MACROECONOMICS
OBJECTIVES
1) Full employment: most people who are willing and able to work should be able to find work = equilibrium
- High unemployment → social + economic challenges
2) Low inflation: APL of goods and services should increase over time
- Unanticipated fluctuations in PL = undesirable
- Some inflation is good because price level is increasing; shift is right-hand side on LRAS
3) Steady rate of economic growth: nation’s output of goods and services should increase year after year (avoid recession); improve
standard of living
4) Income distribution: nation’s income should be distributed relatively equally across various levels or classes of society; ensures
opportunity for all
- Grossly unequal distribution of income → social, political, economic unrest
- Equity over equality; equality in the form of equity
,11: MEASURING NATIONAL ECONOMIC PERFORMANCE
IMF, OECD, World Bank attempts to figure out richest people
Money can be either:
- Leakage: money that exits the system
- Injection: money that enters the system
Circular Flow in open economy (LIIE):
→ Injections and leakages have tendency to become equal; however, it is
very unlikely that they will be equal.
Output = income: essential idea that all spending in economy equal income
received
Income flow (from FoP) = expenditure flow (on g & s)
- Two flows must equal value of total g & s (output flow), because
each good and service multiplied by its price will add up to total
output
- = consumer expenditure, because spending by consumers = each
item bought multiplied by price
Size of injection + leakage
- If injection < leakage, income flow is smaller
- If injection > leakage, income flow is greater
Sectors
1) Government sector: draw money out using tax; however, re-enters model through government spending
2) Foreign sector: imports and exports
3) Financial sector:
- Savings slow down flow of expenditure → income
- Savings from bank available to borrowers who inject money through investment
Method of measuring national income:
1) Expenditure approach: total spending on final new goods and services in a given year
*does not include intermediate: goods that will be input goods/raw materials for other production
a) Consumption (C): durable and nondurable goods and services purchased by private individuals and households →
SEPARATE from consumption
- Durable goods: goods that last more than one year (ex. Refrigerator, televisions)
- Nondurable goods: rapidly consumed goods that do not last long as a year (ex. Food, magazines, beauty
products)
- Services: actions performed by firm (ex. Legal services, insurance, sales firms)
b) Investment (I): spending by firms and households
- Firms spend on capital goods like BEM; business, equipment, machinery
- Households spend on housing and new construction (resale value)
c) Government spending (G): spending on gov. purchases such as salaries + capital goods
- Does NOT include transfer payments (tax revenue redistributed to pensioners, veterans, and unemployed)
because it is not a new production; direct gov. entitlement programs
d) Net exports (X-M): treat all exports as an inflow
- Net exports = export revenues - import payments
→ (total income from sale of exports to foreigners) - (total amount spent by nation’s households, firms, gov. on
goods and services imported from other countries)
- Expenditure approach; GDP = C + I + G + (X-M)
- - : more import
- + : more export
→ good, because there is no overlapping + delineate each economic actor
= quantity how confident and well households are doing
1
, 2) Income approach: roughly approximates returns for factors of production (wages, interest, rent, profit)
- Looks at market view of the circular flow of income
3) Output approach: total value of all final goods and services produced in a year
- Attempts to take raw material and makes value
Why measure economic performance? = PEC
1) Political power to people
- Gives one ability to understand/interpret own experience of economy + fiscal policies
- Voters can assess effectiveness of leaders
2) Evaluation of economic performance
3) Change policy accordingly
Gross domestic product (GDP): total value of all final goods and services within borders of a country (in a
macroeconomy) in a given time period = measure of economic activity
- Real GDP: measures of output that factor out price changes and should show more accurate measure of true output from one
year to next
- Nominal GDP: value of goods and services produced in country in a given year, expressed in the value of the prices charged for
that year
- Inflation: when price level increases; nominal GDP exaggerates value of output compared to real
- Deflation: when price level decreases; “ underestimates “
-
- Per capita GDP: national income (total output) divided by population
How useful and accurate? (short comings) → per capita income levels do not necessarily constitute to welfare levels (LOU):
- Lacks information:
- X value composition of output (ex. Hospitals vs. weapons)
- X measure other aspect of quality of life (ex. Trust for gov.)
- X information about distribution of income
- X purchasing power; does not take into account what that dollar means
- Purchasing power parity (PPP) based on law of one price; identical good should cost the same in all countries,
thus reflects the exchange rate
- Overestimates well-being:
- Counts money spent to negative social behaviours and transactions (ex. Jails, wars, consumption of unhealthy products)
- Under-reports the loss of natural resources: often spending resources include those that harm the environment (ex.
