Macroeconomics – Basic Concepts & National

Income

Lecture No. 02
BSSS – SZABIST
Department of Social Science

SHAHEED ZULFIQAR ALI BHUTTO INSTITUTE OF SCIENCE AND

TECHNOLOGY
Prepared By: Shakeel Shahzad
BASIC CONCEPTS OF MACROECONOMIC
 Microeconomics VS Macroeconomics
 Basic Concepts of macroeconomics
 Basic Definitions of Economies and Measuring Economic Activity
 GDP, GNP AND NNP
 Other Important Statistics Used in Macroeconomics
 Inflation vs deflation vs Disinflation
 Components of the
 Types of goods produced in economy
 GDP Classification of Consumption / Consumer Goods
 Difference between Intermediate and Final goods
 Home Task
Microeconomics VS Macroeconomics
Macroeconomics
branch of economics that deals with large-scale economic factors
economics of a national economy as a whole (OR) – The study of aggregate
measures of the economy
money, prices, employment, inflation

Microeconomics
decision-making of individuals
analyses the choices of consumers (who can be individuals or households) and
firms in a variety of market situations

OR
study of behavior of individual economic agents.
 Basic Concepts of macroeconomics
Macroeconomics is that economy in which we study aggregates of economic system. Aggregates of economic means those
variables which represent economy as whole. Some aggregates are :

 Aggregate Consumption ⇒ In an accounting period consumption of goods and services of economy.

 Aggregate Investment ⇒ It includes all the expenditure by the producers on the purchase of goods which added to
capital during the year.

 Aggregate Demand ⇒ Total expenditure on the purchase of goods and services  during accounting period.

 Aggregate Supply ⇒ Total production of goods and services .

 Domestic Income ⇒ Income generated within the domestic territory of a country.

 General Price Level ⇒ It included the prices of all goods and services at the end of specific period of time.
Economies and Measuring Economic Activity

Economies in world :

1. Traditional Economy
2. Command Economy
3. Market Economy
4. Mixed Economy

Measuring Economic Activity :

 Stock Variable :
point in time
wealth, debt, unemployment, account balance
 Flow Variable:
over a period of time
income, GDP
 GDP , GNP and NNP
GDP (Gross Domestic Product) : is the money value of all the goods and services produced within a
country.

So GDP of Pakistan is the value of all the goods and services produced within Pakistan during the given
year.

GNP (Gross National Product) : is the money value of all the goods and services produced by
the RESIDENTS of a country. (OR)

Gross National Product or GNP is the aggregate market value of all goods and services created or
produced during a particular period and net factor income from abroad.

Net national product (NNP) is the market value of a nation's goods and services minus depreciation.
NNP = Market Value of Finished Goods + Market Value of Finished Services - Depreciation.

Alternatively, NNP can be calculated as:

NNP = Gross National Product - Depreciation
 OTHERS IMPORTANT STATISTICS
 Unemployment :

the total number of adults (16 and up) who are willing and able to work and
who are actively looking for work, but have not found a job

 Labor Force
adults who are either employed or unemployed

Unemployment rate = Unemployed / Labor Force

Types of Unemployment : Structural, Cyclical, Frictional, Seasonal

 Inflation vs deflation vs Disinflation
Inflation – the situation in which the average of all prices in the economy is
rising
GDP deflation, CPI, PPI, Core CPI, Core PPI
cost of market basket today
Price Index   100
cost of market basket in base year
 Deflation :

When the general level of prices is falling. Deflation have been rare in the late twentieth Century.

 Disinflation : A decline in the rate of inflation

 RECESSION
two consecutive quarters of negative growth
Components of the GDP
 Personal Consumption
Goods
Durable
Non-durable
Services
 Gross Private Domestic Investment
Fixed Investment
Non-residential
Structure
Equipment and software
Residential
Business Inventories

 Government Spending
Federal and State and Local level
Exports of goods and services
Imports of goods and services

GDP = C + I + G + x - m
 TYPES OF GOODS PRODUCED IN ECONOMY

 Final Consumer Goods – Those goods which are ready for their final users and consumers are their final users. For
example : Bread and Butter.

 Final Producer Goods –  Those goods which finally produced for its final users and producers are their final users. For
example : Tractors and Harvesters, are used by farmer.

 Consumption Expenditure refers to that expenditure by the household on final consumption. Expenditure on final
goods by producers is Investment expenditure.

