Unit 3 - Macroeconomics

Macroeconomics

Macroeconomics

The field of economics that studies the behavior of the aggregate economy

Circular Flow of Income in an open economy

illustrates the flow of resources, goods, services and money in an economy. Depicts the relationship between households and firms.

Factors of Production

• land

• labor

• capital

• entrepreneurship

Leakages

Outflows from the circular flow of income, which reduce the money available for expenditure

examples of leakages

saving taxes imports

Injections

Inflows into the circular flow of income, which increase the money available for expenditure

example of injections

investment government spending exports

imports

goods and services produced in other (foreign) countries and purchased by domestic buyers

exports

goods and services produced domestically and purchased by foreigners

Expenditure Approach

A method of measuring GDP that adds up all spending on final goods and services produced within a country over a time period (1 year)

what components are part of the expenditure approach

• Consumption (C)

• Investment (I)

• Government spending (G)

• Net exports (X-M)

Income Approach

A method of measuring GDP that adds up all income earned by the factors of production within a country over a time period (1 year)

GDP

Gross Domestic Product

What is GDP?

The market value of all final goods and services produced within a country over a specific period (1 year) including spending on consumption, investment, government spending, and net exports

GDP formula

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

components of income approach

• wages

• rent

• interest

• profits

Output approach

A method of measuring GDP that sums up the value of all final goods and services produced in a country over a time period (1 year) to obtain the total value of output produced

GNI

Gross national Income

What is GNI?

The total income received by the residents of a country, including the value of all final goods and services produced by factors of production supplied by residents, regardless of where the factors are located

Nominal GDP

The value of goods and services produced in a country in a given year expressed in the prices charged for that year, without adjusting for inflation

Real GDP

The value of goods and services produced in a country in a given year adjusted for inflation

GDP Deflator (what is it? + what does it reflect?)

A measure used to convert nominal GDP into real GDP by adjusting for inflation. It reflects changes in the price level of all goods and services included in GDP

GDP per Capita

An average measure of national income, calculated by dividing the GDP of a country by its population

How is GDP per capita used?

used to compare economic performance between countries

Business Cycle

The fluctuations in national income

phases of business cycle

• peak

• recession

• trough

• expansion

Green GDP

An alternative measure of GDP that accounts for environmental degradation and resource depletion, aiming to provide a more comprehensive view of economic performance and sustainability.

Cons of GDP

• GDP Overestimates Well-Being (includes negative behaviours and environmental challenge)

• GDP Underestimates Well-Being (excludes factors like life expectancy, blackmarkets, unpaid work)

• GDP Sometimes Does Not Provide Enough Information (does not account for other aspects of quality of life)

Alternative ways to measure well-being

• World Happiness report

• OECD Better life index

• Gross National Happiness

• Happy Planet Index

• Green GDP

Aggregate Demand

total demand for goods and services produced in an economy

AD components

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

changes in price level cause a … of the AD curve

movement

changes in components of AD cause a … of the AD curve

shift

Determinants of consumption (C)

• Confidence

• Unemployment

• Real interest rates

• Wealth

• Personal taxes

• Level of household indebtedness

• Expectations for future price level

Determinants of Investment (I)

• Interest rates

• Business confidence

• Technology

• Business Taxes

• Level of corporate indebtedness

Determinants of Government (G)

differing economic priorities, the government can change, depends on health of economy

Determinants of net export (X-M)

• Income of trading partners

• Exchange rates

• Changes in trade policies

• less traditional methods