
country in a given period of time
- GDP measures total income and expenditure
- Market value: market prices- the value of goods and services in the market
- Final goods: all final products being recorded; includes new goods only; already captures
intermediate value, thus counting only final goods avoids double-counting (i.e: notebook is a
final good, whilst the paper inside of a notebook would be an intermediate good)
- Domestic production: produced within a country
- Quarterly GDP is generally presented at an annual rate (multiply by four)
- Stocks and bonds are not included in GDP as they do not represent current production
Methods of Calculating GDP
The Expenditure Approach: adds up all expenses in the country (sum)
GDP=Y =C+ I +G+ NX
i. Consumption (C): spending of goods and services by households (i.e: chairs haircuts etc.);
houses are not included
ii. Investments (I): goods used to make other goods and services (i.e: capital equipment,
factories, structures, new houses etc.); changes in inventory are part of investment
iii. Government purchase (G): spending on goods and services by all levels of the government
(i.e: government worker salaries, public projects etc.); does not include transfer payments
iv. Net exports (NX): also called trade balance; NX =value of exports−value of imports
a. Exports: purchases of domestically produced products abroad (increases GDP)
b. Imports: domestic purchases of foreign products (decreases GDP)
The Income Approach: adds up all of the incomes of people in the country (sum)
Income=wages+interest + rentalincome + profits+indirect taxes−operating subsidies
The Value-Added Approach: sum of value added during each stage of production
At each stage , valueof outputs−value of inputs
Nominal GDP: production of goods and services at current prices; demonstrates both changes in
price and in production
Nominal GDP= p 1 q 1+ p 2q 2+ p 3 q 3 ...+ pnqn
Real GDP: production of goods and services at constant prices; demonstrates only the change in
production; choose a base year and only use base year prices; represents changes in quantities
Real GDP=p 1 q 1+ p 2 q 2+ p 3 q 3...+ pnqn→at constant prices
GDP Deflator: represents only changes in prices
Nominal GDP
GDP deflator = ×100
Real GDP
a. If the nominal GDP > real GDP: deflator > 100
b. If the nominal GDP < real GDP: deflator < 100
c. If the nominal GDP = real GDP: deflator = 100
,Chapter 1: Ten Principles of Economics
Scarcity: the limited nature of society’s resources; unlimited wants so must allocate resources
Economics: study of how society manages its scarce resources
Ten Principles of Economics
1. People face trade-offs (trade-offs between efficiency and equity)
i. Efficiency: the property of society getting the most it can from its scarce resources
ii. Equity: the property of distributing economic prosperity fairly among the members of
society
2. The cost of something is what you give up to get it
i. Opportunity cost: cost of something you give up to get it; value of the best alternative
(note: not all forgone opportunities)
3. Rational people think at the margin
i. Rational: idea that given available opportunities, an individual will pick the option that
best fits their interests and objectives (individuals acts in their own self-interest);
those who systematically and purposefully do the best they can to achieve their
objectives
ii. Marginal: rational people at the margin; they only make decisions if marginal benefits
outweigh marginal costs
iii. Marginal change: small incremental adjustments to the original plan
4. People respond to incentives
i. Incentives: inducing people to act by changing their trade-offs; something that
induces a person to act
a. Positive incentives: encourages behaviour
b. Negative incentives: discourages behaviour
5. Trade can make everyone better
i. Trade allows people and societies to specialize which results in a greater variety of
goods services
6. Markets are usually a good way to organize economic activities
i. Market: interaction of things being produced with value; the results of self-interested
individuals
ii. Invisible hand: describes the decisions of firms and households (in self-interest) that
collectively guide markets and advance the economy )markets organize economic
activity)
iii. Market economy: economy allocates resources through the decentralized decisions
of many firms and households as they interact in markets for goods and services
iv. Unitary actor assumption: group of people acting together is an individual
7. Governments can sometimes improve market outcome
i. Though generally good and markets are not always most efficient (market failures,
market power, externalities etc.); markets can fail to produce an efficient outcome
8. A country’s standard of living depends on its ability to produce goods and services
i. Standard of living: income per capita
