Macroeconomics Measures and International Trade Notes

What is Macroeconomics?

Macroeconomics studies the big economy, focusing on the entire system rather than individual consumers and businesses. It emerged during the Great Depression to:

  • Measure the economy's health.

  • Guide government policies for issues like high unemployment (which reached 25% during the Great Depression).

The Circular Flow of the Economy

Factor Market:

  • Households sell production factors (labor, land, capital, entrepreneurial ability).

  • Firms buy these factors.

  • Money income (wages, rents, interests, profits) flows to households.

Product Market:

  • Firms sell goods and services.

  • Households buy these products.

  • Consumption expenditures flow from households to firms, generating revenue.

Businesses: Buy factors of production and sell products.

Major Economic Goals for All Countries

  1. Promote Economic Growth

  2. Limit Unemployment

  3. Keep Prices Stable (Limit Inflation)

Goal #1: Promote Economic Growth

Economic growth is measured using Gross Domestic Product (GDP).

Measuring Economic Growth: GDP

  • National Income Accounting: Collecting stats on production, income, investment, and savings.

  • GDP Definition: The total dollar value of all final goods/services produced in a country in one year, involving:

    • Dollar Value: Measured in dollars.

    • Final Goods Only: Excludes intermediate goods (e.g., only the finished car is included, not parts like radios).

    • Annual Measurement: Looks at one year’s performance.

Using GDP for Comparison

  • Compare year-over-year GDP to assess growth.

  • Analyze GDP after policy changes for effectiveness.

  • Compare GDP among countries for economic well-being benchmarks.

Calculating Percentage Change in GDP

  • Formula: \text{% Change in GDP} = \frac{\text{Year 2} - \text{Year 1}}{\text{Year 1}} \times 100

  • Example: Mordor's GDP in 2007 was $4000 and in 2008 it was $5000. So:

    • % Change = 5000−40004000×100=25%\frac{5000 - 4000}{4000} \times 100 = 25\%

What is NOT Included in GDP?

  • Intermediate Goods: Only final goods are counted to avoid double counting (like excluding parts of cars).

  • Non-Production Transactions: Financial transactions like stocks or used goods, illegal activities, and unpaid work are not included.

Calculating GDP: Two Approaches

  1. Expenditures Approach: Sum all spending on final goods/services in a year.

  2. Income Approach: Sum all income from selling final goods/services in a year.

Both approaches yield the same GDP since every dollar spent is income.

Expenditures Approach Components of GDP

  • GDP=C+I+G+XnGDP = C + I + G + Xn where:

    • C: Consumer Spending (like movie tickets)

    • I: Investments (business purchases)

    • G: Government Spending (public projects, not social security)

    • Xn: Net Exports (exports minus imports)

Examples: Included or Not Included in GDP?

  • Included in GDP:

    • $10 for movie tickets (C)

    • $5M defense spending increase (G)

    • $2M new factory (I)

  • Not Included in GDP:

    • $45 used textbook

    • $20K Toyota made in Mexico

Nominal GDP vs. Real GDP

  • A rise in nominal GDP does not mean true economic growth if inflation is high.

  • Nominal GDP: Current prices without inflation adjustment.

  • Real GDP: Adjusted for inflation—this is the true measure of growth.

Real GDP Example

  • 2008: 10 cars at $15,000 => Nominal GDP = $350,000

  • 2009: 10 cars at $16,000 => Nominal GDP = $370,000

  • To calculate Real GDP for 2009 using 2008 prices:

    • 10 cars at $15,000 + 10 trucks at $20,000 => Real GDP = $350,000.

Real GDP per Capita

  • Real GDP per capita reflects standard of living based on economic performance adjusted for population.

Factors Influencing GDP Differences

  1. Productivity

  2. Technology

  3. Economic System (capitalist countries excel)

  4. Capital availability

  5. Human Capital (knowledge)

  6. Natural Resources

The Business Cycle

  • The national economy goes through booms and busts.

  • Recession: A six-month decline in output, leading to unemployment.

Characteristics:

  • Expansions: Less unemployment, increased GDP, rapid job growth.

  • Recessions: More unemployment, decreased GDP, social problems.

What is Economic Growth?

  • An increase in real GDP or real GDP per capita over time.

  • Importance of Growth: Accessibility to better goods/services, increased wages, improved quality of life, enhanced ability to meet wants.

Goal #2: Limit Unemployment

Unemployment reflects the share of the labor force not working but available for jobs. The Unemployment Rate measures this as:
\text{Unemployment Rate} = \frac{\text{# Unemployed}}{\text{# in Labor Force}} \times 100

  • Labor Force includes those:

    • Over 16 years old

    • Able and willing to work

    • Not institutionalized

    • Not in full-time school or military.