MACROECONOMICS · CRASH COURSE
MACROECONOMICS
Based on Mankiw & Taylor, Economics, 6th Edition
COMPACT EXAM HANDBOOK
KU Leuven – Faculty of Economics and Business
Prof. Dieter Verhaest
Crash Course · Compact Textbook · Exam Survival Guide
Rania El Ghalbzouri Page 1
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Table of Content
Table of Content ........................................................................................................................................................ 2
Chapter 1 · What is (Macro)Economics?.................................................................................................................. 3
Chapter 2 · Thinking Like a (Macro)Economist ........................................................................................................ 6
Chapter 4 · Measuring a Nation’s Well-Being and the Price Level .......................................................................... 9
Chapter 5 · Production and Growth ....................................................................................................................... 19
Chapter 6 · Unemployment and the Labour Market ............................................................................................. 24
Chapter 7 · Saving, Investment, and the Financial System .................................................................................... 30
Chapter 8 · The Monetary System ......................................................................................................................... 32
Chapter 9 · Open-Economy Macroeconomics ....................................................................................................... 42
Chapter 10 · Business Cycles .................................................................................................................................. 48
Chapter 11 · Keynesian Economics and IS–LM Analysis ........................................................................................ 52
Chapter 12 · Aggregate Demand and Aggregate Supply ....................................................................................... 65
Chapter 13 · The Influence of Monetary and Fiscal Policy on Aggregate Demand ............................................... 73
Chapter 14 · The Short-Run Trade-Off Between Inflation and Unemployment .................................................... 79
Graph Tool ............................................................................................................................................................... 84
Rania El Ghalbzouri Page 2
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 1 · What is (Macro)Economics?
1.1 Microeconomics and Macroeconomics
Economics divides into two principal subfields. Microeconomics studies how individual households and firms make
decisions and interact in specific markets. Macroeconomics studies the economy as a whole, focusing on
economy-wide phenomena such as inflation, unemployment, economic growth, and national income.
Microeconomics Macroeconomics
Studies individual parts of the economy Studies the economy as a whole
How households and firms decide and interact Economy-wide phenomena: inflation, unemployment,
growth
Examples: firm pricing, consumer choice Examples: overall price level, GDP, unemployment rate
The term macroeconomics was coined by Ragnar Frisch; Joan Robinson described it as ‘the theory of output as a
whole’. The two subfields are deeply intertwined: macroeconomic outcomes arise from the aggregation of millions
of individual microeconomic decisions.
Key Definitions
Microeconomics: the study of how households and firms make decisions and how they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic
growth
1.2 The Three Core Principles of Macroeconomics
The introductory macroeconomics course is structured around three central propositions:
● Principle 1: The standard of living depends on a country’s ability to produce goods and services.
● Principle 2: Prices rise when the government prints too much money.
● Principle 3: Society faces a short-run trade-off between inflation and unemployment.
1.3 Principle 1 — Standard of Living and Productivity
Almost all variation in living standards across countries and over time can be explained by differences in
productivity — the single most important determinant of long-run economic well-being. Policies that aim to raise
long-run prosperity must focus on increasing the economy’s productive capacity through well-educated workers,
high-quality capital, and advanced technology.
Key Definitions
Standard of living: a welfare measure based on the amount of goods and services a person’s income can buy;
typically expressed as real GDP per capita
Productivity: the quantity of goods and services produced from each hour of a worker’s time
Economic growth: the increase in goods and services produced in an economy over a period of time
Rania El Ghalbzouri Page 3
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
EXAM TIP
Productivity is the key driver of long-run living standards. When asked why country A is richer than country B, the
answer almost always traces back to higher productivity — not to having more money.
Distinguish standard of living (a real welfare measure) from nominal income (money income). Economists always
prefer real, inflation-adjusted measures.
1.4 Principle 2 — Money Supply and Inflation
When a central bank creates large quantities of money without a corresponding increase in output, the value of
money falls and the general price level rises. This is one of the most robust empirical regularities in economics.
