Download PRESENTATION 1 INTRODUCTION&GDP

Macroeconomics
Introduction
Frederick
University
2014
Economic Agents
government
Final goods and
services
L, N, K
households
firms
Factors Generating Economic
Problems



Scarcity of resources
Technological changes
Changes in tastes and preferences
Main Economic Questions
Generators

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Scarcity of resources
Technological
changes
Changes in tastes
and preferences
Questions

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What (and how
much)
How
For whom
Main Economic problems
Questions
Problems

What and how much


How


For Whom

Efficiency in
allocation
Efficiency in
motivation
Efficiency in
distribution
Economics
Economics is the study of how
economic agents make decisions what
to produce, how to produce, and for
whom to produce
Microeconomics vs.
Macroeconomics


Microeconomics – studies how economic
agents make decisions what, how and for
whom to produce from the point of view of
individual households and firms
Macroeconomics - studies how economic
agents make decisions what, how and for
whom to produce from the perspective of the
impact of these decisions on the national
economy as a whole.
Major Macroeconomic Issues



Output
Employment and Unemployment
Price Level
Macroeconomic objectives

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Issues
Output
Employment
and
Unemployment
Price level
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Objectives
High level and rapid
growth of output
High
level
of
employment and low
level of involuntary
unemployment
Price level stability
Production Possibilities Frontier
Production Possibilities Curve
W
20 A
wine
20
16
12
8
4
0
movies
0
6
10
13
15
16
choices
A
B
C
D
E
F
16
B
C
12
16
0
6
10
F
M
Physical and Institutional PPF
w
Physical PPF
Physical PPF – indicates the potential of the
economy to produce, constrained by the
physical availability of resources
Institutional PPF
M
Institutional PPF – indicates the potential of the economy to produce,
constrained by the physical availability of resources and by the rules
and traditions followed by the decision makers
Institutional PPF and Potential
Output



Potential Output – the maximum sustainable
level of output that the economy can
produce, given the productive capacity, the
economy’s technological efficiency, and the
rules and traditions, followed in the economy
When actual output exceeds potential output,
price inflation tends to rise
When actual output falls below the potential,
unemployment tend to increase
The Rate of Employment and
The Rate of Unemployment





Employment Rate – reflects the fraction of working
population over 16 and below 64 years
Unemployment rate – reflects the percentage of
unemployed in the labor force
Labor force = employed + unemployed
Unemployment rate = [unemployed : (employed +
unemployed)] x 100%
Natural rate of Unemployment – the rate of
unemployment, determined by the institutional PPF
and potential output.
Price Stability and the Rate of
Inflation




Price stability – the price level is unchanged
or rises very slowly
The Consumer Price Index (CPI) - measures
the average price of goods and services
bought by consumers
Rate of Inflation – the percentage change in
the overall price level from one year to the
next
Inflation 2012 = [(CPI20012 – CPI2011) : CPI2011] x 100%
Aggregate Demand
AD – the quantity of GDP, which the economic agents are
planning to buy at every price level, ceteris paribus
Price level
AD depends on:
AD
The willingness of households to buy output
The willingness of firms to buy output
Government fiscal and monetary policies
output
Aggregate Supply
Aggregate supply (AS) - the total quantity of goods and services that the firms in
the country are willing to produce and sell at
every price level, ceteris
paribus.
AS depends on:
Price level
AS
Physical PPF – resources and technology
Potential output determined by institutions,
shaping costs, efficient use of resources
Output
Macroeconomic Equilibrium
P
AD
AS
E
Output
AS and AD determine:
 equilibrium output
 the level of
employment and
unemployment
 the price level and
the rate of inflation
 the balance of
payments
Expenditures on final goods and
services
Final goods and
services
FIRMS
HOUSEHOLDS
Production factors
Primary Income
The Circular Flow
GDP




Gross Domestic Product – value of final goods
and services produced in the economy within
a year
Final goods and services – produced during
the current period and not used in the
production of other goods and services
Intermediate goods
The double counting problem
Value Added
Stages of the production
process of 1/2 kilo of
bread:
Value added
1.
2.
1.
2.
3.
Wheat from the
farmer – € 0.15
Flour from the miller –
€0.43
Bread from the backer
– €0.84
3.
4.
Wheat – €0.15
Flour – €0.28
Bread – €0.41
Total Value added =
= 0.15 + 0.28 +
0.41 = 0.84
Expenditure Approach
Economic Agents




households
firms
government
foreigners
Expenditures

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C
+I
+G
+X
-M
Expenditure approach
GDP = C + I + G + X – M = АЕ
Aggregate Expenditures
Income approach
GDP = ∑ primary income =
 Wages and salaries
 + proprietors’ income
 + interests
 + rents
 + dividends
 + retained earnings
 + depreciation
Expenditure approach vs.
Income approach
АЕ
- Indirect taxes
- + subsidies
=
Primary income
Three approaches to GDP
calculation
The value added approach
 The expenditure approach
 The income approach

GDP vs. GNP


GDP – created on the national territory
GNP – created by the citizens of the
country
Net Domestic Product
GDP (АЕ)
– depreciation allowances
= NDP
Domestic Income, Personal
Income and Disposable Income
GDP (income approach)
- Depreciation = NDP (income approach) = Domestic income
Domestic income
- Retained earnings
- Corporate taxes
- Social security
+ Transfer payments to the households
_________________________________
= Personal income
- households’ income taxes
= Disposable income
GDP Shortcomings

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underground activities
income distribution
leisure time
demerit activities
market prices
public goods production at factor prices
quantity vs. quality
net exports might not contribute to the
growth of welfare
Real vs. Nominal GDP
Nominal GDP – GDP at current prices
 Real GDP – GDP at constant prices
(base year prices – chosen year)
 Index – the change in the value of an
indicator compared to its previous level,
taken as a base (= 100)
 GDP deflator =
(Nominal GDP : Real GDP) х 100
