MACROECONOMICS
Lecture 1 – Introduction to MACROECONOMICS
Macroeconomics – is the study of how economy behaves in broad outline (business cycle, inflation &
unemployment)
GDP – measures the value of what is produced in one country
GNI (GNP) – measures the income accruing to residents
Consumer Price Index (CPI) – the average price of goods/services bought by a typical consumer
Productivity growth – can be achieved using more inputs (increasing the number of workers) or by
getting more output for any given amount of inputs
Fiscal policy –governments increasing/decreasing their spending and/or taxes
Monetary policy – involves changing the interest rates in order to influence the economy. High interest
rates are a symptom of a tight monetary policy. When interest rates are high, it is more costly for the
firms to borrow and this makes them more reluctant to invest. Individuals are also hit by high interest
payments on their loans. Hence high interest rates tend to reduce demand in the economy – firms
invest less, and low interest rates stimulate the demand
Actual GDP – is what the economy actually produces
Potential GDP - is what the economy would produce if all resources (inputs) were fully employed
GDP gap – is the difference between actual GDP and potential GDP. When the actual GDP is below the
potential GDP – is a negative output gap, called a recessionary gap. While in booms, actual GDP is higher
than potential GDP, causing the output gap to become positive, and it is called an inflationary gap
The national output is related to the sum of all the outputs produced in the economy by individuals,
firms and governmental organizations. However, an error would arise in estimating the national output
by adding all sales of all firms, called DOUBLE COUNTING. So to avoid double counting the concept of
VALUED ADDED (VALUE ADDED = OUTPUT - INPUTS) is used
The total value of a firm’s output is the gross value of its output. The firm’s value added is the net value
of its output - it is this figure that is the firm’s contribution to the nation’s total output. The sum of all
values added in an economy is a measure of the economy’s total output. This measure of total output is
called gross value added – a measure of all final output that is produced in the economy. (The gross
value of the firm’s output is the total output before making any deductions, while the net value deducts
inputs made by other firms. In “gross value added” the usage is different, value added is already
1
Lecture 1 – Introduction to MACROECONOMICS
Macroeconomics – is the study of how economy behaves in broad outline (business cycle, inflation &
unemployment)
GDP – measures the value of what is produced in one country
GNI (GNP) – measures the income accruing to residents
Consumer Price Index (CPI) – the average price of goods/services bought by a typical consumer
Productivity growth – can be achieved using more inputs (increasing the number of workers) or by
getting more output for any given amount of inputs
Fiscal policy –governments increasing/decreasing their spending and/or taxes
Monetary policy – involves changing the interest rates in order to influence the economy. High interest
rates are a symptom of a tight monetary policy. When interest rates are high, it is more costly for the
firms to borrow and this makes them more reluctant to invest. Individuals are also hit by high interest
payments on their loans. Hence high interest rates tend to reduce demand in the economy – firms
invest less, and low interest rates stimulate the demand
Actual GDP – is what the economy actually produces
Potential GDP - is what the economy would produce if all resources (inputs) were fully employed
GDP gap – is the difference between actual GDP and potential GDP. When the actual GDP is below the
potential GDP – is a negative output gap, called a recessionary gap. While in booms, actual GDP is higher
than potential GDP, causing the output gap to become positive, and it is called an inflationary gap
The national output is related to the sum of all the outputs produced in the economy by individuals,
firms and governmental organizations. However, an error would arise in estimating the national output
by adding all sales of all firms, called DOUBLE COUNTING. So to avoid double counting the concept of
VALUED ADDED (VALUE ADDED = OUTPUT - INPUTS) is used
The total value of a firm’s output is the gross value of its output. The firm’s value added is the net value
of its output - it is this figure that is the firm’s contribution to the nation’s total output. The sum of all
values added in an economy is a measure of the economy’s total output. This measure of total output is
called gross value added – a measure of all final output that is produced in the economy. (The gross
value of the firm’s output is the total output before making any deductions, while the net value deducts
inputs made by other firms. In “gross value added” the usage is different, value added is already
1