Key Definitions
Inflation: an increase in the overall level of prices in the economy
Key mechanism: rapid expansion of the money supply → each unit of currency buys less → prices rise across the
economy
Historical examples: Zimbabwe (2007–2009, rates exceeding 200,000,000%), Weimar Germany (early 1920s),
Venezuela (2018, >4,000%)
High inflation imposes significant social costs: it erodes purchasing power, distorts price signals, redistributes
wealth from creditors to debtors, and creates uncertainty that discourages investment.
EXAM TIP
The precise statement: a sustained increase in the money supply, unmatched by an increase in real output, leads
to a proportional increase in the price level — the Quantity Theory of Money, studied in Chapter 8.
Inflation refers to a sustained rise in the general price level, not a one-time price increase.
In the short run there is an inverse relationship between inflation and unemployment, illustrated by the Phillips
Curve. This trade-off exists only in the short run — in the long run the economy returns to its natural rate of
unemployment regardless of the inflation rate.
Key Definitions
Negative relationship: higher inflation is associated with lower unemployment in the short run, and vice versa
Short-run only: the long-run Phillips Curve is vertical at the natural rate of unemployment — there is no permanent
trade-off
Policy implication: policymakers can reduce unemployment by accepting higher inflation, or reduce inflation by
accepting higher unemployment
Why it matters: the Phillips Curve trade-off is why macroeconomic stabilisation policy is complex and contested
EXAM TIP
Always qualify the Phillips Curve with “in the short run”. The long-run Phillips Curve is vertical at the natural rate of
unemployment. This distinction is frequently tested.
The Phillips Curve is revisited in Chapters 12, 13, and 14.
Rania El Ghalbzouri Page 4
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
1.5 Principle 3 — The Short-Run Trade-off: Inflation vs Unemployment
In the short run, there is an inverse relationship
between inflation and unemployment. This
relationship is illustrated by the Phillips Curve, one of
the central tools of short-run macroeconomic analysis.
Figure 1.1 — The Phillips Curve (source: lecture slide). As
inflation rises, unemployment falls in the short run, and vice
versa.
1.6 Key Terms — Chapter 1
Term Definition
Standard of living A welfare measure based on real GDP per capita.
Productivity The quantity of goods and services produced per unit of
a worker’s time.
Economic growth The increase in goods and services produced over a
given period.
Inflation An increase in the overall level of prices.
Phillips Curve The short-run inverse relationship between inflation
and unemployment.
Microeconomics The study of how households and firms make decisions
and interact in markets.
Macroeconomics The study of economy-wide phenomena including
inflation, unemployment, and economic growth.
Rania El Ghalbzouri Page 5
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 2 · Thinking Like a (Macro)Economist
2.1 Macroeconomic Models
Economists cannot run controlled experiments on nations, so they build models — simplified representations of
reality that allow analysis of cause and effect, prediction of outcomes, and evaluation of policy. Models have two
principal uses: (1) prediction; and (2) counterfactual analysis — what would have happened if a policy had not
been implemented.
Variables in a Model
Term Definition
Endogenous variable A variable determined within the model — the output
the model explains. Example: quantity demanded (Qᵈ)
in a demand model.
Exogenous variable A variable determined outside the model — taken as
given. Example: price (P) in a simple demand model.
Ceteris paribus ‘Other things equal’ (Latin). When analysing the effect
of one variable, all others are held constant.
Limitations of Models
Models become less reliable over longer time horizons. External shocks — unforeseen events such as the
September 11 attacks or a global pandemic — alter dynamics in ways that cannot be anticipated. Chaos theory’s
butterfly effect illustrates how small errors in assumptions can compound into large forecasting errors.
2.2 The Role of Assumptions
Assumptions allow economists to simplify the complex world and make it tractable. The art of modelling lies in
choosing assumptions that are useful without being so restrictive that the model loses contact with reality.
● Example: To study international trade, assume just two countries each producing two goods. Once the logic
is understood, assumptions can be relaxed progressively.
