An Introduction to Macroeconomics (Ch.23)

An Introduction to Macroeconomics (Ch.23)Gross Domestic Product (GDP)GDP, or gross domestic product , measures the value of final goods and services produced within the borders of a given country during a given period of time, typically a year.

Real vs Nominal GDP

Nominal GDP totals the rupee value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced .

Real GDP corrects for price changes. As a result, we can compare real GDP numbers from one year to the next and really know if there is a change in output (rather than prices).Inflation and Unemployment Unemployment is the state a person is in if he or she cannot get a job despite being willing to work and actively seeking work.

Inflation is an increase in the overall level of prices.

Measuring inflation and unemployment. Macroeconomic models also clarify many important questions about the powers and limits of government economic policy.

These include :

Can governments promote long-run economic growth?

Can they reduce the severity of recessions by smoothing out short-run fluctuations?Importance of Macroeconomics4Importance of MacroeconomicsAre certain government policy tools like manipulating interest rates (monetary policy) more effective at mitigating short-run fluctuations than other government policy tools such as changes in tax rates or levels of government spending (fiscal policy)?

Is there a trade-off between lower rates of unemployment and higher rates of inflation?

Does government policy work best when it is announced in advance or when it is a surprise?

Savings, Investment, and Choosing between Present and Future Consumption

Investment vs financial investmentFinancial securities What determines investmentThe relationship between investment and output Why do we save? Current vs future consumptionAutonomous versus induced consumption

Measuring Domestic Outputand National IncomeThe primary measure of the economys performance is its annual total output of goods and services or, as it is called, its aggregate output.

Monetary measure

Avoiding Multiple Counting

To measure aggregate output accurately, all goods and services produced in a particular year must be counted once and only once.

Measuring Domestic Outputand National IncomeTo avoid counting those components each time, GDP includes only the market value of final goods and ignores intermediate goods altogether.

Intermediate goods are goods and services that are purchased for resale or for further processing or manufacturing.

Final goods are consumption goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing.

Value Added

GDP Excludes NonproductionTransactionsNonproduction transactions are of two types: purely financial transactions and secondhand sales.

Financial Transactions Purely financial transactions include the following:

Public transfer payments. These are the social security payments, welfare payments, and veterans payments that the government makes directly to households.

Private transfer payments Such payments include, for example, the money that parents give children or the cash gifts given at Eid time.GDP Excludes NonproductionTransactionsStock market transactions The buying and selling of stocks (and bonds) is just a matter of swapping bits of paper. Stock market transactions create nothing in the way of current production and are not included in GDP.

Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economys current output of goods and services.

Secondhand Sales. Secondhand sales contribute nothing to current production and for that reason are excluded from GDP.Two Ways of Looking at GDP:Spending and IncomeThe Expenditures Approach:

To determine GDP using the expenditures approach, we add up all the spending on final goods and services that has taken place throughout the year.

Personal Consumption Expenditures (C)

durable consumer goods (automobiles, refrigerators, video recorders), nondurable consumer goods (bread, milk, vitamins, pencils, toothpaste), and consumer expenditures for services (of lawyers, doctors, mechanics, barbers).The Expenditures ApproachGross Private Domestic Investment (I g)

Under the heading gross private domestic investment, the accountants include the following items:

All final purchases of machinery, equipment, and tools by business enterprises. All construction. Changes in inventories.The Expenditures ApproachGovernment Purchases (G)

These expenditures have two components:

expenditures for goods and services that government consumes in providing public services and expenditures for publicly owned capital such as schools and highways, which have long lifetimes.The Expenditures ApproachNet Exports (X n )

Net exports (Xn) = exports (X ) - imports (M )

The Income ApproachCompensation of Employees-Rents -Interests -Proprietor's income-Corporate profit -Tax on production and imports

The sum of all these is equal to National Income (NI)From National Income to GDPNational income is the total of all sources of private income (employee compensation, rents, interest, proprietors income, and corporate profits) plus government revenue from taxes on production and imports.

National income includes the total income of Pakistanis, whether it was earned in Pakistan or abroad.

But GDP is a measure of domestic output total output produced within the United States regardless of the nationality of those who provide the resources.

From National Income to GDPNet Foreign Factor Income?

Domestic Income or net domestic product (NDP) = National Income net foreign factor income

GDP = NDP + Consumption of Fixed Capital

Therefore,

Expenditures vs Income Approach

Nominal vs Real GDP

Nominal vs Real GDP

Business Cycle, Unemployment and Inflation

Business cycles are alternating rises and declines in the level of economic activities over several years. Unemployment

Frictional UnemploymentStructural UnemploymentCyclical Unemployment

Full employment and natural rate of unemployment

GDP Gap and Okuns LawGDP Gap = actual GDP potential GDP

The law okun explains the relationship between the GDP gap and the unemployment rate.

If GDP gap > 0, then unemployment would be ---?

If GDP gap < 0, then unemployment would be ---?

Measurement of Inflation What is inflation? How can one measure it?

Types of Inflation Demand-pull Inflation

- Definition - Causes

Cost-push inflation

- Definition - Causes How is hurt or helped by inflation? Fixed-income receiversFlexible-income receivers Savers Creditors Debtors Basic Macroeconomic Relationship Income and consumption The interest rate and investment Changes in spending and changes in output

The concept of multiplier The aggregate expenditure model Equilibrium GDP = C + I

Changes in consumption Changes in investment

Full employment and Equilibrium GDP