MACROECONOMICS, ALL IN ONE

By: Ali Chraibi

GENERALITIES:
MACROECONOMICS AGGREGATES:
The macroeconomics aggregates are the variables of macroeconomics. We have the :
-GDP: Gross domestic product. It’s the sum of all the value added of all the businesses of the
country
-Inflation: the general increase of the prices of goods and services
-Unemployment rate: percentage of all the unemployed people that are actively seeking for
employment but are unable to find a job.
-Foreign trade balance: takes into account the exports and imports of all the businesses of the
country

THE DISTINCTION BETWEEN MACRO AND MICRO:

-Micro: We analyze the behaviors of individuals, markets and firms.
-Macro: We analyze the behavior of the economy as a whole
Macro is basically micro but at a higher level.

THE OBJECTIVES OF MACROECONOMICS:

- Sustainable growth (stable increase of the supply of goods and services)
- Stable prices (we want to avoid a lot of price variations)
- Full employment
- A positive or at least an equilibriate foreign trade balance

THE DISTINCTION BETWEEN THE ECONOMIC SECTORS:

-Primary sector: this sector contains the industries that extract or produce raw materials like
fishery, agriculture, mining, forestry etc…
-Secondary sector: this sector contains the industries that transform or assemble the raw
materials
-Terciary sector: this sector contain all the services like healthcare, restaurants etc …

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THE DISTINCTION BETWEEN THE CLASSICAL APPROACH AND THE
KEYNESIAN APPROACH:
-Classical approach: government should only provide public services and not interfere in case
of imbalances because they believe that the market can fix itself overtime. They also believe
that there’s no need to give transfer payments to individuals in order to create demand
because they believe that the supply creates its own demand (say’s law).
-Keynesian approach: they believe that the government should interfere in case of imbalances
by setting public economic policies and that it should give transfer payments to individuals in
need so that they formulate an effective demand.

THE FUNCTIONS OF EACH ECONOMIC ACTOR:

-Functions of households:
1) They buy goods and services
2) They provide the factors of production (capital, labor, land)
-Function of Businesses: They produce goods and services
-Function of the government:
1) the government provides public services like hospitals, infrastructure, education etc…
2) and gives transfer payments to people in need

Below is the circular flow (it shows how the money circulates and the functions of each
economic actor)

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 • DEMAND, SUPPLY AND MARKET EQUILIBRIUM: (we studied this in micro
already, but read it just for the sake of revision)
-DEMAND:
Demand curve: it shows the quantity demanded by individuals for each specific price.
-There's a negative correlation between the quantity demanded and the price: when price goes
up, quantity demanded goes down and vice versa.

A change in the price of the product causes a movement along the demand curve.
A change in any other factor than the price of the product, causes a shift of the demand curve
(either to the left or to the right)

The shifters of the demand curve (they can shift the demand curve to the left or right):
-The tastes and preferences of consumers
-Number of consumers
-The price of related goods
-income (if the income increases, the demand for normal goods increases and inferior goods
decreases and vice versa)
-The expectations of the consumers (if we're expecting a price increase of the product in the
future, we'll buy more of that product before the price increase and vice versa)

-SUPPLY:
quantity supplied: how much quantity the suppliers are ready to inject into the market.
when prices increase, the quantity supplied will increase because the suppliers are looking for
profit (and vice versa)

A change in the price of the product causes a movement along the supply curve.
A change in any other factor than the price of the product, causes a shift of the supply curve
(either to the left or to the right)

The shifters of the supply curve (they can shift the supply curve to the left or right):
-The prices of raw materials
-The number of producers (with less producers there's less quantity supplied and vice versa)
-Technology (with better technology we're able to produce more supply)
-Taxes and subsidies (if it's in the favor of the businesses, they’ll want to produce more supply
and vice versa)
-Expectations (if you know that the price will increase in the future, you will wait for the price to
increase before injecting your supply and vice versa)

-MARKET EQUILIBRIUM: it's where the demand curve and supply curve intersect and it’s the
only point where the quantity demanded = quantity supplied.
This point gives us the equilibrium price and the equilibrium quantity.
when the quantity demanded is higher than the quantity supplied: shortage
when the quantity supplied is higher than the quantity demanded: Surplus.

