Macroeconomics IB summary

LEVEL OF OVERALL ECONOMIC ACTIVITY:

CIRCULAR FLOW OF INCOME MODEL




→ in an open economy (with foreign trade) with government and financial market
includes leakages and injections

IF: injections>leakages→ circular flow grows bigger→ economy grows
IF: injections<leakages→ circular flow shrinks→ economy is in recession


GDP & GNI (GNP)

GDP→ The total value of all final goods and services produced Within the boundaries of
the country, in a year.

GNI(GNP) → the total income received by the residents of the country in a year.

GNI= GDP + factor income received from abroad - factor income sent abroad = GDP + net factor income from abroad

,factor income received from abroad:
● Remittances
● Profits of multinational corporations earned abroad and sent home

factor income sent abroad:
● Remittances
● Profits of multinational corporations operating domestically sent back to their
home country

!GDP is a better measure of the value of output produced by a country than GNI!
!GNI is a better measure of the amount of income earned by the residents of a country!

Nominal GDP/GNI→ Measures of output and income in terms of current prices

Real GDP/GNI→ measures of output and income in terms of constant prices in one
particular year, therefore real values eliminates the influence of price level changes over
time

GDP/GNI PER CAPITA→ Divided by the number of population

MEASURING ECONOMIC ACTIVITY
1) Expenditure approach
2) Income approach
3) Output approach

,EVALUATING THE USE OF NATIONAL INCOME STATISTICS
GDP (or GNI) may GDP (or GNI) may GDP (or GNI) may
underestimate standards overestimate standards over/under estimate
of living because they: of living because they: standards of living
because they:

● Do not include ● Do not take into ● Disregard what
output sold in the account the value of outfit consist of
underground negative ● disregard
economy externalities that distribution of
(unreported income reduce standards of income
of a plumber) living (pollution) ● disregard differing
● do not include out ● do not take into price levels in
food that is not sold account the different countries
in markets ( food destruction of
grown for own Natural Resources
consumption) (forests)
● do not take into
account
improvements in
quality of goods and
services
● do not take into
account standards
of living factors (
Education, Health,
life expectancy)



THINGS THAT CAN CORRECT:
● HDI: per capita income, health and educational levels
● PPP (Purchasing Power Parity): Correct for differing price levels in different
countries
● Green GDP: takes into account environmental destruction

Green GDP
→ measure of GDP that takes into account environmental destruction arising from
production and consumption activities, green GDP<GDP in general

Green GDP= GDP - value of environmental destruction

, BUSINESS CYCLE

Business cycle→ Short-term fluctuations in Real GDP over time, consisting of four
phases: Peak, contraction, trough & expansion

Potential output→ the level of real GDP produced when the economy is on its
long-term growth trend, where cyclical unemployment=0 and unemployment= the
natural rate (full employment output)

Short-term fluctuations→ cyclical pattern of increase and decrease in Real GDP
Long-term growth trend→ potential output




1) Peak= Temporary maximum of real GDP
2) Contraction = real GDP ↓, unemployment ↑ (cyclical) , rate of inflation ↓ (known
as recession)
3) trough= Temporary minimum of real GDP
4) expansion= real GDP ↑, unemployment ↓, rate of inflation ↑

POLICIES FOR BUSINESS CYCLE:
1- Demand-side policies (fiscal + monetary) reduce short-term fluctuations of
business cycle. Contractionary policies try to weaken the expansion (inflation) an
expansionary policies try to reduce the size of contraction (cyclical unemployment)

2- Supply-side policies increase the slope of the long-term growth trend, by increasing
the rate of economic growth, hence the level of potential output