● Analogy: A physicist may assume a vacuum when studying a falling cannonball but not a beach ball.
Economists must judge which simplifications are reasonable for their specific question.
EXAM TIP
Assumptions are not weaknesses — they are methodological tools. A good assumption strips away irrelevant
complexity without distorting the relationship being studied.
Common exam format: “What assumption underpins model X, and how would relaxing it affect the conclusion?”
Rania El Ghalbzouri Page 6
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
2.3 Positive vs Normative Analysis
When economists engage with the world they operate in two distinct modes: as scientists (describing how the
economy is) and as policy advisors (prescribing what ought to be done).
Scientist Policy Advisor
When trying to explain the world When trying to change the world
Uses positive analysis — describes how the economy Uses normative analysis — prescribes what ought to be
works done
Objective; conclusions can be tested against data Incorporates values; conclusions reflect normative
judgements
A positive statement is a claim about how the world is; it is, in principle, testable. Example: “Higher federal budget
deficits will cause interest rates to increase.” A normative statement embeds a value judgement. Example: “The
income gains from a higher minimum wage are worth more than any slight reductions in employment.” A single
statement can contain both components.
EXAM TIP
Classic exam task: “Classify the following statements as positive or normative.” Key test: can it be empirically
verified? If yes → positive. If it depends on values → normative.
A positive statement is not necessarily true — it is simply testable in principle.
2.4 Why Economists Disagree
Economists frequently offer conflicting advice, reflecting two distinct and legitimate sources of disagreement.
● Differences in scientific judgements: Economists may disagree about the validity of alternative positive
theories, or about the size of key parameters (e.g. how much does a tax change affect household saving?).
● Differences in values: Even if two economists agree on all positive facts, they may recommend different
policies because they hold different normative views about whose welfare to prioritise.
EXAM TIP
When you encounter a policy debate, ask: “Is this a positive disagreement (facts) or a normative disagreement
(values)?” This is analytically powerful and frequently tested.
Economists can agree on the positive analysis but still reach different policy conclusions.
Rania El Ghalbzouri Page 7
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
2.5 Key Terms — Chapter 2
Term Definition
Model A simplified representation of reality; allows prediction and counterfactual analysis.
Endogenous variable A variable determined within the model.
Exogenous variable A variable determined outside the model.
Ceteris paribus Latin for “other things equal”; all variables except the one under study are held
constant.
Counterfactual analysis Analysis of what would have occurred if a policy or event had not happened.
Positive statement A claim describing the world as it is; testable in principle.
Normative statement A claim prescribing how the world should be; not directly testable.
Assumption A simplification that allows focus on the key relationships under study.
Hypothesis A tentative prediction that can be tested against evidence.
Falsifiability The property (Popper) that a scientific theory must be capable of being disproved.
2.6 Chapter Summary — At a Glance
Topic Chapter 1 Chapter 2
Core focus Defining macroeconomics vs How economists think, model, and
microeconomics reason
Key concepts Standard of living, productivity, Models, ceteris paribus,
inflation, Phillips Curve endogenous/exogenous variables
Central distinction Micro (individual markets) vs Macro Scientist (positive) vs Policy Advisor
(economy-wide) (normative)
Why economists disagree — Positive theories differ and/or
values differ
Exam priority 3 principles of macro Positive vs normative; how models
work
Rania El Ghalbzouri Page 8
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 4 · Measuring a Nation’s Well-Being and the
Price Level
4.1 The Economy’s Income and Expenditure
When judging whether an economy is performing well or poorly, economists look at the total income that
everyone is earning. GDP serves this purpose by measuring both total income and total expenditure
simultaneously — the two are always equal because every transaction has a buyer and a seller: every euro of
spending by a buyer is a euro of income for a seller.
The Circular Flow of Income — Simplified Model
The simplest circular flow model describes an economy with only
firms and households interacting across two markets: the
market for goods and services, and the market for factors of
production.
