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Sectors of macroeconomic: household sector (consumption C); business sector (investment I); Government sector (government expenditure G); external sector (net export NX). Main economic goals: sustainable economic growth (Y=3%per year); full employment (Un=5-6%); price level stability. M. Porter, according to his theorem there are 4 stages of economic development: 1. Factor pull stage Y=F(K,L), (agriculture+ food industry) 2. Investments pull stage (hard industry, growth+ development) 3. Innovations pull stage 4. Wealths full stage (social security, medicine, education) Potential level of GDP- Y*=F(K,L). Classical model school (long run) Keynesian model school (short run)

Production Vact=Y* price=constant * Real GDP Y =constant cost of L, K=constant Price = changes, flexible Yincome=/Y* Government role=0 real Price=nominal Key role: agregate supply Yinc= changes Classical lichotomy: Govern role increase P- nominal indicators-flexible GDP- real indicators-constant The recurrent ups and downs in the level of economic activity extending over several years of business cycle or macroeconomic fluctuations. Business cycles vary substantially in duration and intensity. There are 4 stages of business cycle: peak (maximum)- business activity has reached a temporary maximum, here the economy is at full employment and the domestic output is also at or vary close to capacity AD>AS; recession- a period of decline in total output, income, employment and trade, the price level decreases, because consumption decreases and depression- stage flation- Y decrease, pi increase and U increase; frough (minimum)the output and employment bottom out at their lowest level ; recovery- output and employment move to full employment, but out the first sub place of recovery.

2. Labour markets elements: labor demand, labor supply and real wages. Types of unemployment: Frictional- at any time some workers would be between jobs. Natural reasons: some would be voluntary changing jobs; temperorly leid off their jobs; young people working for their first job. Frictional leads to the better allocation of labor resources and to large real output Structural U- Us. reasons: change in agrgate demand; changes in technology; changes in the structure of GDP Natural U- Un=Uf+ Us Cyclical U- Uc f- Rate of job finding, the share of unemployment individuals who find a job each month s- rate of job separation, the share of employed individuals who ease their jobs each month U= S/S+F; U/L= S/S+F- model of natural level of unemployment- this equation states that the rate of U (in the left part) depends on the rate of job separation (s) and job finding (f), the higher the rate of job finding- the lower of the rate of U. The goal of the Okuns law: to connect the changes in output and changes of U. okuns law indicates that for every 1 % that the actual U rate exceeds the natural rate, and 2-3% GDP GAP occurs. A relationship between an economy's GDP gap and the actual unemployment rate.

3. Inflation is raising general level of prices or of overall level of prices. Reasons of inflation: changes in aggregate demand; changes in cost of production. Types of inflation: demand pull inflation; cost-push inflation.

DPI CPI The 70 rule provides a quantitative appreciation of inflation.

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Phillips curve implies the trade- off between inflation and unemployment in the short run. It has negative slope, because of the - minus in the equation. In the short run there is a negative relationship between inflation and unemployment. At any point in time, policy makers who contrast aggregate demand AD can chose a combination of inflation and U on the short run Phillips curve.

