Macroeconomics = is about entire economies and nations.
Economic growth = is the expansion of the economy’s production possibilities, assessing the
economy’s overall performance and health. Is measured by the increase in real GDP.
Determinants of productivity = physical capital (land, building), human cap (teacher knowledge),
natural cap (all nature provide), tech cap (innovation, entrepreneurship).
GDP = the market value of the total production of all products and services within a country. Is
measured in the prices of a single year. Within (no exports), final good (no intermediate). It excluded :
stock and bonds, public and private transfer payments and other financial transactions. Sales of
used/2hands goods (it would be counting output of that particular year, plus sales of goods produced in
a previous year). Household production. Illegal transactions.
2 approaches – expenditure a., sum of money spent buying the final goods. Income a., counts income
derived from production, wages, rental income, interest income, profit.
GDP = Y = C+I+G (X-M)
- Consumption (households) – purchase of bread
- Investments (firms) – purchase of computer by a business
- Government purchases – military aircraft
- Net exports – Mozzarella for Italy
For an economy as a whole, total income must equal total expenditure
because: every trans has a buyer and a seller, every euro of spending by
some buyer is a euro of income for some seller, circular-flow diagram
illustrate the equality of income and expend. →
- Nominal GDP = value of final goods and services valued at the
prices of that year. Will grow as prices increase, even if the country
does not produce more .
- Potential = what a country can potentially produce
- Real = value of goods and services valued at the prices of a
reference base year. Base year : nominal GDP = real GDP. If real
GDP increases, the economy has really grown.
GDP deflator = is a measure of the price level calculated as the ratio of nominal GDP to real GDP
times 100 → (nom/real)*100. It tells us the rise in nominal GDP that is attributable to a rise in prices
rather than a rise in the quantities produced.
Advantages of GDP – it is objectively measured and fairly easy to accurately collect data. It is well
understood by policy makers. Also that GDP has a correlation with other objective measures such as
life expectancy and education standards.
Limitations of GDP – GDP doesn’t measure the standard of living. Ignore income inequality,
environment, quality of life, crime, freedom, pollution.
, When real < potential = resources are underused. (unemployment). When real > potential = res are
overused (people working overtime, land used too intensively)
Business cycle = (not predictable), GDP falls quickly and recover slowly.
Is the natural rise and fall of economic growth that occurs over time
- Contraction = the economy has a shrunk
- Amplitude = difference between peak and trough
- Trend = underlying long-term movement
- Stationary and nonstationary data = time-series data with a constant
mean (or not)
- Procyclical and countercyclical = the behaviour of variable with respect
to GDP. It move along (pro) or not (counter).
Causes of shocks – irregular innovations, changes in productivity, monetary
factors, political events, financial instability.
GDP gap = real GDP – potential → Okun’s law = every 1% of cyclical
unemployment creates a 2% GDP gap.
Causes in changes in the business cycle – households, external factors, companies, gov policy.
Variables indicators:
- Leading = indicator tends to forecast changes in the economy (average weekly hours worked
in manufacturing)
- Lagging = indicator changes after the change in the economy (employment rate, customer
confidence)
- Coincident = indicator changes at time as changes in the economy (personal income, GDP)
Level of nation’s GDP = measures both the total income earned in the economy and the total expenditure
on the economy's output of goods and services. The level of real GDP is a good gauge of economic
prosperity, and the growth of real GDP is a good gauge of economic progress.
Economic growth rate is the annual percentage change of real GDP, it explain how rapidly the tot
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟−𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑟𝑒𝑣 𝑦𝑒𝑎𝑟
economy is expanding → 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑟𝑒𝑣 𝑦𝑒𝑎𝑟
x 100
Standard of living depends on real GDP per capita = real GDP / population
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟−𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑝𝑟𝑒𝑣 𝑦𝑒𝑎𝑟
Real GDP per person growth rate = 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑝𝑟𝑒𝑣 𝑦𝑒𝑎𝑟
x 100
or real GDP growth rate – population growth rate
Determinants of growth :
- Supply – increases in quantity and quality of natural resources (oil), incr in quantity and quality
human resource, incr in the supply of capital goods, improvements in technology.
- Demand factors – households, businesses, gov must purchase the economy’s expanding output
of goods and services.