In equilibrium, total leakages equal total
injections. Leakages (withdrawals) are taxes
(T), saving (S), and imports (M). Injections
are government spending (G), investment
(I), and export revenue (X):
S+T+M = I+G+X
Rania El Ghalbzouri Page 9
MBA Bridging Programme
, MACROECONOMICS · CRASH COURSE
4.2 The Measurement of Gross Domestic Product
Key Definitions
GDP: the market value of all final goods and services produced within a country in a given period of time
GDP per capita: GDP divided by population; expresses national income per head and is the primary cross-country
comparator of living standards
Unpacking the Definition
Each word in the GDP definition carries specific analytical weight:
● "Market value" — output is valued at market prices, allowing apples, haircuts, and cars to be aggregated
into one number.
● "Of all" — all formal market production is included; informal/shadow activity, unpaid household work, and
illegal transactions are excluded (though some statistical offices estimate the latter).
● "Final" — only final goods are counted; intermediate goods (e.g. steel used in a car) are excluded to avoid
double-counting. Goods added to inventories are treated as final for that period.
● "Goods and services" — tangible goods (food, cars) and intangible services (haircuts, healthcare) are both
included.
● "Produced" — GDP counts current-period production only. The sale of a used car does not add to GDP; only
a new car does.
● "Within a country" — GDP is geographic. A Belgian worker in Germany contributes to German GDP
regardless of nationality.
● "In a given period" — measured quarterly (annualised) or annually; quarterly figures are seasonally adjusted.
4.3 The Components of GDP
GDP (Y) is the sum of four expenditure components:
Y ≡ C + I + G + NX
where C = Consumption, I = Investment, G = Government Spending, NX = Net Exports (X − M).
Consumption (C)
Household spending on goods and services, excluding new housing purchases. Comprises:
● Durable goods — cars, appliances, furniture (long-lived)
● Non-durable goods — food, clothing, fuel (short-lived)
● Services — haircuts, healthcare, entertainment, education
Rania El Ghalbzouri Page 10
MBA Bridging Programme
MACROECONOMICS
Based on Mankiw & Taylor, Economics, 6th Edition
COMPACT EXAM HANDBOOK
KU Leuven – Faculty of Economics and Business
Prof. Dieter Verhaest
Crash Course · Compact Textbook · Exam Survival Guide
Rania El Ghalbzouri Page 1
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Table of Content
Table of Content ........................................................................................................................................................ 2
Chapter 1 · What is (Macro)Economics?.................................................................................................................. 3
Chapter 2 · Thinking Like a (Macro)Economist ........................................................................................................ 6
Chapter 4 · Measuring a Nation’s Well-Being and the Price Level .......................................................................... 9
Chapter 5 · Production and Growth ....................................................................................................................... 19
Chapter 6 · Unemployment and the Labour Market ............................................................................................. 24
Chapter 7 · Saving, Investment, and the Financial System .................................................................................... 30
Chapter 8 · The Monetary System ......................................................................................................................... 32
Chapter 9 · Open-Economy Macroeconomics ....................................................................................................... 42
Chapter 10 · Business Cycles .................................................................................................................................. 48
Chapter 11 · Keynesian Economics and IS–LM Analysis ........................................................................................ 52
Chapter 12 · Aggregate Demand and Aggregate Supply ....................................................................................... 65
Chapter 13 · The Influence of Monetary and Fiscal Policy on Aggregate Demand ............................................... 73
Chapter 14 · The Short-Run Trade-Off Between Inflation and Unemployment .................................................... 79
Graph Tool ............................................................................................................................................................... 84
Rania El Ghalbzouri Page 2
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 1 · What is (Macro)Economics?
1.1 Microeconomics and Macroeconomics
Economics divides into two principal subfields. Microeconomics studies how individual households and firms make
decisions and interact in specific markets. Macroeconomics studies the economy as a whole, focusing on
economy-wide phenomena such as inflation, unemployment, economic growth, and national income.
