Macroeconomics is the study of the economy in the aggregate and the general equilibrium (prices, wages,
unemployment, income, interest rate) and the interaction between markets such as financial markets
Economists will use variables to measure the performance of an economy:
- GDP (gross domestic product): measures the total income of everyone in the economy, adjust for the
level of prices
- Inflation Rate: measures the percentage change in the average level of prices from the year before
- Unemployment Rate: measures the percentage of people in the labour force who do not have jobs.
GDP per capita, tell us the income of a person and income is an ‘imperfect’ measure of economic wellbeing.
Unemployment is important, because if we could reduce it, we could raise aggregate output and raise GDP,
which would raise well being.
Inflation affects our purchasing power and our perception when keeping money as it loses value and will result
in shoe-leather costs.
Unexpected inflation will redistribute welfare: if you are a debtor in nominal terms, in real terms, you have to
repay less. Other way round, if you creditor, in purchasing power terms, you get repaid less, from your
investment. All of which will create uncertainty, reducing investment, costing society as inefficiency.
Economic models:
Endogenous variables – those variables that a model tries to explain
Exogenous variables – those variables that a model takes as given
Model will show how the exogenous variables affect the endogenous variables: if aggregate income increases,
then the quantity demanded will increase and price (equilibrium will rise). If price of material increase, then
the supply of the good decreases (equilibrium will fall)
𝑄𝑑 = 𝐷(𝑃, 𝑌)
P = price, Y = aggregate income, D( )= demand function
𝑄𝑠 = 𝑆(𝑃, 𝑃𝑚)
P = price, Pm = Price of material, S( ) = Supply function
In equilibrium, (market clears): 𝑄𝑑 = 𝑄𝑠
Exogenous variables: aggregate income, price of material
Endogenous variables: quantity demanded and supplied, price
Circular flow of income
Value of income that flows from the firm to the household, OR the value of the flows of expenditure that goes
from household to firms.
,An economy is made up of firms and households. Firms produce goods/services – all of this makes up national
output. Households provide factor of production that firms use to produce national output. The money paid by
the firms to the households for their F.O.P is the national income. Households spend their money on
goods/services that firms create – the value of this spending is national expenditure.
Stock and Flow Variables:
Stock is a quantity measured at a given point in time (e.g. wealth, capital, government debt), whereas a flow is a
quantity measured per unit of time (e.g. GDP, investment, saving)
Gross Domestic Product
GDP – the total income of everyone in the economy/total expenditure on the economy’s output of goods and
services. The market value of all final goods and services produced within an economy in a given period of time.
Income = Expenditure, as the expenditure of buyers on products is income to the sellers of those products.
GDP is a flow variable – telling us how many dollars/pounds are flowing around the economy’s circular flow
per unit of time.
To calculate GDP, we add up the total value of different goods and services using market prices.
- We do not include used goods, as GDP measures the value of currently produced goods/services
- Unsold goods: if the goods are storable, then the unsold units are called inventories and will enter GDP,
but if they are perishable, unsold units do not enter GDP.
- A sale out of inventory is a combination of positive spending (the purchase) and negative spending
(inventory disinvestment) so it does not influence GDP.
- GDP includes only the value of final goods (the value of intermediate goods is already included as part
of the market price of the final goods in which they are used).
To compute the value of all final goods and services is to sum the value added at each stage of production: value
added = the value of the firm’s output – the value of the intermediate goods that the firm purchases.
,Real vs Nominal GDP
Nominal GDP is the value of goods/services measured at current prices, which will increase if either prices rise
or quantities – increases with price increases even if quantities are unchanged
Real GDP is the value of goods/services measured using a constant set of prices (uses prices in a fixed base
year, j) – only increases if quantities increase
(If all prices double, with unchanged quantities, we are not better off)
GDP vs GNP
GDP is the total income produced domestically, but gross national product is the total income earned by home
residents (both at home and abroad.
𝐺𝑁𝑃 = 𝐺𝐷𝑃 + 𝐹𝑎𝑐𝑡𝑜𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑓𝑟𝑜𝑚 𝐴𝑏𝑟𝑜𝑎𝑑 − 𝐹𝑎𝑐𝑡𝑜𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑡𝑜 𝐴𝑏𝑟𝑜𝑎𝑑
Price Aggregation
Aggregate price level is the average prices of different goods. Two measuring weights can be used to measure
the cost of living:
- Consumer Price Index – fixed weights for representative consumption bundle
- GDP deflator: weights are the quantities produced domestically in the current year
GDP Deflator: ratio of nominal GDP to real GDP, reflecting what’s happening to the overall level of prices in the
economy.
