Macroeconomics: Lecture 1

Macroeconomic Data - Nation’s Income

ARCHITECTURE OF MACRO
Microeconomics
- Microeconomics is the study of how individual households and firms make decisions and
how they interact with one another in markets.
Macroeconomics
- Macroeconomics is the study of the economy as a whole.
- Its goal is to explain the economic changes that affect many households, firms, and markets
at once.

MEASUREMENT OF GDP
Macroeconomics answers questions like the following:
- Why is average income high in some countries and low in others?
- Why do prices rise rapidly in some time periods while they are more stable in others?
- Why do production and employment expand in some years and contract in others?

The Economy’s Income and Expenditure

- If you were to judge how a person is doing economically, you might first look at his
income. People with higher incomes enjoy higher standards of living.
- The same logic applies to a nation´s economy. When judging whether the economy is
doing well or poorly, it is natural to look at the total income that everyone in the economy
is earning.
- That is the task of gross domestic product.

For an economy as a whole, income must equal expenditure because:

- Every transaction has a buyer and a seller.
- Every monetary unit ($, €..) spent by a buyer is a monetary unit of income for a seller.
Macroeconomics: Lecture 1

Gross domestic product (GDP) is a measure of the income and expenditures of an economy.

The equality of income and expenditure can be illustrated with the circular-flow diagram.

Gross domestic product

Gross domestic product (GDP) is the 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.

- “. . . Of All . . .”
GDP tries to be comprehensive. It includes all items produced in the economy legally and
sold legally in markets.

- “. . . Final . . .”
GDP includes only final goods, This is done, because the value of intermediate goods is
already included in the price of the final goods.
Macroeconomics: Lecture 1
It records only the value of final goods, not intermediate goods (the value is counted only
once).

- “. . . Goods and Services . . . “

It includes both tangible goods (food, clothing, cars) and intangible services (haircuts,
housecleaning, medical care).

- “. . . Produced . . .”
It includes goods and services currently produced, not transactions involving goods
produced in the past.

- “ . . . Within a Country . . .”
It measures the value of production within the geographic confines of a country.

- “. . . In a Given Period of Time.”

It measures the value of production that takes place within a specific interval of time,
usually a year or a quarter (three months).

Computing methods of GDP

- Productive approach
- Cost approach
- Expenditure approach

Productive approach
- The sum of added values
GDP= production (market) value minus value of intermediates

Cost approach
- A revenue (income) to a household is a cost to a firm.
GDP = sum of all incomes (wages, rents, profits..)
Macroeconomics: Lecture 1
Expenditure approach
- All expenditures to final goods and services.
GDP = sum of expenditures of all sectors in the economy (households, firms, government, world)
This is a basic method of computing GDP.
Macroeconomics: Lecture 1
Macroeconomic payment flows

NDP – net domestic product

- The net domestic product (NDP) equals the gross domestic product (GDP) minus
depreciation on a country's capital goods.
- Net domestic product accounts for capital that has been consumed over the year in the
form of housing, vehicle or machinery deterioration. The depreciation accounted for is
often referred to as "capital consumption allowance" and represents the amount of capital
that would be needed to replace those depreciated assets.

- If the country is not able to replace the capital stock lost through depreciation, then the
capital stock will diminish.
- In addition, a growing gap between GDP and NDP indicates increasing obsolescence of
capital goods, while a narrowing gap means that the condition of the capital stock in the
country is improving.
Macroeconomics: Lecture 1
THE COMPONENTS OF GDP
- GDP includes all items produced in the economy and sold legally in markets.

What Is Not Counted in GDP?

- GDP excludes most items that are produced and consumed at home and that never enter
the marketplace.
- It excludes items produced and sold illicitly.

GDP (Y) is the sum of the following:

- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX)
Y = C + I + G + NX

- This equation is an identity - an equation must be true because of how of variables in the
equation are defined (the equation is always valid).

Consumption (C):
- The spending by households on goods and services, with the exception of purchases of
new housing.

Investment (I):
- The spending on capital equipment, inventories, and structures, including new housing.

Government Purchases (G):

- The spending on goods and services by local, state, and federal governments.
- Does not include transfer payments (TR) because they are not done in exchange for
currently produced goods or services.

Net Exports (NX):

- Exports minus imports.