Macroeconomics:

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

A. Measuring a Nations Income and Growth

1. 2. 3. 4. 5. Income and Expenditures Definitions Measurement Real versus Nominal GDP GDP and Well-being

B. Measuring Unemployment C. Measuring the Cost of Living

Author: Prof. Sharif Memon 1

1. Income and Expenditure

Q: Why do we care about GDP (gross domestic product, or total income)?

Author: Prof. Sharif Memon

1. Income and Expenditure, cont.

Consider the circular-flow diagram: it describes all transactions between households and firms.
Revenue Spending

Market for outputs

Goods and services sold Goods and services bought

Firms
Inputs for production Wages, rent, profit

Households
Land, labor, capital

Market for inputs

Income
Author: Prof. Sharif Memon 3

1. Income and Expenditure, cont.

Point: (1) GDP measures both income and expenditures. (2) Output = Income = Expenditures

Author: Prof. Sharif Memon

2. Definitions

GDP: The market value of all final goods and

services produced within a country in a given period of time.

GNP: The market value of all final goods and

services produced by permanent residents of a nation in a given period of time.

Author: Prof. Sharif Memon

2. Definitions, cont.

Y = C + I + G + NX
Consumption: spending by households on goods and
services, with the exception of purchases of new housing.

Investment: spending on capital equipment, inventories,

and structures, including household purchases of new housing.

Government purchases: spending on goods and services by

local, state, and federal governments

Net exports: spending on domestically produced goods by

foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Author: Prof. Sharif Memon 6

3. Measuring GDP
Approaches:

Final goods approach: add up the total value of goods and services produced, categorized by ultimate users. (C + I + G + NX)
Value-added approach: calculate the value added at each stage of production. Income approach: add up incomes received.

Author: Prof. Sharif Memon

3. Measuring GDP, cont.

Problems with measurement: Quality changes Service output Nonmarket goods These problems affect the ability of GDP to provide an accurate measure of the economys performance.

Author: Prof. Sharif Memon

4. Real versus Nominal GDP

Q: Last year, the state of Maryland gave me a 3% raise. Did this raise make me better off?

Author: Prof. Sharif Memon

4. Real vs. Nominal GDP, cont.

Nominal GDP: the production of goods and services
valued at current prices.

Real GDP: the production of goods and services valued

at constant prices. GDP deflator: a measure of the price level = (Nominal GDP/Real GDP)*100

Author: Prof. Sharif Memon

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A. Measuring a Nations Income

5. GDP and Well Being

GDP fails, in many respects, to measure the things that matter to us.
Q: Why then do we still care about GDP?

Author: Prof. Sharif Memon

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Currently Produced Sold through official market Not Resold or used in further production Produced by nationally owned resources Value at Market Prices It excludes: un/under reported and illegal, like gambling, drinking, prostitution and narcotics.

Author: Prof. Sharif Memon

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Two Exceptional Cases: Self-consumption of production by producers is valued and is included in GNP. Thus, farmers consumption of its own produced wheat, is a part of GNP. Rent on owner-lived houses is computed and included in GNP.

Author: Prof. Sharif Memon

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Formula GNP = GDP NIA NIA = Net Factor Income Earned Abroad

Author: Prof. Sharif Memon

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Here we have NNP and NDP. The difference between the gross and net is capital consumption, called Depreciation(D)
NNP = GNP - D NDP = GDP - D

Author: Prof. Sharif Memon

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