Download Macroeconomics Unit 1(1)

Unit 1: Introduction to
Macroeconomics
Objectives:
o
Explain the meaning of an economic aggregate
o
Assess the problems involved in aggregation
o
Define the terms national product, national
expenditure, national income, consumption,
saving and investment.
Micro vs macro economics

Microeconomics is the study of decisions that
people and businesses make regarding the
allocation of resources and prices of goods
and services.
Macroeconomics, on the other hand, is the
field of economics that studies the behavior
of the economy as a whole and not just on
specific companies, but entire industries and
economies.

This looks at economy-wide phenomena,
such as gross national product (GDP) and
how it is affected by changes in
unemployment, national income, rate of
growth, and price levels.
Aggregates in the
economy
Most important aggregates in the economy
1.
The economy’s total output of goods and
services
2.
The total demand for and supply of this
output
3.
Total employment and unemployment
4.
The general price level
5.
The balance of payments
6.
The rate of economic growth
Aggregate demand
Aggregate demand is the sum of the demands for
goods and services by consumers, businesses, the
government and foreign residents:
AD  C  I  G  X  M
Where AD is aggregate demand,
C is the sum of all individual consumers’ demands
for goods and services,
I is the sum of all individual firms’ demand for
investment goods,
G is the governments’ demand for goods and
services,
X is the total demand for the country’s exports and
M is the demand for imports.
Problems with aggregation
The problems of aggregation
Difficulty in finding an appropriate unit of
measurement. For example apples are
measured in tones while clothes are measured in
meters.
How do you add tones to meters?
The problem is overcome, at least partially, by
using money as the unit of measurement.
But there is another problem of distinguishing
between nominal and real value.
If the value of total output double from N$10
million to N$20, this does not necessarily mean
that total output itself have double.
Problems with aggregation
(Cont.)
Two possible reasons why it has doubled:

Increase in physical output

Increase in price level
In this case we need to estimate the real
output
Real output is the quantity of goods and
services produced in an economy. Real output
can be obtained by adjusting the value of output
measured in current prices by an appropriate
price index.
Price index is used to measure changes in the
price level by comparing the price of a basket of
goods and services in the current year to the
price of this basket in a selected base year.
Problems with aggregation
(Cont.)
The problems of aggregation
Another problem with aggregates is that they
hide their constitute elements. An increase in
the economy’s total output tell us nothing
about who receives that output.
It is possible for a country to have an increase
in economic total output and at the same time
some people will be worse off.
An increase in economy’s total output cannot be
necessarily be interpreted as an
improvement in the country standard of
living.
Total output
Three ways of measuring the annual value of
total output in an economy are by calculating
its:
National product
This is found by adding up the value of all the
final goods and services produced by firms during
the year
National expenditure
This is found by adding up all the spending on the
final goods and services produced by firms
National income
By adding up all incomes (wages, salaries,
interest, rent and profits) of factor of production,
those producing intermediate goods as well those
producing final goods.
Problems with total output
The Black Economy
It refers to those unrecorded economic
transactions conducted on a cash basis with a
view to illegal evasion of tax. Official statistics
tend to underestimate the actual volume of
economic activity that occurs.
National Income and economic welfare
Two steps of how to convert national income
into real output per capita.
1.
National income must be deflated by an
appropriate price index to convert it to real
terms
2.
The figure must then be divided by the
population to convert it to per capita terms
Example of total output
Two years, 1995 and 1999, price increases by
20% between 1995 and 1999, National income
in 1995 is N$12 m and in 1999 is N$24 m, the
population in 1995 is 5000 and in 1999 is 7500.
1995
1999
National Income
N$12m
N$24m
Price Index
100
120
Real national income (1995
prices)
N$12m
N$20m
(= 24* (100/120))
Population
5000
7500
Real output per capita
2400
3200
Real national income = money value of national
income in that year times 100 divided by
price index in that year
Economic growth, welfare
and development
What is the difference between:

Growth in total output?

Growth in total output and economic
welfare?

Growth in total output and economic
development?