Macroeconomics Lecture Notes

Flashcards on macroeconomics, GDP, and economic policy.

Macroeconomics

Study of how aggregate demand and aggregate supply shape national and global economies

Aggregate Demand

Sum of the demand for all goods and services by all economic actors.

Traditional Macroeconomics

Focuses on business cycle, economic growth, consumption, employment, investment, and stability.

Fiscal Policy

Government's use of taxation, spending, and borrowing to influence the economy.

Monetary Policy

Central bank's actions to control the money supply and credit conditions to influence the economy.

Objectives of Fiscal Policy

Stimulating economic growth, ensuring full employment, reducing inequalities, and stabilizing the economy.

Gross Domestic Product (GDP)

Measures economic production of a given geographic territory at a given time.

Value Added

Revenue - expenditures in intermediate consumption

Final Expenditures

goods and services purchased for the direct satisfaction of individual and collective needs

GDP: Expenditure Approach Formula

Household final consumption + Gross capital formation + Government final consumption + (Exports – Imports)

Household Final Consumption (C)

Expenditures to satisfy households needs, such as food, clothes, rent or any daily consumption

Gross Fixed Capital Formation

Acquiring buildings, infrastructure, land improvement, and machinery. households purchases of housing

Final Government Expenditure (G)

Expenditures in goods and services consumed during the period for collective consumption.

Compensation of Employees

Total remuneration payable by an employer to an employee in return for work done by the employee

Gross Operating Surplus

GDP - compensation of employees - net taxes on production and imports

Other Taxes on Production

Taxes on wages and capital paid by firms.

Taxes on Products

Value added tax, fossil fuel tax, taxes on alcohol and tobacco, etc.

Excluded Productions from GDP

Unpaid labor, informal labor, and illegal activities.

Wellbeing Indicators Not Captured by GDP

Health, happiness, social life, access to good food, culture, quality housing, and job security.

GDP Includes “Bads”

Reconstruction after destructions, depollution after environmental damage, vaccines after pandemics.

Nominal GDP

Total monetary value of all goods and services produced at current prices.

Real GDP

Total volume of goods and services produced at constant prices.

Real GDP Formula

Nominal GDP / GDP deflator

GDP Deflator

Price in one year compared to prices in the base year.

Consumer Price Index (CPI)

Weighted average of a basket of goods and services.

Inflation

Increase in prices.

Disinflation

Slow down of the increase in prices.

Deflation

Decrease in prices.

Say’s Law

Economy self-adjusting in temporary downturns, recessions and overheating, no government intervention required

New Keynesian Economics

Economy does not tend towards a long-run stable equilibrium when downturns or booms, stabilization policies needed

New Classical Economics: Savings & Investment

When people consume less and save more, savings increase leading to business investment

Keynesian Critique

Wages and input prices are sticky, effective demand does not increase, locking the economy in recessions

Key Mechanism: Fiscal Multiplier

Government spends money and creates demand (income) in the economy

Marginal Propensity to Consume (MPC)

Change in consumption from a change in disposable income

Net Marginal Tax Rate (t)

Amount government takes out of a change in income

Marginal Propensity to Import (MPM)

Increase in Imports from Increase in Disposable Income

Marginal Respending Rate (MRR)

Money goes out of the country so cannot be respent further

GDP: Production Approach

GDP = Σ value added of all sectors + taxes - subsidies on products

GDP: Income Approach

GDP = Σ incomes = compensation of employees + gross operating surplus + taxes - subsidies on production and imports

Value Added measures

The value that each firm adds to the intermediate consumption it uses as inputs to produce a good or a service.

Nominal GDP Definition 2

GDP at current prices

Real GDP Definition 2

GDP at constant prices.

New Classical + Austrian Economics Downturn take

Downturns are temporary

Keynesian critique Downturn take

Downturns are not temporary

Keynesian critique Investment

Primary determinant of business investment is expected demand, not the interest rate

Key mechanism: fiscal multiplier effect

creates 1 * x DKK of demand (income) in the economy

Magnitude of shift of AD:

depends on initial change in G spending and multiplier

Assume mpc = 0.8:

consumers spend 80% of any increase in income and save 20%

1-mpc

what is saved and not spent (marginal propensity to save, s) => multiplier = 1 / s

mpm decreases marginal respending rate

money goes out of the country so cannot be respent further

mpc varies with income:

richer people have a lower mpc than poorer people