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MACROECONOMICS and
NATIONAL ACCOUNS
Manouchehr Mokhtari
AM
Measure off T
Total
t lO
Output
t t in
i Armenia:
A
i
Annual Gross Domestic Product (GDP)
GDP of Armenia 2000-2008
(Million Drams)
4,000,000
3,500,000
Dram s
D
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1
2
3
4
5
6
7
8
9
Year
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Components of GDP & Accounting Identity
• GDP is total market value of all final goods and services
pproduced in an economy
y during
g a pparticular time pperiod (
e.g., within one year, one quarter, or one month).
• Observed Supply (GDP or Y) is the sum of four major
Demand aggregates:
Y ≡ C + I + G + NX
•
•
•
•
Consumption Expenditure “C”
p
“I”
Investment Expenditure
Government Expenditure “G”
Net exports (Exports – Imports) “NX”
NX
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COMPONENTS OF GDP –2008
2008
Government
Expenditures, G
8%
Net export, NX
-18%
Consumption, C
50%
Investment, I
26%
4
Circular Flow of Macroeconomic Fund
(Closed Economy with no Government)
The equality of income and expenditure is shown below.
Spending=GDP
Revenue=GDP
M k t for
Markets
f Goods
G d & Services
S i
Firms
Households
Markets for Factors of Production
Wages, rent,profit=GDP
fi
Goods Flow
Income=GDP
Funds Flow
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Circular Flow of Macroeconomic Fund
•
•
•
The circular-flow diagram shows four economic
sectors.
The diagram shows that households bought
goods and services from firms in the market for
goods
d andd services,
i
and
d firms
fi
use their
th i revenue
from sales to pay wages to workers in the
market for factors of production, rent to
landowners and p
profit to firm owners.
But real economy is more complex than this
diagram
diagram.
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Circular Flow of Macroeconomic Fund
(with Government and Foreign Trade)
Investment
Rest
of the
World
Markets for Goods
& Services
Spending
on Imports
Receipts from
Exports
Enterprise Income
Government
Spending
((Consumption
p
+
Investment)
Spending on
Investment
Transfers
Households
Firms
Disposable
Income
Spending
p
g
Savings
g
Markets for Factors
of Production
Savings
Financing of
Investment
Househol
d Income
Taxes
Financing
of Deficit
Financial Markets
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Circular Flow of Macroeconomic Fund
• There are three other economic sectors:
• Financial sectors work as financial intermediaries,
g system,
y
and pension
p
funds.
such as banking
• Government creates regulatory and legal
framework, provides public goods, such as
education, taxes and government expenditures
• The rest of the world are countries with which our
country transacts. (import & export)
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REAL VERSUS NOMINAL GDP
•
•
•
•
When studying changes in the economy over
time,
i
it
i is
i is
i useful
f l to separate these
h
two effects.
ff
In particular, for studying the economy, a
measure is required that is not affected by
changes in the prices of goods an services.
This measure is called real GDP.
Real GDP answers the hypothetical question:
What would be the value of goods and services
produces
d
this
hi year if we valued
l d these
h
goods
d andd
services at prices that prevailed in some specific
year.
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REAL VERSUS NOMINAL GDP
Year
Price
Lavash
Quantity
Lavash
Price
Khorovats
Quantity
Khorovats
2006
10 drams
100
20 drams
50
2007
20
150
30
100
2008
30
200
40
150
Calculating Nominal GDP
2006 : (10 drams
d
x 100 Lavash)
L
h) + (20 drams
d
x 50 Khorovats)
Kh
t ) = 22,000
000 drams
d
2007 : (20 drams x 150 Lavash) + (30 drams x 100 Khorovats) = 6,000 drams
2008: (30 drams x 200 Lavash) + (40 drams x 150 Khorovats) = 12,000
drams
C l l ti Real
Calculating
R l GDP
2006 : (10 drams x 100 Lavash) + (20 drams x 50 Khorovats) = 2,000 drams
2007: (10 drams x 150 Lavash) + (20 drams x 100 Khorovats) = 3,500 drams
2008: (10 drams x 200 Lavash) + (20 drams x 150 Khorovats) = 5,00010drams
REAL VERSUS NOMINAL GDP
•
•
•
•
To Summarize nominal and real GDP calculations:
Nominal GDP uses current prices to place a value
on the economy’s production of goods and
services;
Real GDP uses constant base year prices to place a
value
l on the
th economy’s
’ production
d ti off goods
d andd
services.
Because real GDP is not affected by changes in
prices, changes in real GDP reflect only changes in
the amounts produced, this real GDP is a measure
of the economy’s
y production
p
of goods.
g
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GDP DEFLATOR
•
Using the previous numerical example
Calculating Nominal GDP
2006 (10 drams x 100 lavash) + (20 drams x 50 Khorovats) = 2,000 drams
2007 (20 drams x 150 lavash) + (30 drams x 100 Khorovats) = 6,000 drams
2008 (30 drams x 200 lavash) + (40 drams x 150 Khorovats) = 12,000 drams
Calculatingg Real GDP
2006 (10 drams x 100 lavash) + (20 drams x 50 Khorovats) = 2,000 drams
2007 (10 drams x 150 lavash) + (20 drams x 100 Khorovats) = 3,500
3 500 drams
2008 (10 drams x 200 lavash) + (20 drams x 150 Khorovats) = 5,000 drams
Calculating GDP Deflator
2006 (2,000/2,000) x 100 = 100
2007 (6,000/3,500) x 100 = 171.4
2008 (12,000/5,000) x 100 = 240
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GDP AND ECONOMIC WELL
BEING
•
•
•
•
GDP does not measure the health of children,, the
quality of education, intelligence, the beauty of
y, the qqualities of its citizens,, etc.
the country,
Further, GDP leaves out the quality of the
environment and such important issues as leisure
and quality of life.
On the other hand, countries with larger real GDP
per person, possess the capacity to provide better
health care
care, education,
education and social services
services.
Finally, in reality is there a correlation between
GDP and quality of life ?
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