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 GDP:
There are 3 approaches to calculate the GDP:
-Value added approach
-Expenditure approach
-Income approach

The result of the GDP at market price will be the same no matter which method we use.

• Calculating the GDP at market price using the value added approach:
We first need to calculate the value added at factor cost.
Value added at factor cost = value of production - intermediate consumption.

Then to calculate the GDP at basic price, there are 3 ways:

1) GDP = value added at factor cost + taxes on production - the subsidies of production
2) GDP = sum of the income of the three business sectors
3) GDP = Value added at basic price

Then we use this GDP at basic price to calculate the GDP at market price. GDP at market price is
the price that is paid by individuals to get a product.
-GDP at market price = GDP at basic price + taxes on products - subsidies on products.

Additional info:
how the value added of businesses is distributed:
- the wages are the first thing paid
- then we pay the value added tax (indirect taxes) (VAT)
then we distribute the gross operating product (GOP) between these:
1)depreciation
2)profit taxes
3)corporate reserves (it’s their self-financial capacity)
4)dividends

DO EXERCICE 1 AND 2 TO PRACTICE THE VALUE ADDED APPROACH

• Calculating the GDP at market price using the expenditure approach:

GDP = consumption + business investment+ government spending + inventory change + net
exports

inventory change: it’s when some of the products are left unsold and stay in the warehouse
until it's sold.

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To calculate the performance of our foreign trade balance, we calculate the net exports.
Net exports = Exports - Imports of the country
if net exports is positive = the foreign trade balance is profitable (surplus)
If net exports equals 0 = the foreign trade balance is equilibrate
if net exports is negative = the foreign trade balance is unprofitable (shortage), this means that
we gave more currency than we received.

DO EXERCICE 3 TO PRACTICE THE EXPENDITURE APPROACH

• Calculating the GDP at market price using the income approach:

GDP= National income + NFI + value of depreciation - subsidies + sales taxes.

national income = Wages + rent + interest +profit.

In the wages, we also include the social security contribution and the employee’s compensation

NFI = net foreign income (income made by citizens living abroad)

DO EXERCICE 4 TO PRACTICE THE INCOME APPROACH

DO EXERCICE 5 TO PRACTICE THE VALUE ADDED AND THE INCOME APPROACH
DO EXERCICE 6 TO PRACTICE THE 3 APPROACHES

• NOMINAL AND REAL GDP:

There are 2 types of GDP, nominal GDP and real GDP. In the nominal GDP, we don’t take into
account the effect of inflation and the in the real GDP, we take It into account.

Nominal GDP = sum of (all quantities of current year x prices of current year)

Real GDP= sum of (all quantities of current year x prices of previous year)

DO EXERCICE 7 TO PRACTICE THE NOMINAL AND REAL GDP

• GDP DEFLATOR:
CPI is for a specific market basket only but the GDP deflator is for all the goods and services.

GDP deflator = (nominal GDP/real GDP) x 100

DO EXERCICE 8 TO PRACTICE THE NOMINAL GDP, REAL GDP AND GDP DEFLATOR

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• GROWTH RATE:
To track the performance of our economy, the real gdp is not enough, we need to calculate the
growth rate which is variation of the real GDP overtime.

growth rate = [(real GDP of period 2 – real GDP of period 1) / real GDP of period 1} x100

-value of first period = the reference year (base year)

DO EXERCICE 9 TO PRACTICE THE NOMINAL GDP, REAL GDP, GDP DEFLATOR AND
THE GROWTH RATE

DO EXERCICE 10 TO PRACTICE THE NOMINAL GDP, REAL GDP, GDP DEFLATOR

AND THE GROWTH RATE

• BUSINESS CYCLES:

The economy of a country moves through 6 different stages:

1) Expansion: The economy is performing well and there is an increase in all economic
indicators.
2) Peak: it’s the saturation point. The maximum limit of growth is attained.
3) Recession: the demand for goods and services starts declining rapidly. Suppliers don’t
notice it at first so they keep producing which creates an excess supply and prices start
to fall.
4) Depression: there’s a rise in unemployment and the growth in the economy continues
its fall.
5) Trough: it’s the lowest point. The negative saturation point of the economy : the
opposite of the peak stage.
6) Recovery: The economy starts recovering again. Demand starts going up again due to
the low prices and supply starts to increase. And the investments and the employment
also start rising.