,
unemployment, income, interest rate) and the interaction between markets such as financial markets
Economists will use variables to measure the performance of an economy:
- GDP (gross domestic product): measures the total income of everyone in the economy, adjust for the
level of prices
- Inflation Rate: measures the percentage change in the average level of prices from the year before
- Unemployment Rate: measures the percentage of people in the labour force who do not have jobs.
GDP per capita, tell us the income of a person and income is an ‘imperfect’ measure of economic wellbeing.
Unemployment is important, because if we could reduce it, we could raise aggregate output and raise GDP,
which would raise well being.
Inflation affects our purchasing power and our perception when keeping money as it loses value and will result
in shoe-leather costs.
Unexpected inflation will redistribute welfare: if you are a debtor in nominal terms, in real terms, you have to
repay less. Other way round, if you creditor, in purchasing power terms, you get repaid less, from your
investment. All of which will create uncertainty, reducing investment, costing society as inefficiency.
Economic models:
Endogenous variables – those variables that a model tries to explain
Exogenous variables – those variables that a model takes as given
Model will show how the exogenous variables affect the endogenous variables: if aggregate income increases,
then the quantity demanded will increase and price (equilibrium will rise). If price of material increase, then
the supply of the good decreases (equilibrium will fall)
𝑄𝑑 = 𝐷(𝑃, 𝑌)
P = price, Y = aggregate income, D( )= demand function
𝑄𝑠 = 𝑆(𝑃, 𝑃𝑚)
P = price, Pm = Price of material, S( ) = Supply function
In equilibrium, (market clears): 𝑄𝑑 = 𝑄𝑠
Exogenous variables: aggregate income, price of material
Endogenous variables: quantity demanded and supplied, price
Circular flow of income
Value of income that flows from the firm to the household, OR the value of the flows of expenditure that goes
from household to firms.
,An economy is made up of firms and households. Firms produce goods/services – all of this makes up national
output. Households provide factor of production that firms use to produce national output. The money paid by
the firms to the households for their F.O.P is the national income. Households spend their money on
goods/services that firms create – the value of this spending is national expenditure.
Stock and Flow Variables:
Stock is a quantity measured at a given point in time (e.g. wealth, capital, government debt), whereas a flow is a
quantity measured per unit of time (e.g. GDP, investment, saving)
Gross Domestic Product
GDP – the total income of everyone in the economy/total expenditure on the economy’s output of goods and
services. The market value of all final goods and services produced within an economy in a given period of time.
Income = Expenditure, as the expenditure of buyers on products is income to the sellers of those products.
GDP is a flow variable – telling us how many dollars/pounds are flowing around the economy’s circular flow
per unit of time.
To calculate GDP, we add up the total value of different goods and services using market prices.
- We do not include used goods, as GDP measures the value of currently produced goods/services
- Unsold goods: if the goods are storable, then the unsold units are called inventories and will enter GDP,
but if they are perishable, unsold units do not enter GDP.
- A sale out of inventory is a combination of positive spending (the purchase) and negative spending
(inventory disinvestment) so it does not influence GDP.
- GDP includes only the value of final goods (the value of intermediate goods is already included as part
of the market price of the final goods in which they are used).
To compute the value of all final goods and services is to sum the value added at each stage of production: value
added = the value of the firm’s output – the value of the intermediate goods that the firm purchases.
,Real vs Nominal GDP
Nominal GDP is the value of goods/services measured at current prices, which will increase if either prices rise
or quantities – increases with price increases even if quantities are unchanged
Real GDP is the value of goods/services measured using a constant set of prices (uses prices in a fixed base
year, j) – only increases if quantities increase
(If all prices double, with unchanged quantities, we are not better off)
GDP vs GNP
GDP is the total income produced domestically, but gross national product is the total income earned by home
residents (both at home and abroad.
𝐺𝑁𝑃 = 𝐺𝐷𝑃 + 𝐹𝑎𝑐𝑡𝑜𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑓𝑟𝑜𝑚 𝐴𝑏𝑟𝑜𝑎𝑑 − 𝐹𝑎𝑐𝑡𝑜𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑡𝑜 𝐴𝑏𝑟𝑜𝑎𝑑
Price Aggregation
Aggregate price level is the average prices of different goods. Two measuring weights can be used to measure
the cost of living:
- Consumer Price Index – fixed weights for representative consumption bundle
- GDP deflator: weights are the quantities produced domestically in the current year
GDP Deflator: ratio of nominal GDP to real GDP, reflecting what’s happening to the overall level of prices in the
economy.
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