Macro Economics Overview

What is Macroeconomics?
• Macroeconomics examines economies at the
aggregate (international, national, regional)
level.
• Focus on macroeconomic aggregates, namely
GDP (GNP), consumption, savings,
investment, money, inflation, unemployment,
public finance deficit, current account deficit,
public debt, exchange rate, interest rate and
others
• Some aspects of macroeconomics are about
comparing two aggregate economies at the
same time.
 Why study the economy at the
aggregate level?
• Much of macroeconomics is concerned with
policies such as money supply or tax policy which
is national in scope.
• Equilibrium effects means that outcomes are
different when we consider the economy in
aggregate.
• There are certain phenomenon like economic
growth and business cycles which affect the
aggregate economy equally.
• We can consider interesting dynamic questions.
Objectives and Instruments of Macroeconomics
 Measuring Economic Success
Aggregate output: The total quantity of goods and services
produced in an economy in a given period.

Measure: The most comprehensive measure of the total output in

an economy is the gross domestic measure (GDP).

GDP: is the total market value of all final goods and services
produced within a country in a given period of time
• GDP is the Market Value . . .”
– Output is valued at market prices.
– Cannot add eggs to cars to oranges directly
– GDP is a weighted average
– When prices are determined in markets they reflect the
marginal value people place on them.
 GDP……..
• Of All Final . . .”
– It records only the value of final goods, not intermediate
goods (the value is counted only once).
– If a baker buys flour, it is not part of GDP, the bread
produced from it is. If you buy flour in the supermarket it is
part of GDP.
• Goods and Services . . . “
– It includes both goods (food, clothing, cars) and
services (haircuts, doctor visits).
• Includes only those goods and services produced in market
– Not those produced at home
• A women marries her gardener and GDP falls
• Important to remember because in developing
countries many goods may be produced outside the
market
 GDP……..

– No illegal goods
• Important to remember differences in legal structure
when comparing different countries

• “ . . . Within a Country . . .”
– It measures the value of production within the geographic
confines of a country.
• GNP is a similar measure
– total value of all final goods and services produced by a
country’s citizens regardless of where produced.
 GDP and Welfare
• GDP is the best single measure of the economic well-being
of a society.
• GDP per person tells us the income and expenditure of the
average person in the economy.
• Higher GDP per person indicates a higher standard of
living.
• GDP is not a perfect measure of the happiness or quality of
life, however.
• Some things that contribute to well-being are not included in
GDP.
– The value of leisure.
– The value of a clean environment.
– The value of almost all activity that takes place outside of
markets, such as the value of the time parents spend with
their children and the value of volunteer work
 Problems with GDP measurement for
developing economies
• Does not include non traded goods
– Home production
– Illegal activities
• Data may not be accurate
– Limited resources for data collection
– Difficult to count production in agricultural area
– Incentive to under report production to avoid taxes etc
 Growth Calculations

• Growth rate for a year is calculated by

100* (GDPt+1 –GDPt )/GDPt

• Growth rate over N years is calculated by

GDPt+N=GDPt(1+g)N
 Growth Calculations

Q. If the GDP of Bangladesh is 400 billion dollars in 2013

and growth rate of GDP is 6.2% for 10 years, how much will
GDP be in 2018?