The Bucharest University Of Economic Studies / Academia De Studii Economice Din București
Macroeconomics
Class notes
Macroeconomic Notes, based on Principles of Macroeconomics by Gregory Mankiw
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Course
Macroeconomics
Institution
The Bucharest University Of Economic Studies / Academia De Studii Economice Din București
Book
Principles of Macroeconomics
This is the entire Macroeconomics course I had as a first-year BA student, based on the book Principles of Macroeconomics by Gregory Mankiw. It includes 13 chapters in which various macroeconomic concepts are explained: GDP, aggregate demand, aggregate supply, Phillip's Curve etc. This is the perfe...
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Test Bank, For Macroeconomics 11th Edition By N. Gregory Mankiw.
Summary Introduction to Macroeconomics Final Exam Notes
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- the study of the economy as a whole
- the study of national economies & how a nation’s resources are allocated
- a young & imperfect science
- explains economic events & behaviour
- devises policies meant to improve economic performance
Macroeconomics:
- groups economic agents into broad categories: households, businesses, the government etc.
- merges thousands of individuals into aggregate markets: output & input markets, domestic & international
markets
- focuses on aggregate variables: aggregate demand (AD), aggregate supply (AS), overall price level
- stresses the interdependence between people interacting into aggregate markets
ECONOMIC GROWTH – ensuring a steady rate of increase in national income
PRICE STABILITY – low, stable rate of inflation
EMPLOYMENT – keeping a low level of unemployment
EXTERNAL STABILITY – favourable balance of payments
INCOME DISTRIBUTION – equitable distribution of income
MAINTAIN ENVIRONMENT
MODELS explain relationships between variables (how exogenous variables affect endogenous variables)
VARIABLES
- endogenous
determined by its relationship with other variables within the model (dependent variable)
- exogenous
outside of a given economic model (independent variable)
Market clearing models assume that prices are flexible & adjust to equate supply and demand,
BUT, in reality, some prices (magazine prices change once every 3-4 years) & wages (labour contracts) are sticky.
Price flexibility is a good assumption for studying long-run phenomena, while in the short-run, prices are fixed.
illustrates how economic agents interact in aggregate markets
There are 2 types of flows:
- Real flows
o Flows of outputs (goods & services)
o Flows of inputs (labour, capital, land, entrepreneurship = factors of production)
- Monetary flows
o Aggregate expenditure on goods & services
o Aggregate income of inputs / factors of production (wages, interest, rent, profit)
There are 2 types of markets:
- For goods & services (firms = S & households = D)
- For inputs / factors of production (firms = D & households = S)
,AGGREGATE EXPENDITURE = AGGREGATE INCOME
Retained earnings + Household saving = INVESTMENT
part of the profits the business saves households don’t consume everything
Though many firms use their savings in order to support their investments, most often there are financial aggregate
markets that intermediate the relations between S & I
Governments use fiscal policies to get money (income) to support their EXPENDITURES (G)
Income:
- Direct taxes (on income)
- Social security payments (households & corporate)
- Indirect taxes (on goods & services)
- Tariffs on the purchase of imported goods
- Profits of nationalised companies & industries / from selling them
- Rent on government-owned land & buildings
Expenditure:
- Capital expenditure (building new schools, hospitals etc.)
- Current expenditure (salaries of public sector employees)
- Transfer payments (benefits for the unemployed, child allowances, payments for the disabled)
,Households receive income that is spent on:
- Taxes to the government
- Goods & services
- Saved through financial markets
Firms receive revenue from:
- Sale of goods & services
The money is used to pay for factors of production
Households & firms borrow in financial markets to buy investment goods (houses, factories etc.)
The government receives revenues from:
- TAXES (T)
The money is used to pay for government purchases
If T > G – public saving = budget surplus
If T < G – budget deficit
INJECTIONS = I (INVESTMENTS) + G (GOV. EXPENDITURE) + X (EXPORTS)
WITHDRAWALS = S (SAVINGS) + T (TAXES) + M (IMPORTS)
𝐼+𝐺+𝑋 = 𝑆+𝑇+𝑀
If WITHDRAWALS ↑ without a corresponding ↑ in INJECTIONS, then the INCOME ↓ to a NEW EQUILIBRIUM, so less
income will be circulating
If INJECTIONS ↑ without a corresponding ↑ in WITHDRAWALS, then the INCOME ↑ to a NEW EQUILIBRIUM, so more
income will be circulating
, market value of economic activity (all final goods & services) in a given period of time
GDP – total income from X production (wages for employees & profit for shareholders) – THE INCOME METHOD
GDP – total expenditure on X purchases – THE EXPENDITURE METHOD
GDP – total output as sum of value added – THE OUTPUT METHOD
The 3 values should be equal.
GDP measures
1. Total income of everyone in the economy
2. Total expenditure on the economy’s output of goods & services
In every transaction, buyer’s expenditure = seller’s income
1. MARKET PRICES are used to compute GDP
2. Used goods are not included, GDP measures the value of CURRENTLY PRODUCED GOODS & SERVICES (the
sale is a transfer, not an addition to the economy’s income)
3. PRODUCTION FOR INVENTORY increases GDP just as much as production for final sale.
A sale out of the inventory does not influence GDP.
4. The value of INTERMEDIATE GOODS is not included in the GDP, but the FINAL VALUE.
GDP can be computed as sum of Value Added at each stage of production.
5. HOUSING SERVICES & OTHER IMPUTATIONS
Assigning values for goods & services that are NOT TRADED (police, firefighters etc.) and valuing them at their
COST.
HOME PRODUCTION & CONSUMPTION are not included in the GDP.
UNDERGROUND / HIDDEN ECONOMY is not included in the GDP (for tax evasion reasons / illegal activities).
→ GDP is an imperfect measure of economic activity
- Inaccuracies – different methods of gathering data
- Unrecorded / under-recorded economic activity – informal markets (DIY, hidden economy – illegal activity,
tax evasion)
- External costs – GDP does not include resources depletion
- Other quality of life concerns – GDP does not include free activities: volunteering, caring for the elderly, raising
children
- Composition of output – weight of defence, capital goods etc. that do not increase the standard of living
Nominal GDP – value of goods & services measured at current prices (Σq1p1), meaning that it doesn’t adjust for
inflation
Changes in nominal GDP can be due to:
- Changes in prices
- Changes in quantities of output produced
Real GDP – value of goods & services measured using a constant set of prices (Σq1p0)
Changes in real GDP can only be due to:
- Changes in quantities (real GDP is constructed using constant base-year prices)
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