Macroeconomics

By: Zunaira Ahmed

Email: xoni.fcc@gmail.com
Text Book: Mankiw, N. G. Macroeconomics, 9th Edition
Outline
 Macro Economics
 National Income
 Basic Concepts of National income
 Gross Domestic Product (GDP)
 Gross National Product (GNP)
 Net National Product (NNP)
 National Income at Factor Cost
 Personal Income (PI)
 Disposable Income (DI)
 Circular Flow of Income
 Measurement of National Income
 Expenditure Method
 Income Method
 Product Method
 Unemployment Rate
 Labor force
 Labor force Participation
Economics
 Economics deals with the study of each society and individual attempts to
maximize the “satisfaction” that it derives from the use of its limited (scarce)
resources in the production of goods and services. So

“Economics is the study of how individual and
societies choose to allocate scarce resources”.
 Scarcity: The fact that there is a limited amount of resources to satisfy
unlimited wants.
 Economic Resources: All the natural, human and manufactured resources
that go into the production of goods and services.
These are also called “Factor of Production”.

Entrepreneurship
Land Labor Capital
 Micro & Macro Economics
 Micro Economics:
The study of how
individuals, businesses and
households make decisions in
allocating their limited
resources to satisfy their
unlimited wants. Micro
economics focuses on single
units.
 Macro Economics:
Is the study of the economic
system as a “whole”. Macro
economics is the study of
how entire economy behave
as a unit. It examine the
major economic tools or
aggregates.
National Income
 National Income is the aggregate measure of economic
activity in an economy during some given period.
 National accounting is the process of estimating national
income of a country.
 National Income is the total income of a country. It is the
aggregate of all the incomes of residents of a country.
 We can define national income in two ways:
 “Total market value of all final goods and services
produced in a country during one year”
 “Sum of all incomes received by households, including
wages, rents, interest payments and profits during one
year”
Concepts Related to National Income:
 Gross Domestic Product (GDP):
 GDP of a country is the market value of all final goods
and services produced in the economy during a year.
 It only records the sum of total incomes when goods
and services are produced inside a country.
“So Expenditure equals income because every dollar
spent by a buyer becomes income to the seller”.
 Value added to GDP:

A firms value added is the value of its

output minus the value of the
intermediate goods the firm used to
produce that output.
Compute and compare value added at
each stage of production and GDP
 Example : A farmer grows wheat and sell it to
miller at $1
The miller turns the wheat into flour and sell it to baker
at $ 3
The baker uses the flour to make bread and sell it to a
doctor $ 6
Final goods, value added and GDP
 GDP= Value of all final goods and services produce
= Sum of all value added at all stages of
production
 The value of the final goods already includes the
value of the intermediate goods so including
intermediate and final goods in GDP would be
double-counting
 GDP=(price of commodity)*(Quantity of commodity)
Real Vs. Nominal GDP:
GDP is the value of all final goods & services
Produce
Real GDP
 Measures these values
using the prices of base
year.
 Real GDP measures output
valued at constant prices.
Nominal GDP
 Measures these values
using Current prices
 Nominal GDP measures
the current dollar value of
the output of the
economy.
 GDP Deflator

 The
GDP deflator define as the ratio of nominal
GDP to real GDP
 GDP Deflator= Nominal GDP/Real GDP
 It is also known as Implicit Price deflator
 TheGDP Deflator reflects what’s happening to the
overall level of prices in the economy
Consider an economy that produces and consume
bread and automobiles. In the following table are
data for two different years
Year 2014 Year 2024
Price of an automobile $50,000 $60,000
Price of a Bread $10 $20
No. of Automobile 100 120
Produce
No. of Bread Produce 500,000 400,000

1. Using the year 2014 as the base year, compute the following statistics for
each year:
i. Nominal GDP,
ii. Real GDP
iii.Implicit Price Deflator (GDP Deflator).
GDP features

 Only the value of goods produced in current year included.

 The value of imputed goods, non production transactions (i.e.
transfer payment, zakat, second hand sales) and underground
economy are not included in GDP
 Increase in GDP is an indicator of that economy is growing and
expanding.
 The relative importance of various sectors of the economy is
determined on the basis of each sector’s share in GDP.
Expenditure Components of GDP

Consumption
Investment
Govt. purchases
Net Exports
1. Consumption

 Thevalue of all goods and services bought by

household.
i. Durable Goods:
Last a long time period. Ex: Cars, home appliances
ii. Non Durable Goods
Last a short time period. Ex: food, clothes
iii. Services
Work done for consumers. Ex: house staff, watch man
2. Investment (I)