ii. Productivity: quantity of goods and services per worker hour
■ Relationship with productivity and income: growth in productivity results in a
growth of income which results in an increased standard of living (related not
caused)
9. Prices rise when governments print too much money
i. Increase in quantity of money erodes value of money, which leads to rising prices
ii. Inflation: increase in the overall level of prices
10. There is a short run tradeoff between inflation and unemployment
i. In the longer run, this relationship falls apart
,Chapter 2: Thinking Like and Economist
Theory of observation: economists collect data to examine trends
Simplifying assumption: simplify the world around us with patterns
Models: Circular Flow Diagram
Goods and
Land, labour
services
and capital
Inco Households Spen
to be bought
me ding
Markets for Markets for
the factors goods
of and
production services
Wages,
Reve
rent Firms
nue
and profit
Purchased Goods and
land, labour services Flow of
and capital to be sold goods
Subsidies Flow of
Public Tax Households and
money
Sector payments and Firms services
(flow of
Two types of markets inputs
1. Markets for goods and services (flow of money/output) and
a. Households: buy goods and services outputs)
b. Firms: sells goods and services
2. Markets for factors of production (inputs)
a. Households: provides and sell factors of production
b. Firms: use and buy factors of production
The Possibilities Production Frontier (PPF)
- Shows trade-offs versus opportunity cost for
PP D production alone with a given amount of resources
FA and technology
Qu C - Points on the curve are always efficient
B - Points A and B are possible and efficient
ant - Point C is possible but inefficient
ity - Point D is impossible
of Quantity of
Ou Output B
tpu
tA
Microeconomics: study of how households and firms make decisions and how they interact in
markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and
economic growth
, Positive statements: claims that attempt to describe the world as it is (facts, data, descriptive)
Normative statements: claims that attempt to prescribe how the world should be (moral judgments)
Chapter 5: Managing a Nation’s Income
Total income equals total expenditure (whole economy)
↳ Total income of everyone in economy is equal to the total spendings of everyone in economy
Gross Domestic Product (GDP): the market value of all final goods and services produced within a
country in a given period of time
- GDP measures total income and expenditure
- Market value: market prices- the value of goods and services in the market
- Final goods: all final products being recorded; includes new goods only; already captures
intermediate value, thus counting only final goods avoids double-counting (i.e: notebook is a
final good, whilst the paper inside of a notebook would be an intermediate good)
- Domestic production: produced within a country
- Quarterly GDP is generally presented at an annual rate (multiply by four)
- Stocks and bonds are not included in GDP as they do not represent current production
Methods of Calculating GDP
The Expenditure Approach: adds up all expenses in the country (sum)
GDP=Y =C+ I +G+ NX
i. Consumption (C): spending of goods and services by households (i.e: chairs haircuts etc.);
houses are not included
ii. Investments (I): goods used to make other goods and services (i.e: capital equipment,
factories, structures, new houses etc.); changes in inventory are part of investment
iii. Government purchase (G): spending on goods and services by all levels of the government
(i.e: government worker salaries, public projects etc.); does not include transfer payments
iv. Net exports (NX): also called trade balance; NX =value of exports−value of imports
a. Exports: purchases of domestically produced products abroad (increases GDP)
b. Imports: domestic purchases of foreign products (decreases GDP)
The Income Approach: adds up all of the incomes of people in the country (sum)
Income=wages+interest + rentalincome + profits+indirect taxes−operating subsidies
The Value-Added Approach: sum of value added during each stage of production
At each stage , valueof outputs−value of inputs
Nominal GDP: production of goods and services at current prices; demonstrates both changes in
price and in production
Nominal GDP= p 1 q 1+ p 2q 2+ p 3 q 3 ...+ pnqn
Real GDP: production of goods and services at constant prices; demonstrates only the change in
production; choose a base year and only use base year prices; represents changes in quantities
Real GDP=p 1 q 1+ p 2 q 2+ p 3 q 3...+ pnqn→at constant prices
GDP Deflator: represents only changes in prices
Nominal GDP
GDP deflator = ×100
Real GDP
a. If the nominal GDP > real GDP: deflator > 100
b. If the nominal GDP < real GDP: deflator < 100
c. If the nominal GDP = real GDP: deflator = 100