Degradation of rainforest, strip mining of metals)
- Underestimates well-being:
- Extended life expectancy x included
- Black and underground market (shadow economy) x included
- Unpaid output such as volunteers, parenting, self-run farmers x counted
- Adds market transactions regardless of quality of output (ex. Hospitals or jails?)
→ Green GDP: country’s aggregate output that accounts for environmental destruction
- Adds monetary value to soil erosion, water pollution, loss of biodiversity
*controversial because it is hard to measure
Calculation
- Real GDP = nominal GDP/GDP deflator ✕ 100; in other words,
- GDP deflator: broad measure of price levels in the economy = nominal GDP/real GDP ✕ 100
2
, - *base year is ALWAYS base year
- ONLY includes domestic goods (GNI includes everything consumed by citizen in a nation)
Growth: increase in real GDP from one year to the next → rate of change:
- Final value - initial value / initial value ✕ 100
GNI: value of the income produced by citizens of a country; counts for Korea’s GNI, but Vietnam’s GDP
Value vs. income
Gross national product (GNP) = GNI measures flow of income based on actual ownership of factors of production
- Net property income from abroad: GDP - any foreign factors of production
- + sum of income from domestically owned assets abroad, - income from foreign owned assets within country
GNP = GDP + net property income from abroad
- GNI per capita <955: low-income
- GNI per capita 995<x<3945: lower-middle-income
- GNI per capita 3946<x<12 195: upper-middle income economies
- GNI per capita x>12 196: high-income economies
- - : more foreigners in the country
- + : more people outside of the country
Net national product (NNP): GNP - depreciation (wearing down of capital goods); to further account for value of goods and services
GDP + GNP: both reflect national output and income of an economy
Business cycle: fluctuations in GDP
Recession: 2 consecutive quarters of declining national output (more than 6 months)
→ different from rate of growth (4 → 2.5% is still growing)
- Recessionary trough: lowest point
- Recovery: increase in GDP from recessionary level to match level of output produced before the recession
- Expansion: economy grows beyond its previous level of output; happens in short bursts
3
OBJECTIVES
1) Full employment: most people who are willing and able to work should be able to find work = equilibrium
- High unemployment → social + economic challenges
2) Low inflation: APL of goods and services should increase over time
- Unanticipated fluctuations in PL = undesirable
- Some inflation is good because price level is increasing; shift is right-hand side on LRAS
3) Steady rate of economic growth: nation’s output of goods and services should increase year after year (avoid recession); improve
standard of living
4) Income distribution: nation’s income should be distributed relatively equally across various levels or classes of society; ensures
opportunity for all
- Grossly unequal distribution of income → social, political, economic unrest
- Equity over equality; equality in the form of equity
,11: MEASURING NATIONAL ECONOMIC PERFORMANCE
IMF, OECD, World Bank attempts to figure out richest people
Money can be either:
- Leakage: money that exits the system
- Injection: money that enters the system
Circular Flow in open economy (LIIE):
→ Injections and leakages have tendency to become equal; however, it is
very unlikely that they will be equal.