Microeconomics Macroeconomics
Studies individual parts of the economy Studies the economy as a whole
How households and firms decide and interact Economy-wide phenomena: inflation, unemployment,
growth
Examples: firm pricing, consumer choice Examples: overall price level, GDP, unemployment rate
The term macroeconomics was coined by Ragnar Frisch; Joan Robinson described it as ‘the theory of output as a
whole’. The two subfields are deeply intertwined: macroeconomic outcomes arise from the aggregation of millions
of individual microeconomic decisions.
Key Definitions
Microeconomics: the study of how households and firms make decisions and how they interact in markets
Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic
growth
1.2 The Three Core Principles of Macroeconomics
The introductory macroeconomics course is structured around three central propositions:
● Principle 1: The standard of living depends on a country’s ability to produce goods and services.
● Principle 2: Prices rise when the government prints too much money.
● Principle 3: Society faces a short-run trade-off between inflation and unemployment.
1.3 Principle 1 — Standard of Living and Productivity
Almost all variation in living standards across countries and over time can be explained by differences in
productivity — the single most important determinant of long-run economic well-being. Policies that aim to raise
long-run prosperity must focus on increasing the economy’s productive capacity through well-educated workers,
high-quality capital, and advanced technology.
Key Definitions
Standard of living: a welfare measure based on the amount of goods and services a person’s income can buy;
typically expressed as real GDP per capita
Productivity: the quantity of goods and services produced from each hour of a worker’s time
Economic growth: the increase in goods and services produced in an economy over a period of time
Rania El Ghalbzouri Page 3
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
EXAM TIP
Productivity is the key driver of long-run living standards. When asked why country A is richer than country B, the
answer almost always traces back to higher productivity — not to having more money.
Distinguish standard of living (a real welfare measure) from nominal income (money income). Economists always
prefer real, inflation-adjusted measures.
1.4 Principle 2 — Money Supply and Inflation
When a central bank creates large quantities of money without a corresponding increase in output, the value of
money falls and the general price level rises. This is one of the most robust empirical regularities in economics.
Key Definitions
Inflation: an increase in the overall level of prices in the economy
Key mechanism: rapid expansion of the money supply → each unit of currency buys less → prices rise across the
economy
Historical examples: Zimbabwe (2007–2009, rates exceeding 200,000,000%), Weimar Germany (early 1920s),
Venezuela (2018, >4,000%)
High inflation imposes significant social costs: it erodes purchasing power, distorts price signals, redistributes
wealth from creditors to debtors, and creates uncertainty that discourages investment.
EXAM TIP
The precise statement: a sustained increase in the money supply, unmatched by an increase in real output, leads
to a proportional increase in the price level — the Quantity Theory of Money, studied in Chapter 8.
Inflation refers to a sustained rise in the general price level, not a one-time price increase.
In the short run there is an inverse relationship between inflation and unemployment, illustrated by the Phillips
Curve. This trade-off exists only in the short run — in the long run the economy returns to its natural rate of
unemployment regardless of the inflation rate.
Key Definitions
Negative relationship: higher inflation is associated with lower unemployment in the short run, and vice versa
Short-run only: the long-run Phillips Curve is vertical at the natural rate of unemployment — there is no permanent
trade-off
Policy implication: policymakers can reduce unemployment by accepting higher inflation, or reduce inflation by
accepting higher unemployment
Why it matters: the Phillips Curve trade-off is why macroeconomic stabilisation policy is complex and contested
EXAM TIP
Always qualify the Phillips Curve with “in the short run”. The long-run Phillips Curve is vertical at the natural rate of
unemployment. This distinction is frequently tested.
The Phillips Curve is revisited in Chapters 12, 13, and 14.
Rania El Ghalbzouri Page 4
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
1.5 Principle 3 — The Short-Run Trade-off: Inflation vs Unemployment
In the short run, there is an inverse relationship
between inflation and unemployment. This
relationship is illustrated by the Phillips Curve, one of
the central tools of short-run macroeconomic analysis.
Figure 1.1 — The Phillips Curve (source: lecture slide). As
inflation rises, unemployment falls in the short run, and vice
versa.