Spending on goods bought for future use

i. Business Fixed Investment
Spending on plants and equipment that firm use to produce other
goods & services
ii. Residential Investment
Spending on housing units by consumers and landlords
iii. Inventory Investment
Is the increase in firms’ inventories of goods
3. Govt. purchases (G)

Govt. purchases are the goods and services bought

by federal, state and local governments. This
category includes such items as military equipment,
highways and the services that government workers
provide.
4. Net Exports (NX)

 Takesinto account trade with other countries. Net

exports are the value of goods and services
exported to other countries minus the value of
goods and services that foreigners provide us .
Net Exports (NX)=Exports-Imports
Gross National Product (GNP):

 GNP of a country is the sum of market values of all

final goods and services produced annually by its
nationals.
 GNPincludes all the production by the residents of a
country whether it is done in the country or abroad.
 GNP=GDP + Factor payments from abroad-Factor
payments to Abroad
 GNP is used as a measure of a nation's welfare.
 GDP & GNP exclude Non-production transactions.
NNP & NI

Net National product(NNP) National Income at Factor

 NNP is the measure of Cost (NI):
national production of a  National Income is the
country obtained by
total of incomes earned
deducting the amount of
by the factors of
depreciation from GNP.
production in the form of
 NNP is a better measure wages, rent, interest and
to know how much total profit.
production an economy  NI = NNP-indirect taxes +
make available for use
subsidies
without decreasing its
capital stock
 NNP = GNP- Depreciation
 Continue…

Personal Income (PI) Disposable Income (DI)

 Personal income is the  Disposable income is the
total income received by
total net amount left with
the people from all
the individuals and
sources
households when they
 PI = NI – social security have paid direct tax.
contributions – corporate  DI = PI- Personal taxes
taxes-undistributed profits
+ transfer payments
Per Capita Income (Average Income)

 The average income of people in a country or per capita

income is calculated when national income is divided by
population of the country.
Per capita income= National income/Population
The concept of per capita income is helpful for the average
standard of living of the people of a country.
Measurement of National Income

1. Expenditure Method
2. Income Method
3. Product Method
Expenditure Method

 National income can be computed by adding the total expenditure done by

the people and government during a year. Every rupee spend on a good or
service is income to somebody, that is, to every rupee of income there is a
rupee of expenditure.
 There are four main categories of expenditure: Items of Expenditure Amount

(Billion
Consumption (c)
rupees)
 Investment (I)
Private Consumption 250
 Government purchases (G) Exp
 Net Exports (X-M) Gross domestic 50
investment
Govt. purchases 90
Net Exports 10
National income 400
Income Method

 This method is derived from the concept of national income as “ the sum of
total of the incomes of all the persons of a country during one year”. The
income approach to measurement highlights the distribution aspect of
national income.
Sources of Income Amount Rs. In billions
Wages & salaries ( earned by workers and employees 200
Rent ( of buildings and lands) 30
Interest ( received on loans) 20
Profit of corporate sector( i.e. joint stock companies) 50

Proprietor’s income(earned by small business org) 60

Indirect business taxes ( taken away by the govt) 40
National Income 400
Product Method
 This method is based on the concept of national income as
“total market value of all final goods and services produced in
a country during one year”. According to this method, the
economy is divided into different sectors the net money values
of total production of these sectors in a given year is then
added.
 Product method is useful to know the relative importance of
various sectors of the economy.
 Double counting is avoided because it causes over estimation of
national income
 Non marketed production and unpaid services are not included
in estimation of national income.
Product Method

 This method is explained by an example. A country’s economy has divided into

seven sectors

Production sector Net value added

(Billion Rupees)
Agriculture 120
Manufacturing 80
Trade 50
Transport & Communication 40
Construction 30
Electricity, gas 20
Services ( defense, public administration, education) 60
National income 400
Conclusion

 The sum value of all final production, the sum of all

incomes and the sum of all expenditure will be the same.
Thus the following identity hold.
 National expenditure= National Output = National
Output
Unemployment & Labor Force
 The unemployment rate is the statistic that measures the
percentage of those people wanting to work who don’t have jobs.
 The Labor force is defined as the sum of employed and
unemployed .
 Labor Force = No. of Employed+ No. of Unemployed
 So the unemployment rate is defined as the percentage of the
labor force that is unemployed. That is
 Unemployment Rate= No. of Unemployed/Labor Force*100
 The Labor Force Participation rate, the percentage of the adult
population that is in the labor force:
 Labor Force Participation Rate= Labor Force/Adult Population*100
Calculate Unemployment Rate and labor
force participation rate

 If No of Unemployed = 5.7 M
 No of Employed = 135.2 M
 Adult population= 209.7 M
Then calculate Labor force ?
unemployment rate ?
Labor force Participation ?
Okun’s Law

 There is a negative relationship between unemployment

and GDP is called Okun’s Law.