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 • GDP PER CAPITA:

It’s to calculate the income that the economy produces per person per year.

GDP per capita = GDP / population

Make sure that the unit of the GDP is the same as the unit of the population !!

DO EXERCICE 11 TO PRACTICE THE GDP PER CAPITA

INFLATION:
• MARKET BASKET, THE CPI AND THE INFLATION RATE:
MASKET BASKET : it contains the goods that individuals consume the most in their daily lives.
To calculate the market basket:
we multiply the price of each good by the quantity of that good and then we sum up all the
values that we’ll have. (we need to use the prices of that period only not the prices of other
periods)

remark: when comparing the market basket price of 2 periods, the quantity of the goods of the
1st period should equal the quantity of the goods of the 2nd period.

CONSUMER PRICE INDEX (CPI): it gives us the average change in prices over time of the same
market basket.
CPI = (cost of market basket for the current year/cost of the market basket of the base year)
x100

INFLATION RATE :
based on the CPI, we can calculate the inflation rate.
inflation rate: [(CPI of the current year – CPI of the base year) / CPI of the base year] x100

DO EXERCICE 12 TO PRACTICE THE MARKET BASKET, CPI AND THE INFLATION

RATE

• CAUSES OF INFLATION:
If we have inflation, we need to know the cause of it before making policies.
Here are some possible causes:
Demand-pull inflation: there's more demand than supply (shortage)
Cost-push inflation: when the cost of production increases so the selling price of the
product must increase also.

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When the money supply increases: it’s when the businesses take more loans, invest
more, hire more and those workers will formulate new demand that will generate an
increase in prices.
Government policies and regulations: when the government applies policies and
regulations that creates inflation.

• The distinction between inflation, disinflation, deflation, reflation and

stagflation:
-inflation : general increase of the prices.
-disinflation : there's a slowdown in inflation but we didn't reach yet our initial prices.
So the inflation is still here
-deflation: when prices drop lower than the initial prices.
-reflation: it's when the government interfere to avoid an economic collapse. The
government lowers the interest rates etc...
-staglation: it's a rare case. the economists don’t know how it happens. It’s in the case
of low growth rate but high inflation.

UNEMPLOYMENT:
2 main types:
1) involuntary unemployment: the individual was fired from his job and he needs to
search for another
2) voluntary employment: the individual doesn’t like his job so he resigns and search for
another.

TYPES OF UNEMPLOYMENT:
1) CYCLICAL UNEMPLOYMENT:
it’s linked to the cycles of the economy (how the economy is performing). When the
economy is performing well (expansion stage), the cyclical unemployment decreases
and when the economy is going down (recession and depression), the cyclical
unemployment increase.
To solve this, the government introduces cyclical policies. For example, it gives
subsidies and aids, decreases the interest rate etc…

2) NATURAL UNEMPLOYMENT:
1) frictional: includes the individuals who voluntarily left their job and are searching for
another. it also includes the students who are graduated and didn't find a job yet.
the government doesn't intervene in this case unless the individual stays unemployed
for a long time.

2) structural: (technological unemployment is part of it) it happens because of a

change in the structure of economy (new technology, new machines, robotisation...).
there's a mismatch of the skills required and the skills of the individual.
To solve this, the government gives trainings to the individuals who lack the required
skills.

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 3) INSTITUTIONAL UNEMPLOYMENT :
it's because of new government rules and regulations that affect negatively the firms’
decisions to hire employees. it can happen in the case of an increase in the minimum
wage for example. If the minimum wage Increases, the company may find the employee
too costly and may decide to not hire him.
in this type, there's also the discriminatory factor : which are the criteria that the
businesses fix (for example not hiring women because they could give birth and not
work in the period of the maternity leave).
To solve this, the government should review its policies to encourage firms to hire
additional workers.

