This is a short summary of Unit 13 needed for the course macroeconomics for the first year of the study economics and business economics in Utrecht. The summary is based on the book The Economy: Economics for a Changing World and includes illustrations from the book for clarification.
Unit 13 Economic fluctuations and unemployment
13.1 Growth and fluctuations
Gross domestic product (GDP) is the market value of the total output of a country in a
timeframe, by taking the natural log we can see the average growth of the GDP.
- A recession is when output is declining or below normal.
A business cycle consists of rapid shifts between booms and recessions, often there is a
recession twice in 10 years.
13.2 Output growth and changes in unemployment
The Okun’s law states that high GDP has a negative correlation with unemployment, the
Okun’s coefficient states how much percent the unemployment will drop when GDP grows
with 1%.
13.3 Measuring the aggregate economy
The aggregate output is the total output in an economy (GDP).
There are 3 ways to measure GDP with the statistics provided by the national accounts.
Spending of households, firms, government and export
Production or total added value by each industry. Added value = output – input
Income of wages, profits and government taxes
As seen in the graph, it doesn’t matter if you count the total
spending’s, production or income; you always get to the same
GDP value.
Because GDP is domestic, you have to include exports, and
subtract the imports (because money flows out of the
country).
The government also counts towards the GDP, with
households paying taxes, and using the government services in return. Because public
services can’t be sold, the added value of the government towards the GDP are the total
expenditures.
13.4 Measuring the aggregate economy: The components of GDP
To measure the GDP we use Y = C + I + G + X - M where Y = GDP.
Consumption is the expenditures of goods and services of households. Goods that last 3
years of more are durable goods, otherwise they are non-durable goods.
Investment is the spending on new equipment by firms, investments also include inventories
or stocks.
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