Macroeconomics

What macroeconomics is concerned with:

The major trends of the entire economy
Aggregate behavior of the economy : its industries, its factors of production, outputs,
government interventions, and the interactions among them.
Measurement of Macroeconomic Performance
Gross National Product
Employment
Inflation
Net Exports
Objectives of Macroeconomics
Objective 1: A high and rising level of real output
The ultimate yardstick of a country's economic success is its ability to generate a high
production level of economic goods and services for its population
The most comprehensive measure of the total value of production in an economy is
the Gross National Product (GNP). This measures the market value of all goods and
services produced in a country during a year.
Nominal GNP = measured in current or actual market prices
Real GNP = measured in a set of constant or invariant prices
Business Cycles = Periods of expansion and contraction in the real GNP
Objective 2: High Employment (Low Unemployment), Providing good jobs that pay well
(read "high") to those who want to work.
Objective 3: A stable or gently rising price level with prices and wages determined by free
markets
3.1 Price Stability - that the overall price level does not rise or fall rapidly
3.2 Maintenance of free markets - prices and quantities should be determined by
market forces, by supply and demand, to the maximum possible extent.
Consumer Price Indices (Index)
= the most common measure of overall price level
= measures the cost of a fixed basket of goods bought by a typical urban consumer
3iy, ECANALY, Maciooconomics, pago 1
Inflation = the rate of growth (+) or decline (-) of the price level from year to year
Deflation= occurs when prices decline or inflation is negative.
Hyperinflation= occurs when the price level rises a thousand or million percent a
year. (at least 10 times as much)
Objective 4: Foreign economic relations marked by a stable foreign exchange rate.
Exports more or less balanced with imports.
Net exports = the difference between the dollar values of exports and the dollar
value of imports.
What are the Policy instruments of a Nation ?
Policy instrument = n. an economic variable under the direct or indirect control of gov't.
Fiscal policy = consists of government expenditures and taxation
Expenditures = means government is spending on goods and services. Expenditure
influences the relative size of collective consumption: as opposed to private
consumption.
Taxation = plays the dual role of (1): Reduce people's income
(2): Facilitate determination of prices that
businesses and individuals face in markets and
thereby affect incentives and behavior.
Monetary Policy = Central banking
Money = the means of exchange or method of payment in the economy
Having a common yardstick of value decreases the number of
transactions made in an economy.
Bank Reserves = a portion of its cash deposits that each bank sets aside to be
deposited with the Central bank
Foreign Economic Policy = Trade policies, exchange rate setting, even monetary and
fiscal polices to keep imports in line with exports to stabilize foreign exchange
rates.
Major tools :
1. Trade Policies = consists of tariffs, quotas and other devices that restrict or
encurage imports and exports.
2. Exchange market management = to be as close to international standards as
possible if it is advantageous; and farther from it if otherwise: with view
of minimizing "damages" from large differences.
3iy, ECANALY, Maciooconomics, pago 2
Income Policies = government actions that attempt to moderate inflation by direct steps,
whether by verbal persuasion (press releases) or by legislated wage and price
controls.