1.6 Key Terms — Chapter 1
Term Definition
Standard of living A welfare measure based on real GDP per capita.
Productivity The quantity of goods and services produced per unit of
a worker’s time.
Economic growth The increase in goods and services produced over a
given period.
Inflation An increase in the overall level of prices.
Phillips Curve The short-run inverse relationship between inflation
and unemployment.
Microeconomics The study of how households and firms make decisions
and interact in markets.
Macroeconomics The study of economy-wide phenomena including
inflation, unemployment, and economic growth.
Rania El Ghalbzouri Page 5
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 2 · Thinking Like a (Macro)Economist
2.1 Macroeconomic Models
Economists cannot run controlled experiments on nations, so they build models — simplified representations of
reality that allow analysis of cause and effect, prediction of outcomes, and evaluation of policy. Models have two
principal uses: (1) prediction; and (2) counterfactual analysis — what would have happened if a policy had not
been implemented.
Variables in a Model
Term Definition
Endogenous variable A variable determined within the model — the output
the model explains. Example: quantity demanded (Qᵈ)
in a demand model.
Exogenous variable A variable determined outside the model — taken as
given. Example: price (P) in a simple demand model.
Ceteris paribus ‘Other things equal’ (Latin). When analysing the effect
of one variable, all others are held constant.
Limitations of Models
Models become less reliable over longer time horizons. External shocks — unforeseen events such as the
September 11 attacks or a global pandemic — alter dynamics in ways that cannot be anticipated. Chaos theory’s
butterfly effect illustrates how small errors in assumptions can compound into large forecasting errors.
2.2 The Role of Assumptions
Assumptions allow economists to simplify the complex world and make it tractable. The art of modelling lies in
choosing assumptions that are useful without being so restrictive that the model loses contact with reality.
● Example: To study international trade, assume just two countries each producing two goods. Once the logic
is understood, assumptions can be relaxed progressively.
● Analogy: A physicist may assume a vacuum when studying a falling cannonball but not a beach ball.
Economists must judge which simplifications are reasonable for their specific question.
EXAM TIP
Assumptions are not weaknesses — they are methodological tools. A good assumption strips away irrelevant
complexity without distorting the relationship being studied.
Common exam format: “What assumption underpins model X, and how would relaxing it affect the conclusion?”
Rania El Ghalbzouri Page 6
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
2.3 Positive vs Normative Analysis
When economists engage with the world they operate in two distinct modes: as scientists (describing how the
economy is) and as policy advisors (prescribing what ought to be done).
Scientist Policy Advisor
When trying to explain the world When trying to change the world
Uses positive analysis — describes how the economy Uses normative analysis — prescribes what ought to be
works done
Objective; conclusions can be tested against data Incorporates values; conclusions reflect normative
judgements
A positive statement is a claim about how the world is; it is, in principle, testable. Example: “Higher federal budget
deficits will cause interest rates to increase.” A normative statement embeds a value judgement. Example: “The
income gains from a higher minimum wage are worth more than any slight reductions in employment.” A single
statement can contain both components.
EXAM TIP
Classic exam task: “Classify the following statements as positive or normative.” Key test: can it be empirically
verified? If yes → positive. If it depends on values → normative.
A positive statement is not necessarily true — it is simply testable in principle.
2.4 Why Economists Disagree
Economists frequently offer conflicting advice, reflecting two distinct and legitimate sources of disagreement.
● Differences in scientific judgements: Economists may disagree about the validity of alternative positive
theories, or about the size of key parameters (e.g. how much does a tax change affect household saving?).
● Differences in values: Even if two economists agree on all positive facts, they may recommend different
policies because they hold different normative views about whose welfare to prioritise.
EXAM TIP
When you encounter a policy debate, ask: “Is this a positive disagreement (facts) or a normative disagreement
(values)?” This is analytically powerful and frequently tested.
Economists can agree on the positive analysis but still reach different policy conclusions.
