Introduction to Economics

Topic 5
Macroeconomic Variables.
National Accounts.
GADE, GDADE, GFICO, GDFICO
Academic Year 2017-2018.

Macroeconomics vs. Microeconomics

Let’s begin by looking more carefully at the difference between
microeconomic and macroeconomic questions.

MICROECONOMIC MACROECONOMIC
QUESTIONS QUESTIONS
Go to business school or take a How many people are employed
job? in the economy as a whole?
What determines the salary What determines the overall
offered by Santander to Maria salary levels paid to workers in a
Gomez, a new UPO graduate? given year?

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Macroeconomics vs. Microeconomics
MICROECONOMIC MACROECONOMIC
QUESTIONS QUESTIONS
What determines the cost to a What determines the overall
university or college of offering a level of prices in the economy as
new course? a whole?
What government policies should What government policies should
be adopted to make it easier for be adopted to promote full
low-income students to attend employment and growth in the
college? economy as a whole?
What determines whether What determines the overall
Santander opens a new office in trade in goods, services and
Brazil? financial assets between the EU
and the rest of the world?
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Macroeconomics vs. Microeconomics

 Microeconomics:
Branch of economics concerned with how people make
decisions and how these decisions interact.
 i.e. it deals with the behavior of individual economic units -
consumers, firms, workers, and investors - as well as the markets
that these units comprise.

 Macroeconomics:
Branch of economics concerned with the overall economy.
Examines the aggregate behavior of the economy (i.e. how the actions
of all the individuals and firms in the economy interact to produce a
particular economic-wide level of economic performance).
 (i.e. it deals with aggregate economic variables, such as the level
and growth rate of national output, interest rates, unemployment, and
inflation).
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Outline

5.1. Aggregate Production.

5.2. Other macroeconomic variables:

unemployment and inflation.

 References: Krugman and Wells (various chapters)

Blanchard et al. (various chapters).

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Gross Domestic Product (GDP)

 Aggregate Output
 National income and product accounts are an
accounting system used to measure aggregate
economic activity.
 The measure of aggregate output in the national
income accounts is Gross Domestic Product (GDP).

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Gross Domestic Product (GDP)
 Gross domestic product (GDP) measures the total
value of all final goods and services produced in the
economy (in a country) in a given period of time.
(It does not include the value of intermediate goods.)
 Final goods and services are goods and services sold to
the final, or end, user.
 Intermediate goods and services are goods and services -
bought from one firm by another firm - that are inputs for
the production of other goods and services.

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Gross Domestic Product (GDP)

 Rules for computing GDP:
 Uses prices to add up disparate goods into a single
number: GDP = (Price of Apples × Quantity of Apples) +
(Price of Oranges × Quantity of Oranges), etc....
 Only new goods are included.
 Inventories (e.g., goods produced but not sold) are
considered “investment” by firms.
 Includes only final goods – not intermediate inputs.

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Gross Domestic Product (GDP)
 Components of GDP:
GDP = C + I + G + NX
 Consumption (C): goods and services bought by households
 Investment (I): goods bought for future use.
 Nonresidential structures (new factories for firms)
 Nonresidential equipment and software (new machines for firms)
 Residential investment (housing for people)
 Government purchases (G): goods bought by all levels of
government.
 Not the same as “government transfers”, which includes transfers like
Social Security.
 Net exports (NX) = Exports (EX) – Imports (IM)
 Positive when the country has a trade surplus.

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Gross Domestic Product (GDP)

 GDP can be calculated three ways:
 Ex.: Mary spends a final good €10, the market value is €10, the income to
the factors is €10.
 Thus: National Expenditure = National Output = National Income

1. Expenditure Approach: Add up all spending on

domestically-produced final goods and services. This
results in the equation: GDP = C + I + G + NX
2. Production (Value added) approach: Add up the value
added of all producers
3. Income approach: Add up all income paid to factors of
production

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 Real vs. Nominal GDP
 Nominal GDP is the value of all final goods and services
produced in the economy during a given year, calculated
using the current prices in the year in which the output is
produced.
 Real GDP is the total value of the final goods and
services produced in the economy during a given year,
calculated using the prices of a selected base year (i.e.
at constant prices).

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Real vs. Nominal GDP (contd.)

Calculating GDP and Real GDP in a Simple Economy
Year 1 Year 2
Quantity of apples (billions) 2,000 2,200
Price of apple €0.25 €0.30
Quantity of oranges (billions) 1,000 1,200
Price of orange $0.50 $0.70
GDP (billions of Euros) €1,000 €1,500
Real GDP (billions of year 1 Euros) €1,000 €1,150

Year 1 Nominal GDP = (2,000b*€0.25) + (1,000b*€0.50) = €1,000 billion

Year 2 Nominal GDP = (2,200b*€0.30) + (1,200b*€0.70) = €1,500 billion

Year 1 Real GDP = same as Year 1 Nominal GDP = € 1,000 billion

Year 2 Real GDP (Year 1 prices) = (2,200b* €0.25) + (1,200* €0.50) = $1,150 billion

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Real vs. Nominal GDP (contd.)
 Except in the base year, real GDP is not the same as
nominal GDP, output valued at current prices.
 GDP per capita is a measure of average GDP per person
(GDP/population).
 Note: GDP per capita is not a measure of personal income
(GDP may increase while real incomes for the majority decline).
 Has its limitations with regard to measuring the standard of
living in a country.
 Using GDP as a standard-of-living proxy: not because it is a good
indicator of the absolute level of standard of living, but living standards
tend to move with per-capita GDP.