Terms
Price Index = Price in any given year x 100 %
Price in a certain base year
GNP per capita = GNP / # Population
Net National Product = a measure of the net output of the economy after deducting from
GNP an amount necessary to maintain the existing stock of capital intact.
= measures only the net additions to the values already on hand at the
beginning of the period.
= NNP gives an estimate of the values of final goods and services available to
be consumed by various purchasers, while maintaining intact the
economy's productive capacity.
NNP = GNP - CCA
CCA = Capital Consumption Allowance =money value of the depreciation and
obsolescence in the stock of capital goods during the relevant particular
period.
Capital Consumption = the process by which the stocks of capital goods will be used by the
business firms in the production of goods and services. Capital goods are
gradually consumed, or we say they depreciate.
Disposable Income = that part of the total national income that is available to households for
consumption or saving / investment.
Net Economic Welfare (N.E.W.)= an adjusted measure of total national output that includes
only consumption and investment items that contribute directly to
economic well-being.
NEW was proposed to correct the defect of the GNP (inaccuracy of measure) and
to better reflect the value of products that truly satisfy in the economy.
NEW would have been equal the GNP, had we also added to GNP the ffg.
unaccounted outputs:
1. Add House wives' labor
2. Add unpriced benefits (e.g. "best things in life are free" love, anonymous
contributions )
3. Subtract unpriced costs (e.g. pollution, environmental damages which "steal from
our children")
3iy, ECANALY, Maciooconomics, pago 3
4. Add costs from the underground economy (e.g.
4.1 legal but unrecorded for tax purposes (babysitting, maids)
4.2 illegal busineses (drugs, force of arms/guns, tong )
Two Ways of Measuring National Product
Flow of Product approach (or the Expenditures approach)
= measuring the sum of annual flow of goods and services :
GNP = C + I + X + G
Local transportation,
roads, basketball courts
Local government
Defense, Employee
compensation, national
roads
National Govt.
expenditures
G
goods and services Exports less imports Net exports X
Farm
Wholesale / Retail
Mfg Changes in business
inventory
Additions, alterations
New homes Residential fixed
Producers' durable eqmt
factories, office bldg. ,
stores
Nonresidential fixed Investments I
Transportation
medical care
Household rent Services
Gasoline
Clothing
Food Non-durables
furniture
Autos Durable goods Consumption C
Examples Subcategories Major Category
This can be seen as the value in the products market in "Circular Flow" diagm
3iy, ECANALY, Maciooconomics, pago 4
Sample Accounting: GDP in Billions of Dollars
4,861.4 5,722.9 Gross Domestic Product
653.4 Local
445.9 National
946.3 1,099.3 Government Purchases
621.1 Imports
601.5 Exports
(19.1) (19.6) Net Exports
(8.6) Change in business invtry
373.3 Durable eqmt.
182.6 Structures
555.9 Nonresidntial fixed invmt
189.6 Residential Construction
675.6 736.9 Investments
2,190.7 Services
1,257.9 Nondurable goods
457.8 Durable goods
3,258.6 3,906.4 Personal Consumption
1987 dollars 1991
3iy, ECANALY, Maciooconomics, pago b
The other way of measuring national product :
Earnings or income approach
= measuring the sum of the costs of output production (that is, the earnings of factors of
production: land, labor and capital ). The NNP in this approach is equal to the measure
of annual flow of factor earnings or income.
This can be seen as the value in the resources market in "Circular Flow" diagm
Sample Accounting: (Source: Bureau of Economic Analysis, US Dept of Commerce, for1991)
5,722.9 equals: Gross Domestic Prd
(14.2) plus: Net factor Payments to
Foreigners
5,737.1 equals: Gross National Prodt
626.2 plus: Depreciation
5,110.9 equals: Net National Product
525.7 plus: indirect business taxes
& other payments
4,585.2 equals: National Income
1,347.7 plus: Corporate profits, net
interest, and social
insurance contributions
1,613.4 less: Items either included in
profits or transfers
4,850.9 Personal Income
This is simply an allocation of the total output among households (personal incomes) and
corporations (profits) that shows how the output is allocated among the factors used to produce
it. Thus, personal income is adjusted to remove payments that are either mixed between
households and businesses (e.g. dividends are part of corporate profits) or unrelated to current
production (transfer payments are excluded from both GDP and GNP). Corporate (before taxes)
profits are then added to arrive at the national income. Indirect business taxes and transfer
payments mainly include pensions, and this is added to arrive at the GNP. The appropriate
adjustments for factor incomes paid to foreigners (added back in) and received from foreigners
(subtracted out) are then made to derive GDP.
3iy, ECANALY, Maciooconomics, pago 6