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Macroeconomics
the allocation of a nation's resources: the whole economy
• including economic growth; employment; inflation or price stability; international stability; income distribution; leakage and injections
Leakage
DIVERSION OF INCOME (savings, taxes, imports)
• any diversion of income from the domestic spending stream; including savings, taxes, and imports
• capital or income that escapes an economy or system
ex: bank deposits; imports
Injection
INTRODUCTION OF INCOME (investment, expenditure, export)
• introductions of income into circular flow from sources outside households and businesses, such as additions to investment, government expenditure and exports
• the addition of spending into the economy that stimulates growth; includes investments, government spending, and exports.
Circular Flow of Income
• the unending flow of production of goods and services, income, and expenditure in an economy
Circular Flow of Income: Categories
Main: Households 🏡 ↔ Firms 💼
Sub-categories:
• Goods & Services
• Factors of Production (land, labor, capital, entrepreneurship)
• Banks
• Government
• Abroad
Circular Flow of Income: Injections & Leakage
Injections (external economic activities that introduce money into the economy):
• revenue
• bank investment
• gov expenditure
• exports from the country to abroad
Leakages (withdrawal of income):
• salaries and wages
• goods and services
• personal savings
• gov tax
• expenditures abroad or imports
National Income Figures: Main Indicators
• GDP
• Nominal GDP (raw; distorted by inflation)
• Real GDP (adjusted for inflation)
• GDP per capita (divide GDP of a nation by population)
• GNP (total value of all goods and services)
• Economic growth
National Income Figures (positive & negative)
Positives ✔
+ easy to compare (past and with other countries)
+ helps identify overall trends and outliers
+ helps government recognize goals and create better policies
+ gives an idea of the size of the economy
+ GNI & GDP per capita shows the average lifestyles of individuals
Negatives ⚠
- doesn't show inequalities (wealth disparity)
- difficulty of calculating (inaccuracy)
- inflation changes
- opportunity cost: GDP development uses up finite natural resources
- unrecorded economic activity (self-sufficient DIY & black markets)
- devastation of nature for development limits growth
- too holistic
- growth is not conclusive—economic growth doesn't directly relate to indicators
GDP: Definition
Gross Domestic Product: the total income earned within a country (residents and foreigners)
Expenditure Formula: C + I + G + (X - M)
Consumption + Investment + Gov spending + (Export - Import expenditure)
GDP Equation
C + I + G + (X-M) = GDP
Consumption + Investment + Gov spending + (Export - Import)
GDP Case Study: China's Ghost Cities
↑ GDP doesn't always equal ↑ Quality of Life
• massive-scale cities: rapid construction drives GDP up
• however, residents are unable to afford the houses
• OVERSTATING ECONOMIC GROWTH: appears to advance
National Income Calculation: 3 Methods
1. Income method
(rent, wages, interest, profit)
2. GDP: Expenditure method
C + I + G + (X - M)
= Consumption + Investment + Gov spending + (Export - Import expenditure)
3. Output method
total value of goods + services
GDP Increase + Effects
as GDP increases...
+ Good: ↑ spending; ↑ producing; ↑ employment
- Bad: ↑ pollution; market failure; ↑ possible exploitation
Real GDP
GDP adjusted for inflation
• dividing "nominal GDP" by "GDP deflator" then "times 100"
• GDP deflator is "nominal GDP" divided by "real GDP" "times 100"
GNI
• Gross National Income: the total income earned by residents + residents abroad, all income earned by a nation's people
GDP + net income of residents abroad = GNI
PPP (Purchasing Power Parity)
• estimates the buying power of income across different countries by using prices in the United States as a benchmark
• exchange rate for residents to purchase a basket of goods or services in different countries
• takes into account the cost of living
(Local Price) ÷ (US Price)
* Big Mac Index 🍔 cost of buying a Big Mac in different countries
Happy Planet Index (HPI)
[(Life Expectancy) x (Experienced Well-Being)] ÷ (Ecological Footprint)
• higher number = happier life
• well-being is surveyed
• ranks countries by the SUSTAINABILITY of the country's well-being
Happy Planet Index: Benefits & Limitations
Benefits ✔
• Sustainability-Focused 🌍 (ecological footprint)
• Measures Well-Being Beyond Wealth 😊 (life satisfaction and life expectancy, more holistic than economic growth)
• Encourages Policy Change 📊 (gov prioritize happiness and sustainability over pure economic growth)
• Challenges the Traditional "Richer = Happier" Mindset 💰🚫
• Global Perspective 🌎
Limitations ⚠
• Ignores Political and Human Rights Factors 🏛 (political instability or inequality)
• Overemphasizes Environmental Impact 🌱 (high consumption lowers score)
• Subjectivity in Well-Being Measurement (subjective and influenced by culture)
• Does Not Account for Economic Growth and Innovation 📈 (high innovation and economic progress = high resource consumption = lower score)
