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Summary Macroeconomics
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Summary of Macroeconomics for BA1 Business Economics at the VUB.
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Macroeconomics for Business Economics II. Macro vs. Micro:
Micro is really old while Macro is much more recent.
Microeconomics: individual households and firms.
Macroeconomics: economy as an aggregate (totals).
- Income (in an economy)
- Prices
- Unemployment (in a country)
- Interest rates (when borrowing money)
- Exchange rates
ð Income per person has been increasing 5x between 1950 and 2011.
Outline:
1. Measuring the aggregate economy:
- Measuring production & income + prices.
2. Long run:
- Production & growth
- Unemployment
- The financial system
- Money & Prices
- The open economy
3. Short run:
- Economic fluctuations
ð How do you measure an economy’s income ?
ð Circular flow:
, - Real flows (factors of production, goods and services)
- Flows representing payments
ð Production º expenditures º income
II. Gross Domestic Product (GDP):
• The market value of all final goods and services produced within a country in a given
period of time. Measures the well-being of the economy.
Explanation:
Market value: Production from informal economy is not included in GDP.
Final: To avoid double counting.
Goods and services: easy x+x.
Produced: Only contemporary (produced in the current year).
↳ Used goods are not included.
Within a country: if it’s done in *country* it is *country’s* GDP, (NOT GNP => Gross National
Product, we look at the nationality of the manufacturer instead of the location where it was
manufactured).
In a given period of time: GDP is a flow variable (euros per year, euros per quarter).
Formula of GDP at a given period of time:
*./
𝐺𝐷𝑃% = ( 𝑝*,% . 𝑞*,%
*.0
We measure/calculate GDP using all three approaches:
1. Production
2. Income
3. Expenditures
1. Production
Value chain of bread:
600g 500g 800g
Grain Flour Bread
Farm => Mill => Bakery => Final Expenditures
0.10€ 1.20€ 2.10€
GDP = 2.10€
Value added = (Market price of output) – (Market Price of non-factor inputs)
𝑉𝐴3456 = 0.10€ - 0.00€ = 0.10€
𝑉𝐴6*77 = 1.20€ - 0.10€ = 1.10€
𝑉𝐴849:5; = 2.10€ - 1.20€ = 0.90€
,*.@
( 𝑉𝐴 = 2.10€ = 𝐺𝐷𝑃
*.0
↳ This has an advantage because it allows you to see the structure of the economy and check
the % of each producer.
Solution 1: Only final goods (𝐺𝐷𝑃% ).
Solution 2: Compute for every producer.
I.J
Value added = 𝐺𝐷𝑃% = ∑I.0 (𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑)I,%
2. Income
Where does the value added end up?
↳ Labour, Profit (Capital) and Land.
ð Income of labour + capital + land º income º GDP
3. Expenditures
Instead of production of final goods & services, we measure expenditures of final goods &
services.
Consumption (C) = Y – T – private saving.
+ Investments (I) = Y – C – G. => capital equipment (structures, inventories). Here, investment
has a different meaning (here: purchase of machines => capital equipment).
+ Governments purchases of goods and services (G) = T – public savings.
Includes: spending on public works, salaries of government workers (» market value of
government services).
Does not include: transfer payments (social security, pensions, benefits, subsidies).
+ Exports
- Imports
GDP º C + I + G + NX
Example: GDP of 410 billion euros (2015)
GDP per person (per capita) = 36 525 euros
////////////////////////////// Per person (in euros) Percent of total
Consumption, C 18 706 51
Investment, I 8 478 23
Government purchases, G 8 732 24
Exports, EX 30 289 83
Imports, IM (-) -29 679 -81
GDP, Y º C + I + G + NX 36 525 100
ð Do not mistake investment and savings. Investment is housing and physical assets.
Savings are stock and things that make you gain money directly.
, Problem with products in storage/inventories:
Jan 1, 2019
2018 2019
Audi A1 produced When sold:
= 20 000€ + 20 000€ -> consumption increase
ð 2018 GDP (because produced in 2018) - 20 000€ -> inventory loss
Cost of a basket of goods: ∑*./
*.0 𝑝*,% . 𝑞*,%
KL
Relative price: KM
e.g.: P of racquets relative to P of cola = Pracquets/Pcola
NO€ P:5 %:QQ*R 54STU:% NO UQ*%R V3 SV74
RP2016 = 0€ P:5 UQ*% V3 SV74
= 0 %:QQ*R 54STU:%
@O€ P:5 %:QQ*R 54STU:% @O UQ*%R V3 SV74
RP2017 = 0€ P:5 UQ*% V3 SV74
= 0 %:QQ*R 54STU:% => Cola becomes more expensive
a. Nominal GDP
*./
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃% = ( 𝑝*,% . 𝑞*,%
*.0
Values (qi at prices) of the current year,
OR, GDP at current prices.
///////////////// Apples Potatoes
///////////////// 𝑝0 𝑞0 𝑝\ 𝑞\
2016 1 100 2 50
2017 2 150 3 100
𝑁𝑜𝑚. 𝐺𝐷𝑃\O0] = (1€/kg . 100 kg) + (2€/kg . 50 kg) = 200€
𝑁𝑜𝑚. 𝐺𝐷𝑃\O0^ = (2€/kg . 150 kg) + (3€/kg . 100 kg) = 600€
ð The price rises because 𝑞* and 𝑝*
If we are interested in 𝑞* we can use real GDP.
↳ Values of defined base year across all calculations for all years.
b. Real GDP
*./
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃% = ( 𝑝*,8 . 𝑞*,%
*.0
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