4.GDP measures production located within the country. GNP measures production using resources owned by citizens of a country. If citizens of RM cross the border to work, for example, in England, their wages count in the GDP of England and GNP of RM. The first step to convert from GDP in GNP: GNP= GNP+ net receipts of factor-income from the rest of the world; GDP= GNP- net receipts from abroad. GNP is often considered the best measure of how well the economy is performing. An economy with a large output of goods and services can better satisfy the demand of individuals firms and government. GNP= the total income of everyone in the economy (Y) or the total expenditure of the economy ouputs of goods and services (E). GNP can measure both the economy income and the expenditure on its output because these 2 functions are really the same. For an economy as a whole income must equal expenditures. The quality of income and expenditures rise from an accounting rule: I rule. All expenditures on purchases of products is necessary income to the producers of the products. According to this rule every transaction that affects expenditures must affect income and every transaction that affects income must affect expenditures. For example: suppose that a firm produce and sells one more loaf of bread to a household, this transaction increases total expenditures on bread, but it also an equal affect on total income. II rule. Concerning stock and flows. Stock- a quantity measured at a given point in time. Flow- a quantity measured per unit time. Example: A consumers wealth- stock; A consumers income and expenditure- flow; The Government debt- stock; The Government budget deficit- flow; The number of unemployment people on the labor market- stock; The number of people losing their jobs- flow. III rule. The treatments of inventories. Inventory is a part of investment- equipment, building, and final price. The general rule is that when a firm increases its inventory of goods, this investment in inventory is counted both, as a part of expenditures (in investment), and as a part of income (wages or profit). Production for inventory increases GNP just as production for final sales does. IV rule. Intermediary goods and value added. Many goods are produced in stages: row materials are transformed into intermediary goods by one firm and then sold to another firm for final processing. How should we treat such products when computing GNP? The answer is that GNP includes only the value of final goods, the value of intermediary goods is already
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included as part of the price of final goods. To add intermediary goods to the final goods would be double counting. A way to compute the value of all the final goods and services is to sum the value added at each stage of production. The value added of a firm equals the value of the firms output less the value of intermediary goods that the firm purchases. GNP and GDP include only final goods and services. V rule. Imputed value. More goods and services are valued at the market prices when computing GNP. Some goods and services arent sold in the market place and therefore dont have market prices. If GNP is to include the value of these goods and services, we must use an estimate of their value. Such an estimate is called an imputed value. Example: A person who rents a house is buying housing services and is providing income for the landlord. The rent is part of GNP, both as expenditures of the renter, and as income of landlord. Many people live in their own houses although they dont pay rent; they are enjoying housing services similar to those of renters. Therefore, to take account of the housing services enjoyed by home owners, GNP includes the rent of these home owners pay to themselves. Example: member of government provides goods and services to the public, but these services are not sold in a market price, therefore, they dont have a market price, GNP includes these services, but valuing at their cost. Methods of calculation of GDP: a) The expenditure approach calculates GDP by summing the four possible types of expenditures as follows: GDP = Consumption + Investment + Government Purchases + Net Exports Consumption is the largest component of the GDP. In the U.S., the largest and most stable component of consumption is services. Consumption is calculated by adding durable and non-durable goods and services expenditures. It is unaffected by the estimated value of imported goods. Investment includes investment in fixed assets and increases in inventory. Government purchases are equal to the government expenditures less government transfer payments (welfare, unemployment payouts, etc.) Net exports are exports minus imports. Imports are subtracted since GDP is defined as the output of the domestic economy. b) Here GDP is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows: Income from people employment and in self-employment +Profits of private sector companies + Rent income from land = Gross Domestic product (by factor income) It is important to recognize that only those incomes that are actually generated through the production of output of goods and services are included in the calculation of GDP by the income approach. There are three approaches to calculating GDP: expenditure approach - described above; calculates the final spending on goods and services. product approach - calculates the market value of goods and services produced. income approach - sums the income received by all producers in the country.
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Without any adjustment, the GDP calculation is distorted by inflation. This unadjusted GDP is known as the nominal GDP. In practice, GDP is adjusted by dividing the nominal GDP by a price deflator to arrive at the real GDP. In an inflationary environment, the nominal GDP is greater than the real GDP. If the price deflator is not known, an implicit price deflator can be calculated by dividing the nominal GDP by the real GDP: Implicit Price Deflator = Nominal GDP / Real GDP The composition of this deflator is different from that of the consumer price index in that the GDP deflator includes government goods, investment goods, and exports rather than the traditional consumer-oriented basket of goods. GDP usually is reported each quarter on a seasonally adjusted annualized basis. 5. The AD-AS or Aggregate Demand-Aggregate Supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. Aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country when inventory levels are static. It is often called effective demand, though at other times this term is distinguished. An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources. AD=C+I+G+NE

ADSD curve These four major parts, which can be stated in either 'nominal' or 'real' terms, are: - personal consumption expenditures (C) or "consumption," demand by households and unattached individuals; its determination is described by the consumption function. The consumption function is C= a + (mpc)(Y-T) A is autonomous consumption, mpc is the marginal propensity to consume, (Y-T) is the disposable income. - Investment (I), such as spending by business firms on factory construction. This includes all private sector spending aimed at the production of some future consumable. In Keynesian economics, not all of gross private domestic investment counts as part of aggregate demand. Much or most of the investment in inventories can be due to a short-fall in demand (unplanned inventory accumulation or "general overproduction"). The Keynesian model forecasts a decrease in national output and income when there is unplanned investment. (Inventory accumulation would
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correspond to an excess supply of products; in the National Income and Product Accounts, it is treated as a purchase by its producer.) Thus, only the planned or intended or desired part of investment (Ip) is counted as part of aggregate demand. (So, I does not include the 'investment' in running up or depleting inventory levels.) Investment is affected by the output and the interest rate (i). Consequently, we can write it as I(Y,i). Investment has positive relationship with the output and negative relationship with the interest rate. For example, an increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers, and unemployment rises. The declining demand also lowers the price level. The economy is in recession. - gross government investment and consumption expenditures (G). - net exports (NX and sometimes (X-M)), i.e., net demand by the rest of the world for the country's output. In sum, for a single country at a given time, aggregate demand (D or AD) = C + Ip + G + (XM). Aggregate supply is the total supply of goods and services that firm in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy. In the long run, the aggregate-supply curve is assumed to be vertical In the short run, the aggregate-supply curve is assumed to be upward sloping Short run aggregate supply (SRAS) shows total planned output when prices in the economy can change but the prices and productivity of all factor inputs e.g. wage rates and the state of technology are assumed to be held constant. Long run aggregate supply (LRAS): LRAS shows total planned output when both prices and average wage rates can change it is a measure of a countrys potential output and the concept is linked strongly to that of the production possibility frontier Shifts in the SRAS curve can be caused by the following factors - Changes in unit labour costs: - Commodity prices: - Government taxation and subsidy