Lecture 1_Introduction 2

Macroeconomics Overview

• Definition: Study of the economy on a broad scale, analyzing aggregate economic phenomena.

• Key Concepts:

  • Economic Growth: Long-term increase in economic productivity.

  • Business Cycles: Short- and medium-term fluctuations in the economy.

  • Monetary Policy: Central bank actions to manage the economy.

    • Central Bank: Institution that manages a country's currency and monetary policy.

    • Interest Rate: Rate at which banks lend money to each other, influencing overall economic activity.

  • Fiscal Policy: Government spending and taxation decisions.

    • Government Spending: Expenses incurred by the government to manage the economy.

    • Taxes/Transfers: Revenue raising and distribution mechanisms.

  • Open Economy: Interactions with other economies through trade.

    • Exchange Rate: Value of one currency for the purpose of conversion to another.

    • Exports and Imports: Outflow of goods to other countries and inflow from them.

    • Trade Balance: Difference between the value of exports and imports.

National Income and Product Accounts (NIPA)

• Historical Context: Developed by Simon Kuznets and Richard Stone.

• Purpose: Measures of aggregate output since 1947 in the US.

• Key Indicators of Economic Size:

  • Production: Total output of goods and services.

  • Income: Total earnings from employment, investments, etc.

  • Expenditure: Total spending on goods and services.

  • All these measures should give the same economic size.

  • Components:

    • Consumers: Individual purchases of goods/services.

    • Firms: Businesses producing goods/services.

Gross Domestic Product (GDP)

• Definition from the Production Side: Market value of all final goods and services produced domestically in a specified period.

• Characteristics:

  • Market Value: Prices applied to gauge different products' values.

  • Final Goods: Only end products counted to avoid double counting.

  • Exclusions: Used products, intermediate goods, and foreign production not included in domestic GDP.

• Relation to Economic Activity: Higher GDP suggests greater economic activity and health.

GDP: Value Added Calculation

• Definition: Sum of production value minus the cost of intermediate goods.

• Value Added Formula:

  • For each firm: Value of output − Cost of inputs.

Labor and Capital Income in GDP

• Examples:

  • Labor Income: Earnings from work, e.g., wages.

  • Capital Income: Earnings from investments and savings.

• Rate Calculation: GDP also incorporates profits from capital and labor incomes.

Nominal vs. Real GDP

• Nominal GDP: Not adjusted for inflation; fluctuates with prices.

• Real GDP: Adjusted for inflation; provides a clearer view of true economic growth and productivity.

  • Calculation: Uses base year prices to evaluate overall production levels.

  • Allows comparison over time without price distortion influence.

Unemployment Rate

• Equation: Unemployment Rate (u) = Unemployed (U) / Labor Force (L)

• Components:

  • Employment (N): People with jobs.

  • Unemployment (U): Those without jobs actively seeking work.

• Insight: Unemployment figures vary by country and can include discouraged workers who have stopped looking for jobs.

Participation Rate & Dynamics

• Definition: Percent of working-age population that is part of the labor force.

• Can reflect economic health and job availability.

Inflation Rate Measurement

• Formula: Inflation (π) = Growth rate of the price level.

• Indicators for Measurement:

  • GDP Deflator: Reflects prices relative to GDP.

  • Consumer Price Index (CPI): Measures cost of living adjustments based on consumer goods and services.

Fiscal Policy Dynamics

• Key Elements:

  • Types of Expenditures: Mandatory (entitlement) and discretionary (optional) spending by governments.

  • Application for stabilizing business cycles through fiscal endorsements.

• Government Spending: Includes military, education, infrastructure, and healthcare, essential for long-term economic health.

Monetary Policy Tools**

• Open Market Operations: Central banks adjust money supply through the buying/selling of government bonds.

• Interest Rate Adjustments: Manage economic heat via target rate settings.

Impact of Policies on Employment and Wages

• Bargaining Power: Higher unemployment decreases workers' bargaining power, influencing wage-setting dynamics.

  • The natural rate reflects conditions where supply equals demand in the labor market consistently.