Macroeconomics - Intro

FoP and Factor Payments

Land - Rent

Labor - Wage

Capital - Interest

Enterprise - Profit

National Income

Value of all goods and services produced in a year.

Output

Quantity of goods and services produced in a specific time period.

GDP

The monetary value of all final goods and services produced in an economy.

3 ways to measure GDP

• Output method

• Expenditure approach

• Income approach

How to calculate with output method

Adding up all the “contributions of each sector”, so you don’t “double dip”. Also, by just looking at the final value (value of sale).

Formula for the expenditure approach

GDP = C + I + G + (X - M)

Formula for income approach

GDP = Wages + Rent + Interest + Profit + (Taxes - Subsidies)

GNI

Measures the value of production within a country’s borders (GDP but taking into account the money made by individuals abroad, and minus the money made by immigrants at our country)

Real GDP

Nominal GDP but adjusted to inflation (tells you if the country is growing because of more production, not just higher prices).

Formula for Real GDP

(Nominal GDP / Price deflator) *100

Price deflator formula

(Old GDP Deflator) * (1+ inflation rate)

Real GDP per capita

Real GDP / Population

PPP

Purchasing Power Parity - Number of units a country’s currency is required to buy a product in the local economy, as 1 dollar would buy the same product in the USA.

Injections in an economy

• Government spending

• Exports

• Investment

Leakages in an economy

• Taxes

• Imports

• Saving

What the PPF curve shows

• Maximum possible productions of 2 goods/services with given factors of production.

• The various combinations of 2 goods that can be provided with given factors of production.

Law of increasing opportunity cost

As we move further along the curve, factors of production are more suitable towards one good than towards the other.

Productive efficiency

Points that lie on the curve of PPF

Allocative efficiency

Whether what’s being produced satisfies consumer demand.

Business cycle

• Expansionary phase

• Peak phase

• Contractionary phase

• Trough phase

Economic growth

When a country produces more goods and services in one period than in a previous one.

Decrease in GDP vs decrease in GDP growth rate

A decrease in GDP means that the output actually falls (is in recession). A decrease in GDP growth rate means that there is an increase in growth, just at a slower rate (gradient decreases).

Disadvantages of using GDP

• Doesn’t distinguish if the GDP per capita is concentrated amongst a small population

• Doesn’t account for improved product quality

• Doesn’t account for people’s wellbeing

• Doesn’t account for the environment

World Happiness Report

How much happiness plays a role in human and economic development

OECD Better Life Index

Measures variables such as housing, income, job, etc.

Gross National Happiness

Measures variables such as education, health, living standards

Happy Planet Index

Uses four indicators to demonstrate how efficiently residents of different countries are using environmental resources to lead long, happy lives. Well-being, life expectancy, inequality of outcomes and ecological footprint.