Lecture notes
Unit 2- Macroecomics and Goverment Policy
- Module
- Unit 1 & 2 Micro and Macro
- Institution
- PEARSON (PEARSON)
Class notes on macroeconomics that will help you before exams
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Unit 2:Macroeconomic
performance
and policy
,Chapter 21: Introduction to the measures of economic performance
Macro economics is concerned with the study of the
economy as a whole whereas microeconomics is the study of
individual markets within an economy
Economic growth
Unemployment
The national economic performance is based on four different matters Inflation
Balance of payments
Economic growth
One of the key measures is the change of output
GDP Also known as real GDP which is adjusted with inflation
High economic growth is there for better than low economic growth or being steady
Unemployment
Represents a waste of scarce resources
Fast growing economies tend to have low unemployment
Inflation
An increase in average price
Positive inflation rate means prices have risen (5%+)
Negative inflation rate means prices have fallen
Deflation means prices are falling not good because paychecks also decrease
Balance of payments
If they spend more than they earn they are in debt
When imports exceed exports there is a balance of trade deficit
When exports are greater than a imports there is a balance of trade surplus
,Chapter 22: Economic Growth and GDP/GNI
Gross domestic product (GDP) measures There are three ways of calculating GDP: National Output =
the total value of national output produced National Expenditure (Aggregate Demand) = National Income
in a given time period (i.e. one year)
Key uses of National Output data
• Measuring the level and rate of growth of national income (Y) is important for keeping track of:
• The rate of economic growth (real GDP)
• Changes to living standards (real GDP per capita)
• Changes to the distribution of income between groups within the population
• Gross Value Added (GVA)
= Gross Domestic Product +
The Difference between Nominal and Real
Subsidies on products -
taxes on products.
Nominal Real
Monetary values for data e.g. money GDP Adjusted for inflation
Not inflation adjusted Prices held at level of the chosen base year
Data expressed at current prices (i.e. today’s prices) Data expressed at constant prices
Measuring Real National Income (GDP)
• Nominal (money) GDP measures the value of national output at current prices i.e. there is no adjustment made
for the effects of inflation
• Real GDP measures the volume of output.
• It is adjusted for inflation and is measured at constant prices
• When economists are discussing economic growth they are referring to a nation’s real GDP
GVA Gross Added Value Transfer Payments
GNP Gross National Product
GNI Gross National Income Not all types of income are included in the
GDP Gross Domestic Product final calculation of the National income
For example, second hand cars, welfare
payments, pocket money, public expenditure
Difference Between GNI and GDP- Difference Between GNI and GNP
• Gross domestic product measures the income of anyone within a country's boundaries. It doesn't matter
who produces it. It includes anything earned by foreigners, including foreign businesses, while they are in
the country. GDP measures production while GNI measures income.
• Gross national product includes the earnings from all assets owned by residents. It even includes earnings
that don't flow back into the country. It then omits the earnings of all foreigners living in the country, even if
they spend it within the country. GNP reports how much is earned by the country's citizens and businesses,
no matter where it is spent in the world.
• GNI measures all income of a country's residents and businesses, regardless of where it's produced.
GNI measures income earned, including income from investments, that flows back into the country.
GNI equals GDP plus wages, salaries, and property income of the country's residents earned abroad. It also
includes net taxes and subsidies receivable from abroad, according to the Organization for Economic
Cooperation and Development.
, Examples of Inaccuracies when Calculating GDP
the shadow economy and the value of unpaid work by volunteers and people caring for their family.
includes illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal
activities such as tax evasion on otherwise-legitimate business activities such as un- reported self-employment
income
Economic Effects of a Fall in Real GDP Per Capita
• Average living standards decline (falling per capita incomes)
• More workers need a second job to supplement their incomes – now more than 1 million people with second jobs
• Less consumer demand for goods & services
• Reduced incomes per capita may cause GDP growth to remain slow – making the recovery more fragile
• Lower incomes and low net savings makes many more people reliant on (expensive) consumer debt e.g. pay day loans
• Becomes much harder for people to reduce the debts accumulated during the growth years including mortgages
• The government receives lower-than-expected tax revenues – making it harder to reduce the size of the UK fiscal
deficit
Purchasing power parities The market exchange
And exchange rate of one currency for another which compares how rate under values the
much a typical basket of goods in one country cost compared to that value of the local
of another country currency in Kenya
when it comes to
buying a basket of
Indicators of national happiness and well-being goods
National income is used as a substitute measure for economic welfare
Other factors such as education health housing
However it’s hard to measure because it’s not numerically measurable and objectively
Happiness is a good indicator but it isn’t measurable such as GDP
Real income and subjective happiness
It was found that happiness plus income are positively related at low levels of
income but higher levels of income are not associated with increases in happiness
Easterlin paradox
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