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Macroeconomics Intro

This document defines key macroeconomic concepts and indicators such as GDP, nominal GDP, real GDP, and the circular flow of the economy. It also outlines the components of GDP expenditure - consumption, investment, government purchases, and net exports. GDP is measured as the total expenditure or total income in the economy. Nominal GDP uses current prices while real GDP uses base year prices to remove inflation.

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16 views

Macroeconomics Intro

This document defines key macroeconomic concepts and indicators such as GDP, nominal GDP, real GDP, and the circular flow of the economy. It also outlines the components of GDP expenditure - consumption, investment, government purchases, and net exports. GDP is measured as the total expenditure or total income in the economy. Nominal GDP uses current prices while real GDP uses base year prices to remove inflation.

Uploaded by

kamrul.shamim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Data of Macroeconomics

Chapter-2

Definition: Macroeconomics is the study of economy from the


aggregate perspective including growth in income, stabilization of the
price level and reduction of the unemployment rate.

Important Macroeconomic Indicators:


Gross domestic product (GDP): GDP is the market value of all FINAL
goods and services produced WITHIN the economy in a given period of
time(in a year). (Spending method view of GDP)
Market Value = Price of the good × Quantity of good
TWO WAYS TO MEASURE GDP
There are two ways to view GDP. One way to view GDP is as the total
income of everyone in the economy. Another way to view GDP is as the
total expenditure on the economy’s output of goods and services.

Circular flow diagram:


income
labour
households Firms
goods
spending
• The GDP is the expenditure on bread flows from households to firms,
and income in the form of wages and profit flows from firms to
households.

• GDP is both the total expenditure on bread and the total income
from the production of bread.
Nominal GDP is the valuation of GDP using current market Prices and
REAL GDP is valuation of GDP using a constant set of Prices known as
base year prices.
Examples
Suppose an economy produces 4 Apples and 3 Oranges. Compute
Nominal GDP and REAL GDP of Bangladesh. [Base year=2015]
Nominal GDP of 2021 in Bangladesh= [Price of A (2021) × Quantity of A
(2021) ]+ Price of ‘O’ (2021) × Quantity of ‘O’ (2021)
Real GDP (2021) =[ Price of A (2015) × Quantity of A (2021) ]+ Price of
‘O’ (2015) × Quantity of ‘O’ (2021)
Hint: You will have to use Base year prices, but the quantities are from
2021.
Calculate REAL GDP of Bangladesh in 2021 if the base year =2012.
(Goods= Apples and Oranges )
Rules for computing GDP
1. Used goods (Second hand goods)
2. Treatment of Inventories: INCREASE in Inventories will be counted as
part of GDP but DECREASE of inventories are NOT, because this
reduction is possible by SPENDING of consumers.
3. Intermediate goods and Value added:
Value added = Value of FINAL good - Value of INTERMEDIATE goods
GDP does not include the market value of Intermediate goods .The
market value of Final good already includes market values of
intermediate goods. GDP is the total Value added of all the firms.
4. Valuation of services are Imputed values. Example: Market value of
housing service = imputed Rent.
Computing GDP deflator
GDP Deflator is the ratio of Nominal GDP to Real GDP.
Deflator(2020) =

1. If the Nominal GDP> Real GDP , Deflator >1


2. If the Real GDP > Nominal GDP , Deflator<1
3. If the Real GDP = Nominal GDP , Deflator= 1
4. Example: Suppose the value of GDP deflator =1.25 for Bangladesh in
the year 2020. If the base year = 2015 how do you interpret this
number?
The Components of Expenditure

1.Consumption (C)(by households)


2. Investment (I ) (by Firms)
3.Government purchases (G) (by public sector)
4. Net exports (NX).(by the external sector)
Thus, letting Y stand for GDP,
• Y = C + I + G + NX.(National Income accounts identity)
• Consumption consists of the goods and services bought by
households. It is divided into three subcategories: nondurable goods,
durable goods, and services.
• Investment consists of goods bought for future use. Investment is also divided into three
subcategories: business fixed investment, residential fixed investment, and inventory
investment.

• Business Fixed I: new plant and equipment purchase


• Residential fixed investment: purchase of new housing by households and landlords.
• Inventory Investment: Inventory investment is the increase in firms’ inventories of goods

• Government purchases are the goods and services bought by federal, state, and local
governments. Example: Govt spending for infrastructure, payments for govt employees,
national defense .Transfer payments are not included in G.
• Net Export = Volume of Export –Volume of Import
Consumption
• Consumption function:
• C=C(Y-T) ……….. (1) Y-T =Disposable income , T= taxes
• Graph: C C function (linear and upward sloping)
• BD = Change in C
• C2 B AD= change in disposable income
• C1 A D MPC = Marginal Propensity to consume = Slope
•
• 0 Y1 Y2 Y-T
MPC +MPS =1
MPS= Marginal propensity to save
0< MPC<1

Investment function: I =I (r) r = cost of capital rises ‘I’ spending falls


r = real interest rate. I is inversely related to ‘r’, Investment
function is downward sloping. I = Investment spending.
Graph of Investment function
• r

• E downward sloping
• r1 investment function
• r2 F

• I function
• 0 I1 I2 I
Govt purchases ‘G’
• Govt. Budget surplus = G < T
• Govt budget deficit = G > T
• Balanced Budget = G=T [ Transfer payments are not included in G]

• We assume that in a particular fiscal year


• G=
• T=

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