Output = income: essential idea that all spending in economy equal income
received
Income flow (from FoP) = expenditure flow (on g & s)
- Two flows must equal value of total g & s (output flow), because
each good and service multiplied by its price will add up to total
output
- = consumer expenditure, because spending by consumers = each
item bought multiplied by price
Size of injection + leakage
- If injection < leakage, income flow is smaller
- If injection > leakage, income flow is greater
Sectors
1) Government sector: draw money out using tax; however, re-enters model through government spending
2) Foreign sector: imports and exports
3) Financial sector:
- Savings slow down flow of expenditure → income
- Savings from bank available to borrowers who inject money through investment
Method of measuring national income:
1) Expenditure approach: total spending on final new goods and services in a given year
*does not include intermediate: goods that will be input goods/raw materials for other production
a) Consumption (C): durable and nondurable goods and services purchased by private individuals and households →
SEPARATE from consumption
- Durable goods: goods that last more than one year (ex. Refrigerator, televisions)
- Nondurable goods: rapidly consumed goods that do not last long as a year (ex. Food, magazines, beauty
products)
- Services: actions performed by firm (ex. Legal services, insurance, sales firms)
b) Investment (I): spending by firms and households
- Firms spend on capital goods like BEM; business, equipment, machinery
- Households spend on housing and new construction (resale value)
c) Government spending (G): spending on gov. purchases such as salaries + capital goods
- Does NOT include transfer payments (tax revenue redistributed to pensioners, veterans, and unemployed)
because it is not a new production; direct gov. entitlement programs
d) Net exports (X-M): treat all exports as an inflow
- Net exports = export revenues - import payments
→ (total income from sale of exports to foreigners) - (total amount spent by nation’s households, firms, gov. on
goods and services imported from other countries)
- Expenditure approach; GDP = C + I + G + (X-M)
- - : more import
- + : more export
→ good, because there is no overlapping + delineate each economic actor
= quantity how confident and well households are doing
1
, 2) Income approach: roughly approximates returns for factors of production (wages, interest, rent, profit)
- Looks at market view of the circular flow of income
3) Output approach: total value of all final goods and services produced in a year
- Attempts to take raw material and makes value
Why measure economic performance? = PEC
1) Political power to people
- Gives one ability to understand/interpret own experience of economy + fiscal policies
- Voters can assess effectiveness of leaders
2) Evaluation of economic performance
3) Change policy accordingly
Gross domestic product (GDP): total value of all final goods and services within borders of a country (in a
macroeconomy) in a given time period = measure of economic activity
- Real GDP: measures of output that factor out price changes and should show more accurate measure of true output from one
year to next
- Nominal GDP: value of goods and services produced in country in a given year, expressed in the value of the prices charged for
that year
- Inflation: when price level increases; nominal GDP exaggerates value of output compared to real
- Deflation: when price level decreases; “ underestimates “
-
- Per capita GDP: national income (total output) divided by population
How useful and accurate? (short comings) → per capita income levels do not necessarily constitute to welfare levels (LOU):
- Lacks information:
- X value composition of output (ex. Hospitals vs. weapons)
- X measure other aspect of quality of life (ex. Trust for gov.)
- X information about distribution of income
- X purchasing power; does not take into account what that dollar means
- Purchasing power parity (PPP) based on law of one price; identical good should cost the same in all countries,
thus reflects the exchange rate
- Overestimates well-being:
- Counts money spent to negative social behaviours and transactions (ex. Jails, wars, consumption of unhealthy products)
- Under-reports the loss of natural resources: often spending resources include those that harm the environment (ex.
Degradation of rainforest, strip mining of metals)
- Underestimates well-being:
- Extended life expectancy x included
- Black and underground market (shadow economy) x included
- Unpaid output such as volunteers, parenting, self-run farmers x counted
- Adds market transactions regardless of quality of output (ex. Hospitals or jails?)
→ Green GDP: country’s aggregate output that accounts for environmental destruction
- Adds monetary value to soil erosion, water pollution, loss of biodiversity
*controversial because it is hard to measure
Calculation
- Real GDP = nominal GDP/GDP deflator ✕ 100; in other words,
- GDP deflator: broad measure of price levels in the economy = nominal GDP/real GDP ✕ 100
2
, - *base year is ALWAYS base year
- ONLY includes domestic goods (GNI includes everything consumed by citizen in a nation)
Growth: increase in real GDP from one year to the next → rate of change:
- Final value - initial value / initial value ✕ 100
GNI: value of the income produced by citizens of a country; counts for Korea’s GNI, but Vietnam’s GDP
Value vs. income
Gross national product (GNP) = GNI measures flow of income based on actual ownership of factors of production
- Net property income from abroad: GDP - any foreign factors of production
- + sum of income from domestically owned assets abroad, - income from foreign owned assets within country
GNP = GDP + net property income from abroad
- GNI per capita <955: low-income
- GNI per capita 995<x<3945: lower-middle-income
- GNI per capita 3946<x<12 195: upper-middle income economies
- GNI per capita x>12 196: high-income economies
- - : more foreigners in the country
- + : more people outside of the country
Net national product (NNP): GNP - depreciation (wearing down of capital goods); to further account for value of goods and services
GDP + GNP: both reflect national output and income of an economy
Business cycle: fluctuations in GDP
Recession: 2 consecutive quarters of declining national output (more than 6 months)
→ different from rate of growth (4 → 2.5% is still growing)
- Recessionary trough: lowest point
- Recovery: increase in GDP from recessionary level to match level of output produced before the recession
- Expansion: economy grows beyond its previous level of output; happens in short bursts
3
