Macroeconomics Flashcards
Macroeconomics:
Macroeconomics: a branch of economics that studies how an overall economy behaves, main questions; inflation, unemployment, gdp, rate of economic growth
Microeconomics:
Microeconomics: is a branch of economics that studies implications of human actions, decision making and how individuals make more efficient and productive decisions and how individuals best cooperate with one another. Main question; scarcity
Questions macroeconomics addresses:
Why is average income higher in some than others ?
Why do prices occasionally rise rapidly at times and are more stable at other times
Why does production and employment expand in some years and retract in others
What can the government do to promote rapid growth in income, low inflation, and stable employment
Two types of studying general equilibrium ( disequilibrium )
Detailed disaggregated but complex model of the type
Aggregative economics where key aggregate variables such as, aggregate output or production, overall employment ( unemployment ), overall price level, total money supply
Circular flow of income:
Consumers buy goods and services and a factory pays wages ( factor payments ) ♺
Withdrawals: what goes out of the system; net saving, net taxes, import expenditure
Injections: investment, government expenditure, export expenditure
Net savings goes to the bank so it leaves the system withdrawal
Investment goes into the system so it enters injection
Tax goes to the government so it leaves withdrawal
Government expenditure goes into the system injection
Import expenditure goes to foreigners leaves system withdrawal
Export expenditure is money entering the system injection
Called money flows
Open economy circular flow
5 agents: governments, households, firms, financial institutions ( intermediary agents ), rest of the world
FDI flow are considered injections but not permanent
GDP:
Gross domestic product, monetary value of all finished goods and services produced within a country’s borders and sold legally. Usually calculated per quarter or per year
Key components of GDP:
Total: GDP aims to be comprehensive, including all goods and services produced legally in markets, but excluding illicit or black market transactions.
Market Value: Different products are combined into a single value using market prices.
Finished Goods: Only the value of final goods is included, excluding intermediate goods to avoid double counting.
Within Borders: GDP includes goods/services produced by both domestic and foreign entities within the country.
Time Period: GDP is measured within specific intervals (quarterly or annually).
Informal vs Illegal Economy:
GDP typically does not include the informal economy (such as unreported income) or illegal activities, though these can significantly affect the actual economic output.
GDP Growth Rate
What is GDP Growth Rate?:
It measures the increase in GDP from one period to the next, providing a snapshot of the country’s economic health.
It is often used to track the overall performance of an economy over time.
GDP Growth Rate formula
chnage in real gdp = new gdp - original gdp / original gdp x100
Three Methods for Calculating GDP: Output
Output (or Production) Method:
This method calculates GDP by summing up the value added at each stage of production across all industries.
Value added is the difference between the revenue and the cost of intermediate inputs.
Three methods for calculating GDP: Income
Income Method:
GDP is calculated by summing all the incomes generated in productive activities. This includes wages, rents, interests, and profits from both public and private sectors.
Three methods for calculating GDP: Expenditure
GDP is calculated by summing all spending on final goods and services in the economy. This includes:
C (Consumption): Spending by households on goods and services, excluding new housing.
I (Investment): Spending on capital goods that will be used for future production, including new housing.
G (Government Spending): Expenditure on goods and services by government entities.
NX (Net Exports): Exports (X) minus Imports (M).
Expenditure method for calculating gdp formula
consumption + Gov spending + Investment + net exports
components of gdp
see in slides
GDP vs GNI (Gross National Income):
Gross National Income (GNI):
GNI includes the total income earned by a country’s residents, both domestically and abroad.
GNI = GDP + Net income from abroad.
GNI accounts for income from investments and businesses located overseas, which GDP does not.
GNI formula
GDP + income from abroad - income sent abroad
Net National Income (NNI):
NNI is the GNI minus depreciation (the loss of value in capital assets due to wear and tear).
This reflects the actual income available after accounting for the capital that is used up.
Limitations of GDP:
Does not account for the informal economy:
GDP excludes activities such as unpaid work (e.g., housework) or unregistered transactions, which can make a significant difference in understanding the true scale of an economy.
Environmental degradation:
GDP does not consider environmental costs, such as pollution or resource depletion.
Inequality:
GDP measures total output but does not indicate how income or wealth is distributed among the population.
Quality of life:
GDP does not capture non-economic factors such as health, education, and overall well-being, which may be more reflective of a population’s quality of life.
Real vs Nominal GDP:
Nominal GDP:
Measured using current market prices and does not account for inflation.
Real GDP:
Adjusted for inflation to reflect the true growth in output, making it a more accurate measure for comparing economic performance over time
GDP Per Capita:
GDP per capita is the GDP divided by the population of the country, providing a measure of the average economic output per person. This is a better indicator of individual prosperity than total GDP.
Example: of GDP by sector
UK GDP Breakdown (2015):
GDP by Sector:
Real Estate Activities contributed significantly to the UK economy, accounting for 13% of the Gross Value Added (GVA).
Other major contributors: Government, health, and education (18.4%), distribution and transport (18.6%), and financial services (7.2%).
National Accounts:
GDP, GNI, and NNI provide different perspectives on the economic output and income of a country.
Depreciation is subtracted from GNI to arrive at NNI, which reflects the net income after accounting for the reduction in value of capital assets.
Discussion Activity:
A discussion point involves comparing national accounts of different countries. For example, comparing GDP and GDP per capita across countries gives insight into their economic size versus individual prosperity.