Expenditure on Final Goods = Consumption Expenditure + Investment Expenditure

 Intermediate Goods ⇒ Those goods which are purchased by the one firm from others for the purpose of resale, using
them as a raw material.
Classification of Consumption / Consumer Goods

 Durable Consumer Goods →  Those goods which are used for several time. (Books,
jewelries, Automobiles, Electronics, Households goods etc…. )

 Semi-durable consumer goods → Those goods which are used for a period of time. (Clothes
and Furniture )

 Non-durable or Single-use Consumer Goods → Those goods which are only used for single
time. (Cosmetics, Clinic Products, Cigarettes, Disposable glasses etc…)

 Services → Those non-material goods which directly satisfy human wants. (Doctor,
Engineer etc)
Difference between Intermediate and Final goods

                       Final Goods
 Intermediate Goods 
1). These goods are not used as raw material.
1). These goods may be used as 1raw material.
2). These goods are not resold for the purpose
2). These goods are resold by the firm for profit.
of profit.
3). These goods are remain inside the boundary
3). These goods are outside the boundary line of
line.
production.
Value Added
Value added is the difference between the value of goods as they leave a stage of production and the cost of the
goods as they entered that stage.
In calculating GDP, we can either sum up the value added at each stage of production, or we can take the
value of final sales.

Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)
STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
(1) Oil drilling $ .50 $ .50
(2) Refining .65 .15
(3) Shipping .80 .15
(4) Retail sale 1.00 .20
Total value added $ 1.00
Calculating Gross Domestic Product
(GDP)
GDP can be computed in two ways:

1. The Expenditure approach

2. The Income approach

The expenditure approach: A method of computing GDP that measures the total amount spent on all final
goods during a given period.

The income approach: A method of computing GDP that measures the income—wages, rents, interest, and
profits—received by all factors of production in producing final goods.
Calculating GDP

GDP can be computed in two ways:

The expenditure approach: A method of computing GDP that measures the total amount spent on all final goods
during a given period.

The income approach: A method of computing GDP that measures the income—wages, rents, interest, and profits
—received by all factors of production in producing final goods.
The Expenditure Approach

Expenditure categories:
 Personal consumption expenditures (C)—household spending on
consumer goods.

• Gross private domestic investment (I)—spending by

firms and households on new capital: plant, equipment,
inventory, and new residential structures.
Expenditure categories:

 Government consumption and gross investment (G)

• Net exports (EX – IM)—net spending by the rest of the

world, or exports (EX) minus imports (IM)
expenditure approach

 The expenditure approach calculates GDP by adding together the four components of
spending. In equation form:

G D P  C  I  G  ( E X  IM )
 Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 2002: The Expenditure Approach
BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Personal consumption expenditures (C) 7303.7 69.9
Durable goods 871.9 8.3
Nondurable goods 2115.0 20.2
Services 4316.8 41.3
Gross private domestic investment (l) 1543.2 14.8
Nonresidential 1117.4 10.7
Residential 471.9 4.5
Change in business inventories 3.9 0
Government consumption and gross investment (G) 1972.9 18.9
Federal 693.7 6.6
State and local 1279.2 12.2
Net exports (EX – IM) - 423.6 - 4.1
Exports (EX) 1014.9 9.8
Imports (IM) 1438.5 13.8
Total gross domestic product (GDP) 10446.2 100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Personal Consumption Expenditures
Personal consumption expenditures (C) are expenditures by consumers on the
following:

Durable goods: Goods that last a relatively long time, such as cars and appliances.

Nondurable goods: Goods that are used up fairly quickly, such as food and clothing.

Services: Things that do not involve the production of physical things, such as legal services,
medical services, and education.
 Gross Private Domestic Investment

 Investment refers to the purchase of new capital.

 Total investment by the private sector is called gross private domestic investment.

 It includes the purchase of new housing, plants, equipment, and inventory by the private sector.