• Limited Global Recognition 🌐 (less widely used)
World Happiness Index
based on RESPONDENT RATINGS of their own lives
• Social support • GDP per capita • Healthy life expectancy • Freedom of making life choices • Generosity • Perceptions of corruption (gov & business)
World Happiness Index: Benefits & Limitations
Benefits ✔
• holistic measure of well-being (economic, social, psychological)
• global comparisons of quality of life
• guides government policies
• public awareness and engagement
• broader definition of success beyond economics
Limitations ⚠
• subjectivity of happiness (1-10 ranking of life)
• cultural bias
• limited economic representation (economic inequality can distort ranking)
• short-term fluctuations (happiness levels can change due to temporary events that may not reflect long-term well-being
• six key factors may not fully capture happiness of all societies
OECD Better Life Index
• first attempt to bring together internationally comparable measures of well-being
• in line with recommendations of the Stiglitz-Sen-Fitoussi Commission
OECD Better Life Index: Main Topics
1. Housing 🏡
2. Income 💴
3. Jobs 💼
4. Health 🚑
5. Education 📚
6. Work-Life Balance ⚖
7. Civic Engagement 🏛
8. Environment 🌿
9. Social Connections 🏘
10. Safety 🔒
11. Life Satisfaction 😀
OECD Better Life Index: Topics in Depth
🏡 1. Housing
• Affordability 💰
• Basic facilities 🚰
• Living space 🏠
💴 2. Income
• Household net income 📊
• Household net wealth 💵
💼 3. Jobs
• Employment rate 👩💻
• Job security 🔒
• Earnings 💲
🚑 4. Health
• Life expectancy ⏳
• Self-reported health 😊
📚 5. Education
• Years of schooling 🎓
• Student skills 📖
• Educational attainment 🏫
⚖ 6. Work-Life Balance
• Time spent on leisure and personal care 🎭
• Long working hours ⏰
🏛 7. Civic Engagement
• Voter turnout 🗳
• Trust in government
🌿 8. Environment
• Air and water quality 🌱
• Access to green spaces 🌳
🏘 9. Social Connections
• Community support
• Strength of social networks 👥
🔒 10. Safety
• Crime rates 🚔
• Feelings of safety at night 🌙
😀 11. Life Satisfaction
• General happiness and well-being 🎉
Business Cycle
Alternating periods of economic expansion and economic recession: a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate
• long term growth trend
• potential output
• general economic growth over time
Business Cycle: Main Parts
peak (boom, bubble); recession (slump); recovery; peak; growth trend
• peak: surge in sales, stabilizes for a short time until recession
• recession = at least 2 quarters of negative growth
• depression = prolonged recession lasting several years
• recovery = when GDP starts to rise from trough, leading to economic growth
• growth trend = line of best fit, the general direction in which the economy is moving
Business Cycle: Peak
the point at which the economy turns from expansion to recession
• peak: surge in sales, stabilizes for a short time until recession
Business Cycle: Recession & Depression
• recession = at least 2 quarters of negative growth
• depression = prolonged recession lasting several years
Business Cycle: Recovery
Rising income/employment/production
• recovery = when GDP starts to rise from trough, leading to economic growth
Business Cycle: Growth Trend
• growth trend = line of best fit, the general direction in which the economy is moving
Business Cycle: Bull & Bear Market 🐂📈🐻📉
"Don't mess with the bull or you'll get the bear"
🐂 Bull Market: expansion and strong economic growth
🐻 Bear Market: recession and weak economic growth
Business Cycle: Bull Market 🐂📈
🐂📈 Bull Market (Expansion Phase)
• A period of rising stock prices (usually by 20% or more)
• Strong economic growth, high investor confidence, and increasing corporate profits
• Low unemployment, rising wages, and high consumer spending
• Often fueled by low interest rates and strong demand for goods/services
• Stock Prices 📊 Rising
• Economic Growth 🌍 Strong
• Investor Confidence 💡 High (optimism)
• Employment 💼 High
• Interest Rates 💰 Often Low
Business Cycle: Bear Market 🐻📉
🐻📉 Bear Market (Contraction/Recession Phase)
• A period of declining stock prices (drop of 20% or more)
• Weak economic growth or recession, with falling corporate profits
• Higher unemployment, reduced consumer spending, and business slowdowns
• Often triggered by high inflation, rising interest rates, or economic crises
• Stock Prices 📊 Falling
• Economic Growth 🌍 Weak/Recession
• Investor Confidence 💡 Low (fear)
• Employment 💼 Low (job losses)
• Interest Rates 💰 Often Rising
Business Cycle: Output Gap Problems
Output gap = when actual output exceeds or falls under the long-term growth trend (the space between the trough or the peak to the growth trend)
• above (peak) or below (trough) of growth trend
Business Cycle: Output Gap Problems (positive)
• Peak to growth trend
↑ employment ↑ wages ↑ business confidence
↑ spending ↑ production
Positive output gap problems
• producing beyond capacity
• inflation from increased spending on finite resources
Business Cycle: Output Gaps Problems (negative)
• Trough to growth trend
↓ employment ↓ wages ↓ business confidence
↓ spending ↓ production
Negative output gap problems
• unemployment
• decreased spending from job loss or in case of
• economic recession