Rania El Ghalbzouri Page 7
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
2.5 Key Terms — Chapter 2
Term Definition
Model A simplified representation of reality; allows prediction and counterfactual analysis.
Endogenous variable A variable determined within the model.
Exogenous variable A variable determined outside the model.
Ceteris paribus Latin for “other things equal”; all variables except the one under study are held
constant.
Counterfactual analysis Analysis of what would have occurred if a policy or event had not happened.
Positive statement A claim describing the world as it is; testable in principle.
Normative statement A claim prescribing how the world should be; not directly testable.
Assumption A simplification that allows focus on the key relationships under study.
Hypothesis A tentative prediction that can be tested against evidence.
Falsifiability The property (Popper) that a scientific theory must be capable of being disproved.
2.6 Chapter Summary — At a Glance
Topic Chapter 1 Chapter 2
Core focus Defining macroeconomics vs How economists think, model, and
microeconomics reason
Key concepts Standard of living, productivity, Models, ceteris paribus,
inflation, Phillips Curve endogenous/exogenous variables
Central distinction Micro (individual markets) vs Macro Scientist (positive) vs Policy Advisor
(economy-wide) (normative)
Why economists disagree — Positive theories differ and/or
values differ
Exam priority 3 principles of macro Positive vs normative; how models
work
Rania El Ghalbzouri Page 8
MBA Bridging Programme
,MACROECONOMICS · CRASH COURSE
Chapter 4 · Measuring a Nation’s Well-Being and the
Price Level
4.1 The Economy’s Income and Expenditure
When judging whether an economy is performing well or poorly, economists look at the total income that
everyone is earning. GDP serves this purpose by measuring both total income and total expenditure
simultaneously — the two are always equal because every transaction has a buyer and a seller: every euro of
spending by a buyer is a euro of income for a seller.
The Circular Flow of Income — Simplified Model
The simplest circular flow model describes an economy with only
firms and households interacting across two markets: the
market for goods and services, and the market for factors of
production.
In equilibrium, total leakages equal total
injections. Leakages (withdrawals) are taxes
(T), saving (S), and imports (M). Injections
are government spending (G), investment
(I), and export revenue (X):
S+T+M = I+G+X
Rania El Ghalbzouri Page 9
MBA Bridging Programme
, MACROECONOMICS · CRASH COURSE
4.2 The Measurement of Gross Domestic Product
Key Definitions
GDP: the market value of all final goods and services produced within a country in a given period of time
GDP per capita: GDP divided by population; expresses national income per head and is the primary cross-country
comparator of living standards
Unpacking the Definition
Each word in the GDP definition carries specific analytical weight:
● "Market value" — output is valued at market prices, allowing apples, haircuts, and cars to be aggregated
into one number.
● "Of all" — all formal market production is included; informal/shadow activity, unpaid household work, and
illegal transactions are excluded (though some statistical offices estimate the latter).
● "Final" — only final goods are counted; intermediate goods (e.g. steel used in a car) are excluded to avoid
double-counting. Goods added to inventories are treated as final for that period.
● "Goods and services" — tangible goods (food, cars) and intangible services (haircuts, healthcare) are both
included.
● "Produced" — GDP counts current-period production only. The sale of a used car does not add to GDP; only
a new car does.
● "Within a country" — GDP is geographic. A Belgian worker in Germany contributes to German GDP
regardless of nationality.
● "In a given period" — measured quarterly (annualised) or annually; quarterly figures are seasonally adjusted.
4.3 The Components of GDP
GDP (Y) is the sum of four expenditure components:
Y ≡ C + I + G + NX
where C = Consumption, I = Investment, G = Government Spending, NX = Net Exports (X − M).
Consumption (C)
Household spending on goods and services, excluding new housing purchases. Comprises:
● Durable goods — cars, appliances, furniture (long-lived)
● Non-durable goods — food, clothing, fuel (short-lived)
● Services — haircuts, healthcare, entertainment, education
Rania El Ghalbzouri Page 10
MBA Bridging Programme