UNEMPLOYMENT RATE:
Unemployment rate: number of unemployed people/ national labor force.

-Unemployed people: people that are actively seeking for a job but they don’t find.
-National labor force: all the individuals of the country from 15y to 74yo who are able to
work (it includes employed and unemployed people)

DO EXERCICE 13 TO PRACTICE THE UNEMPLOYMENT RATE

THE KALDOR’S SQUARE:

The aggregates are related between them and they impact each other. The Kaldor’s
square shows us how they impact each other.

types of relationships between the aggregates:

Growth rate and unemployment rate: When the growth rate goes up, the
unemployment rate goes down and vice versa.
Growth rate and trade balance: When the growth rate goes up, the net exports goes
up. But this happens only in developped economies. in case of underdeveloped or
developing economies, they need to import new equipment from outside if they want to
produce more, so it's not positive. (this is the case of morocco).
Employment and inflation rate: when employment rate goes up, inflation rate goes up
and vice versa. Because with more employed people, there’s new demand and this
demand leads to higher prices.
Inflation rate and trade balance: When inflation rate goes up, the net exports go down
and vice versa. because if the prices of our products go up, the other countries are less
interested in buying from us.

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 ECONOMIC POLICIES:

In case of imbalances, we apply economic policies to fix them.

The types of economic public policies:
1. Structural policies:
These are long term policies, it’s from the government interference but we can't identify
the positive effect immediately. For example: building infrastructure, improving the
education system etc...

2. Cyclical policies :
Cyclical policies are short term policies (we use them when we want to interfere
quickly).
in case of inflation, we use contractionary policies to slow down the economic growth.
and in case of recession, we use expansionary policies to boost the economic growth.
The cyclical policies can be used both for contractionary policies and expansionary
policies.
The 2 types of cyclical policies are: Fiscal and monetary

• Fiscal policies: (it's the interference of the government)

1) Taxation :
expansionary policy: we decrease the taxation.
contractionary policy: we increase the taxation
2) Government spending:
Expansionary policy: we will increase transfer payments, public services, subsidies etc..
contractionary policy: we decrease it

• Monetary policies: (it’s the interference of central banks)

1) Open market operation:
expansionary policy: we buy bonds from individuals and businesses
contractionary policy: we sell bonds to individuals so that they have less income.
2) required reserve ratio (RRR):
RRR is the percentage of money the commercial banks should keep in their vault.
expansionary policy: Central banks decrease the RRR of commercial banks so that they
can give more loans.
contractionary policy: Central banks increase the RRR of commercial banks.
3) discount rate:
The rate at which the central banks lend money to the commercial banks.
expansionary policy: we decrease the discount rate so that the commercial bankS
decrease the interest rate for individuals.
contractionary policy: we increase the discount rate to make interest rates for individuals
higher.

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 FORMULAS TO REMEMBER:

GDP:
value added approach:
GDP = value of production – intermediate consumption + taxes on production - the subsidies of
production
expenditure approach:
GDP = consumption + business investment+ government spending + inventory change + net
exports
income approach:
GDP= National income + NFI + value of depreciation - subsidies + sales taxes.

Nominal GDP = sum of (all quantities of current year x prices of current year)
Real GDP= sum of (all quantities of current year x prices of previous year)
GDP deflator = (nominal GDP/real GDP) x 100
Growth rate = [(real GDP of period 2 – real GDP of period 1) / real GDP of period 1} x100
GDP per capita = GDP / population

INFLATION:
Market basket: we multiply the price of each good by the quantity of that good and then we
sum up all the values that we’ll have.
CPI: (cost of market basket for the current year/cost of the market basket of the base year)
x100
Inflation rate: [(CPI of the current year – CPI of the base year) / CPI of the base year] x100

UNEMPLOYMENT:
Unemployment rate: number of unemployed people/ national labor force.

