This document contains all notes from lecture 1 untill and including 6. Since the lecturer stated that the midterm will only include theory explained in the lecure, this is a summary of everything you need to know for the midterm! The lecture notes are from the course Macroeconomics 1 (6011P0242Y),...
LECURE 1
What is macroeconomics?
Macroeconomics is the study of whole (aggregate) economies. We look at lots of different actors, lots of
different consumers, the whole world, the Netherlands, etc.
• Long run analysis: we take a long run perspective, how an economy changes over several decades. You
look at economic growth and development.
• Short run analysis: we take a short run perspective of a couple of quarters/years. Focus on business cycles,
why does the economy experience expansions and recessions? For example: the Great Depression (1929-
1939) → start of the business cycle theory.
Three core variables
There are many other variables, but we are mainly interested in them in the extent that they are relevant for
these three core variables.
1. Gross Domestic Product (GDP)
o Nominal GDP and Real GDP
o Real GDP measures the total income of everyone in the economy adjusted for the level of prices.
o Real GDP per person/capita is a measure of welfare (= how well of an individual is) in a specific
country.
o There is a positive correlation between real GDP per capita and self-reported happiness. But be
ware: this is not a law!
2. Inflation rate
o High inflation or negative inflation (= deflation) may cause economic instability (an economy to
stop growing) and affect the wealth distribution. Inflation is the extent to which the prices in an
economy increase.
o It is a warning signal that something may be fundamentally wrong in the economy/that the
economy may turn into a recession.
3. Unemployment rate
o Unemployment is a waste of resources, because all those people don't contribute to the GDP.
o Unemployment may cause problems: economics problems, social problems, psychological
problems, health problems, etc. Some people who lose their job can't find a new job for a long
time, until they settle for a lower wage. Unemployment may cause for stress (in families), what do
you do when you find a new job far away from home?
What we will do in this course
In this course we will learn about (neo)classical macroeconomics, also: mainstream economics. This
mainstream economics is based on mathematical models. Mathematical models help us to clarify our thinking,
it clarifies intuitions. But they are a simplification of the reality, therefore they may suffer from (ideological)
bias! In mainstream macroeconomics we make a distinction between two types of models: classical models and
neoclassical business cycle models. In classical models we usually take a long run perspective, we thus assume
that all prices are flexible. The Neoclassical business cycle models analyze the business cycles and have a short
run focus, we assume price rigidities (prices are set in contract and can't be changed from one day to another).
Macroeconomics is not an exact science. There are many other ways to think about economics (other than
mainstream macroeconomics): heterodox schools of thought, investigative journalism or your own intuition
and common sense.
, MICRO
LECTURE 2
THE CORE VALUES OF MACROECONOMICS
There are three core variables in macroeconomics: GDP, inflation rate and unemployment rate. There are more
variables, but we're only interested in them to the extent that they have effect on these three core variables.
• GDP measures production in an economy in a given time period --> how well of is an economy?
• Inflation rate measures the extent to which prices are increasing over time. If inflation is high or negative
(= deflation) that may be a warning signal that there may be something wrong in the economy. This may
have implications for the wealth distribution of the population.
• The unemployment rate measures how many people there are that don't have a job that would like to
have one. It is an economic loss because these people are not contributing to the GDP. Unemployment
rate may cause other problems, such as health problems.
Gross Domestic Product
GDP is a variable in the national accounts (= set of account that measure the economic activity). These
accounts are compiled according to international guidelines, which were set up by the United Nations in
collaboration with lots of other organizations. Since 1953 there have been some revisions and extensions of
these guidelines, last revision was in 2008. In the Netherlands the national accounts are compiled by CBS (=
Centraal Bureau voor de Statistiek).
The most important aggregate measure of economic activity (in these national accounts) is the Gross Domestic
Product (GDP).
How is GDP defined and how is it calculated?
There are three different definitions of the Gross Domestic Product:
• Production approach: total value of all final goods and services produced in an economy during a given
period
o Intermediate goods and services = goods/services that are used in the same period to produce
other goods/services
o Final goods and services = goods/services that are not used in the same period to produce other
goods/services
Production of final goods and services valued at market prices: 𝐺𝐷𝑃 = ∑ 𝑝𝑖 𝑞𝑖
Where 𝑝𝑖 is the price of good 𝑖 and 𝑞𝑖 is the quantity of good 𝑖
Often, market prices are not available. This is for all government services and home production.
We make an assumption for the value of these government services and add them to the GDP (=
imputations), because the value of these services is equal to all the salaries of the workers for that
service. But for home production (and other services like it) we don’t add the value to the GDP →
no imputations.
It is a problem that we only look at the final goods and not the intermediate goods, because it is
very difficult to determine when a good is final and not intermediate. In practice they look at the
different sectors in the economy and how much each sector adds to the economy: 𝐺𝐷𝑃 =
∑𝑖 𝑉𝐴𝑖 + 𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠
Where 𝑉𝐴𝑖 is the value added by sector 𝑖.
Definition: 𝐺𝐷𝑃 𝑎𝑡 𝑏𝑎𝑠𝑖𝑐 𝑝𝑟𝑖𝑐𝑒𝑠 = 𝐺𝐷𝑃 𝑎𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒𝑠 −
𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡. Most taxes on products are value added taxes (VAT).
• Income approach: total value of the income earned with the production of all final goods and services in an
economy during a given period.
o Value of the income is the same as the value of the final goods/services
o Part of income goes to labors (labor income) and the rest goes to profits. Add those two together
and you have the total value of income.
𝐺𝐷𝑃 𝑎𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑖𝑐𝑒𝑠 = 𝐺𝐷𝑃 𝑎𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒𝑠 −
𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑖𝑚𝑝𝑜𝑟𝑡𝑠
GDP at factor prices is the money that our firms can distribute along the factors of production →
labor and capital.
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