 Nonresidential investment includes expenditures by firms for machines, tools, plants,

and so on.
 Residential investment includes expenditures by households and firms on new houses
and apartment buildings.
 Change in inventories computes the amount by which firms’ inventories change during
a given period. Inventories are the goods that firms produce now but intend to sell later.
Gross Private Domestic Investment
 Remember that GDP is not the market value of total sales during a period—it is the market
value of total production.
 The relationship between total production and total sales is:

GDP = final sales + change in business inventories

 Gross Investment versus Net Investment

 Gross investment is the total value of all newly produced capital goods (plant, equipment,
housing, and inventory) produced in a given period.
 Depreciation is the amount by which an asset’s value falls in a given period.
 Net investment equals gross investment minus depreciation.

capitalend of period = capitalbeginning of period + net investment

Government Consumption
and Gross Investment
 Government consumption and gross investment (G) counts expenditures by
federal, state, and local governments for final goods and services.
 Net Exports
Net exports (EX – IM) is the difference between exports and imports. The figure can be positive or negative.

Exports (EX) are sales to foreigners of U.S.-produced goods and services.

Imports (IM) are U.S. purchases of goods and services from abroad).
 The Income Approach
 National income is the total income earned by the factors of production owned by a country’s
citizens.
 The income approach to GDP breaks down GDP into four components:

GDP = national income + depreciation + (indirect taxes – subsidies) + net

factor payments to the rest of the world + other
 The Income Approach

Components of GDP, 2002: The Income Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
National income 8,199.9 80.3
Compensation of employees 6,010.0 58.9
Proprietors’ income 943.5 7.3
Corporate profits 748.9 7.3
Net interest 554.8 5.4
Rental income 142.7 1.4
Depreciation 1,351.3 13.2
Indirect taxes minus subsidies 739.4 7.2
Net factor payments to the rest of the world 11.1 0.1
Other - 96.1 - 0.9
Gross domestic product 10,205.6 100.0
Source: See Table 18.2.
 From GDP to Disposable Personal
Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS
(BILLIONS)
GDP 10,205.6
Plus: receipts of factor income from the rest of the world + 342.1
Less: payments of factor income to the rest of the world - 353.2
Equals: GNP 10,194.5
Less: depreciation - 1,351.3
Equals: net national product (NNP) 8,843.2
Less: indirect taxes minus subsidies plus other - 643.3
Equals: national income 8,199.9
Less: corporate profits minus dividends - 332.6
Less: social insurance payments - 731.2
Plus: personal interest income received from the government and consumers + 439.1
Plus: transfer payments to persons +1,148.7
Equals: personal income 8,723.9
Less: personal taxes - 1,306.2
Equals: disposable personal income 7,417.7
Source: See Table 18.2.
From GDP to Disposable Personal
Income

 Net national product equals gross national product minus depreciation; a nation’s total product minus
what is required to maintain the value of its capital stock.
 Personal income is the income received by households after paying social insurance taxes but before
paying personal income taxes.
 Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002

DOLLARS
(BILLIONS)
Disposable personal income 7,417.7

Less:

Personal consumption expenditures - 7063.5

Interest paid by consumers to business - 204.3

Personal transfer payments to foreigners - 31.3

Equals: personal saving 118.6

Personal savings as a percentage of disposable personal income: 1.6%

Source: See Table 18.2.
 Disposable Personal Income and Personal
Saving

The personal saving rate is the percentage of disposable personal income that is saved.
If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high,
households are spending cautiously.
 Gross National Income per Capita

To make comparisons of GNP between countries, currency exchange rates must be taken into account.

Gross National Income (GNI) is a measure used to make international comparisons of output.

GNI is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates
of inflation.

GNI divided by population equals gross national income per capita.

Gross National Income per Capita
Per Capita Gross National Income for Selected Countries, 2002
COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS
Switzerland 36,970 Portugal 10,670
Japan 35,990 South Korea 9,400
Norway 35,530 Argentina 6,860
United States 34,870 Mexico 5,540
Denmark 31,090 Czech Republic 5,270
Ireland 28,880 Brazil 3,060
Sweden 25,400 South Africa 2,900
United Kingdom 24,230 Turkey 2,540
Netherlands 24,040 Colombia 1,910
Austria 23,940 Jordan 1,750
Finland 23,840 Romania 1,710
Germany 23,700 Philippines 1,050
Belgium 23,340 China 890
France 22,640 Indonesia 680
Canada 21,340 India 460
Australia 18,770 Pakistan 420
Italy 18,470 Nepal 250
Spain 14,860 Rwanda 220
Greece 11,780 Ethiopia 100
Source: The World Bank Atlas, 2002.
 HOME TASK

1. Explain how to measure national income, what are the methods ?

2. Explain the basic concepts of Macroeconomics (5 of the total in slides in your own words).

Note: Not graded - No submission to the department – For your practice.

Thank You !