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Economic Growth
 Economic Growth is the increase in the market value of
the goods and services produced by an economy over
time.
 It is conventionally measured as the percent rate of
increase in real gross domestic product, or real GDP.

GDP in year 2 ‐ GDP in year 1

Rate of GDP growth x 100
GDP in year 1

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Real GDP growth, 2005–2015 (% change compared
with the previous year)

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GDP and life satisfaction…(OECD 2012)

 Richer countries on average have higher life satisfaction than poor countries…
 Money seems to matter less as you grow richer…
 Money isn’t everything.

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Gross National Product (GNP)
= Market value of all products and services produced in
one year by labour and property supplied by the
residents of a country.
 GNP measures the output generated by a country's enterprises
(whether physically located domestically or abroad).
 GDP measures the total output produced within a country's
borders (i.e. according to geographical location and hence
independent whether produced by that country's own local firms
or by foreign firms).
 GNP = GDP + foreign income earned by residents
– domestic income earned by non-residents.

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Outline

5.1. Aggregate Production.

5.2. Other macroeconomic variables:

unemployment and inflation.

 References: Krugman and Wells (various chapters)

Blanchard et al. (various chapters).

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 Unemployment
Labor force (L) = Employment (N) + Unemployment (U)
 Labor force: participating workers, i.e. people actively
employed or seeking employment.
 People not counted include: persons younger than 16 years, students,
retired people, disabled people, stay-at-home parents, etc.

 Employment: number of people currently employed in the

economy, either full time or part time.
 Unemployment: number of people who are actively looking
for work but aren’t currently employed.
 Only those looking for work are counted as unemployed. Those not working
and not looking for work are not in the labor force.
 People without jobs who give up looking for work are known as discouraged
workers.
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Unemployment rate
 The unemployment rate is the percentage of the total
number of people in the labor force who are unemployed.
Number of unemployed people
Unemployment rate x 100
Labour force

 The labor force participation rate is the percentage of

the population of working age that is in the labor force.
Labor force
Labor force participation rate x 100
Population of working age

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Unemployment rates (annual averages 2001 & 2012)

Source: Eurostat database

Most recent data and further information:
http://epp.eurostat.ec.europa.eu/statistics_explai
ned/index.php/Unemployment_statistics
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Unemployment rates, seasonally adjusted, August 2016

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 Unemployment rates, 2015, ranked on the average of
male and female

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CPI and Inflation Rate

 Consumer price index (CPI):
 Measures changes in the price level of consumer goods and
services purchased by households.
 The CPI is a statistical estimate constructed using the prices of
a representative market basket of goods and services.
 For information on the Spanish CPI, see
http://www.ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_C&cid=1254736
176802&menu=ultiDatos&idp=1254735976607
 Monthly or annual changes in the CPI provide a good measure
of the rate of consumer price inflation.
 Inflation rate:
 Is the yearly (monthly) percentage change in a price index,
typically based upon the CPI.
CPI in year 2 CPI in year 1
Inflation rate x 100
CPI in year 1
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 Spanish CPI Composition (2017)
7%

20%
12% Food and non‐alcoholic beverages
Alcoholic beveragea and tobacco
Clothing and footwear
2% Housing
3%
Furniture and household equipment
Health
8%
7% Transport
Communications
Recreation and culture
3%
Education
Hotels, cafes and restaurants
13%
Others

15%

6%
4%

Data Source: INE

Introduction to Economics
GADE, GDADE, GFICO, GDFICO, Academic Year 2017-2018.

Inflation
 Inflation
= rise in the general level of prices of goods and services in an
economy over a period of time.
 When the general price level rises, each unit of currency buys
fewer goods and services.
 Thus, inflation also reflects an erosion in the purchasing power
of money.
 A high inflation rate is alarming because:
 Not all prices and salaries increase proportionally.
 Uncertainty over future inflation may discourage investment and savings.
 Most central banks target price stability, which is usually
defined as a low but positive rate of inflation.
 The European Central Bank specifies that annual inflation should stay
close to 2% over the medium term.
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Other Price Measures
 A similar index to CPI for goods purchased by firms is the
producer price index (PPI).
 Economists also use the GDP deflator, which measures
the price level by calculating the ratio of nominal to real
GDP. nominal GDP
GDP deflator
real GDP
P in year 2 P in year 1
Inflation rate x 100
P in year 1

 CPI vs. GDP deflator in theory:

 GDP deflator measures the price of all goods and services produced,
while CPI measures prices for consumption goods only.
 GDP deflator measures prices of goods produced domestically, while
CPI includes imported consumption goods.
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Introduction to Economics
Topic 5
Macroeconomic Variables.
National Accounts.
GADE, GDADE, GFICO, GDFICO
Academic Year 2017-2018.