Macroeconomics Copy Notes

MACROECONOMICS

Lecture 1 – Introduction to MACROECONOMICS

Macroeconomics – is the study of how economy behaves in broad outline (business cycle, inflation & unemployment)

GDP – measures the value of what is produced in one country

GNI (GNP) – measures the income accruing to residents

Consumer Price Index (CPI) – the average price of goods/services bought by a typical consumer

Productivity growth – can be achieved using more inputs (increasing the number of workers) or by getting more output for any given amount of inputs

Fiscal policy –governments increasing/decreasing their spending and/or taxes

Monetary policy – involves changing the interest rates in order to influence the economy. High interest rates are a symptom of a tight monetary policy. When interest rates are high, it is more costly for the firms to borrow and this makes them more reluctant to invest. Individuals are also hit by high interest payments on their loans. Hence high interest rates tend to reduce demand in the economy – firms invest less, and low interest rates stimulate the demand

Actual GDP – is what the economy actually produces

Potential GDP - is what the economy would produce if all resources (inputs) were fully employed

GDP gap – is the difference between actual GDP and potential GDP. When the actual GDP is below the potential GDP – is a negative output gap, called a recessionary gap. While in booms, actual GDP is higher than potential GDP, causing the output gap to become positive, and it is called an inflationary gap

The national output is related to the sum of all the outputs produced in the economy by individuals, firms and governmental organizations. However, an error would arise in estimating the national output by adding all sales of all firms, called DOUBLE COUNTING. So to avoid double counting the concept of VALUED ADDED (VALUE ADDED = OUTPUT - INPUTS) is used

The total value of a firm’s output is the gross value of its output. The firm’s value added is the net value of its output - it is this figure that is the firm’s contribution to the nation’s total output. The sum of all values added in an economy is a measure of the economy’s total output. This measure of total output is called gross value added – a measure of all final output that is produced in the economy. (The gross value of the firm’s output is the total output before making any deductions, while the net value deducts inputs made by other firms. In “gross value added” the usage is different, value added is already defined as the firm’s net output, and the word ‘gross’ refers to the fact that we are measuring currently produced outputs without taking account the depreciation of capital goods during their production. thus, “gross value added” is the value added of the economy before any allowance for depreciation; and “gross domestic product” refers to the total output produced before allowing for depreciation)

All output must be owned by someone. So whenever the national output is produced it must generate an equivalent amount of national income. There are two ways of measuring the national income: the value of what is produced and the value of income generated. Both measures yield the same total, which is called the GDP. When it is calculated by adding up the all spending for each of the main components of final output, the result is called GDP-spending based. When it is calculated by adding up all incomes generated by production, it is called GDP-income based

GDP-SPENDING BASED for a given year is calculated by adding up the spending going to purchase the final output produced in that year. The total spending on final output is expressed as the sum of 3 categories: Consumption, Investment & Net Exports. Consumption is further divided into: private consumption spending & government consumption spending

• Consumption:

1. Private consumption spending – includes spending by individuals (and non-profit institutions) on goods/services produced and sold to their final users during the year. However, it excludes purchases of newly built houses these are counted as an investment (C)

2. Government consumption spending – when governments provide goods/services that their citizens want such as health care, defense, law & order. Only government spending on currently produced goods/services is included as part of GDP. So it does not include pension funds & unemployment benefits, income support, student grants, all such payments are called transfer payments (G)

• Investment spending – is the spending on the goods not for the present consumption, but rather for future use. The goods that are created by this spending are called investment goods. Investment spending is further divided into 3 categories: changes in inventories, fixed capital formation and the net acquisition of valuables (I)

1. Changes in inventories – an accumulation of stocks & unfinished goods count as the current investment because it represents goods produced that will be used in the future and they valued at their market price, rather than what they cost

2. Fixed capital formation – capital goods such as machines, computers & factory buildings (hospitals, schools & offices). The economy’s total quantity of capital goods is called the capital stock

3. Net acquisition of valuables – goods that are neither for consumption nor for production, rather they are held for their beauty or expected increase in value (e.g. jewelry)

• Net exports – (total exports) – (total imports) (X-IM)

The price paid by consumers for goods/services is not the same as the revenue received by the producer because of indirect taxes. Indirect Taxes – VAT. Thus, if you pay $100 for a meal in a restaurant, the restaurateur will receive only $85.10, and $14.90 will go to the government in the form of VAT. All spending categories are measured at market prices as these are what is spent by purchasers rather than what is received by producers

Market prices – prices paid by consumers

Basic Prices –...

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