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The professor told us that the following part covering the personal
income won’t be in the normal session. But I still recommend to take a
look at it, just in case.
• HOUSEHOLDS INCOMES:
Households can receive money through 2 ways:
1) Primary income distribution: is given by businesses and government to the households that
contribute in the production cycle. This can be in form of wages, rent, profit or interest.
2) Secondary income distribution: (transfer payments/social benefits): is given by the
government to the households in need.

• PERSONAL INCOME:

The national income at factor cost is all the money earned by an individual.
To get the personal income, we take the national income at factor cost and we subtract the
income earned but not received then we add the income received but not earned.

Personal Income = national income at factor cost - income earned but not received + income
received but not earned

-The types of income earned but not received:

-social security contribution (income contribution)
-taxes on production (corporate profit taxes)
-retained earnings (undistributed profit)
-corporate income taxes

The types of income received but not earned:

-Transfer payments

The personal income can also be calculated using this method:

Personal income = wages + interest +rent + profit/dividend + transfer payments

DO EXERCICE 14 TO PRACTICE THE PERSONAL INCOME

DO EXERCICE 15 TO PRACTICE THE PERSONAL INCOME
DO EXERCICE 16 TO PRACTICE THE PERSONAL INCOME
DO EXERCICE 17 TO PRACTICE THE PERSONAL INCOME

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 • DISPOSABLE INCOME :
The personal income is not the amount consumed or saved by individuals because we still need
to subtract the personal income taxes and add government social benefits. After we do this,
we’ll get the disposable income which is the amount that an individual can consume or save.

Disposable income = Personal income - Personal Income Taxes + government social benefits

DO EXERCICE 18 TO PRACTICE THE DISPOSABLE INCOME

DO EXERCICE 19 TO PRACTICE THE DISPOSABLE INCOME
DO EXERCICE 20 TO PRACTICE THE PERSONAL AND DISPOSABLE INCOME

• THE AVERAGE AND MARGINAL PROPENSITIES:

The average propensity to consume or to save shows us how much percentage of the
disposable income, an individual consumes or saves.
-Average propensity to consume: (APC)
(Consumption/disposable income) x100
-Average propensity to save: (APS)
(Savings/disposable income) x100

DO EXERCICE 21 TO PRACTICE THE APC AND APS

DO EXERCICE 22 TO PRACTICE THE DISPOSABLE INCOME, APC AND APS

Some individuals have a high APC, they consume most of their income, which means they don’t
have enough money to satisfy their needs, so the government gives them money in form of
transfer payment.
The marginal propensity to consume or to save, will show us the future behavior of the
individual after the government gives him that money. It will tell us how much cents of each
additional dirham that we will give him will go to consumption and how much cents will go to
savings.

-Marginal propensity to consume (MPC) : (Consumption of 2nd period – Consumption of 1st

period) / (disposable income of 2nd period – disposable income of the 1st period)
-Marginal propensity to save (MPS) : (Savings of 2nd period – savings of 1st period) / (disposable
income of 2nd period – disposable income of the 1st period)

MPS + MPC = 1

DO EXERCICE 23 TO PRACTICE THE APC AND APS, MPC and MPS

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 • NOMINAL VS REAL INCOME :
The nominal income (which is the same as disposable income) is the amount received by the
individual without taking into account the effects of price shifting due to the inflation.
The real income is the disposable income after taking into consideration the price shiftings.

real income = nominal income - (nominal income x inflation rate)

or real income = (nominal income/CPI) x100

DO EXERCICE 24 TO PRACTICE THE REAL INCOME

Factors that can influence the purchasing power:

-price shiftings (inflation or deflation). In case of inflation, our purchasing power goes down. In
case of deflation, our purchasing power goes up.
-in case of a decrease or increase of the disposable income.

If, over a certain period, we have a variation of both the inflation rate and the disposable
income, then we'll compare the variation rate of the disposable income with the inflation rate
and see which is higher.

To calculate the variation rate of the disposable income :

[(Income of the 2nd period – income of the first period)/ income of the first period] x100

DO EXERCICE 25 TO PRACTICE DISPOSABLE INCOME AND THE REAL INCOME

DO EXERCICE 26 TO PRACTICE DISPOSABLE INCOME AND THE REAL INCOME

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