Lecture notes
Macroeconomics 1 Lecture Notes Autumn Term 20/21
- Module
- Macroeconomics 1
- Institution
- The University Of York (UOY)
Macroeconomics 1 Lecture Notes Autumn Term 20/21
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Macro Autumn Term2. National Income Accounting
GDP: the value of output produced in an economy in a year (where the income is produced).
Circular ow of income: a model which shows the ow of income between rms and households
and re ects the interdependencies of households and rms in an economy.
Aggregate expenditure = aggregate income
Measuring GDP:
• Product Approach: a method for calculating GDP; the amount produced excluding output used
in intermediate production.
• Income Approach: a method for calculating GDP which involves aggregating the incomes
received by producers.
• Expenditure Approach: a method for calculating GDP which involves aggregating the
expenditure on all nal goods.
GNP: the value of output produced by domestic factors of production in a year (who owns the
income).
Net Factor Payments: net income from assets owned by domestic citizens.
GNP = GDP + NFP
Depreciation: the degradation/consumption of capital stock.
Net National Product = GNP - depreciation
3. The Goods Market
Consumption (C): the goods and services purchased by consumers.
Investment (I): the purchase of capital goods (by rms).
Government spending (G): the purchases of goods and services by the government.
Imports (M): the purchase of foreign goods and services by consumers, rms and the
government.
Exports (X): the purchases of domestic goods and services by foreigners.
Net exports (X-M)/trade balance: the di erence between exports and imports.
X > M = trade surplus
X < M = trade de cit
Inventory investment: the goods and services produced by rms which have not yet been sold.
AD = C + I + G + (X - M)
Assumptions for this equation:
• Firms produce a homogenous good
• Firms are willing to supply any amount of the good at a given price, P, and meet the demand of
the market
• Closed economy
• Implies that X = M = 0 and so AD = C + I + G
Disposable income (YD): the income that remains once consumers have paid taxes and received
transfers from the government.
YD = Y - T
fl fl fi fi ff fi fl fi fi fi fi
,Consumption function: C = c0 + c1(YD) where c0 is the intercept and c1 is MPC.
MPC: the e ect of an additional unit of disposable income on consumption.
Consumption increases with disposable income, but less than one for one.
Endogenous variable: a variable which depends on other variables within the model.
Exogenous variable: a variable which is not explained within the model.
Fiscal policy: the use of government spending (G) and taxes (T) to in uence the economy.
Investment is treated as an exogenous variable here; it is taken as given (I = Ī). Furthermore, we
will assume that G and T are also exogenous as governments do not behave with the same
regularity as consumers or rms. Another reason for this is that macroeconomists must think
about the implications of alternative spending and tax decisions of the government.
When C = c0 + c1(YD) and YD = Y - T:
AD = C = c0 + c1(Y - T) + Ī + G
Equilibrium in the goods market: AD = Y
Therefore, in equilibrium: Y = c0 + c1(Y - T) + Ī + G
Tools used by macroeconomists:
• Algebra to m
• Make sure the logic is correct
• Graphs to build the intuition
• Words to explain the results
Y = c0 + c1(Y - T) + Ī + G
Y = c0 + c1Y - c1T + Ī + G
Y - c1Y = c0 - c1T + Ī + G
Y(1 - c1) = c0 - c1T + Ī + G
Y = (1/[1 - c1])(c0 - c1T + Ī + G)
Where 1/[1 - c1] is the multiplier, and (c0 - c1T + Ī + G) is autonomous spending
Autonomous spending is the part of the equation which does not depends on output.
ff fi fl
, Propensity to consume (c1): the fraction of disposable income which individuals consume.
Because the propensity to consume is between 0 and 1, the multiplier 1/[1 - c1] is greater than 1.
An increase in autonomous spending has a more than one-for-one e ect on equilibrium output.
An increase in demand leads to an increase in production and an increase in income. This results
in an increase in output which is greater than the initial increase in demand, by a factor equal to
the multiplier.
ff
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