Macro_book__1_

Course Information

Title: Economics II - MacroeconomicsInstitution: Universidad Carlos III de MadridInstructor: Jorge Redondo Caballero

Introduction to Macroeconomics

Macroeconomics examines key aspects such as wealth disparities among countries, unemployment rates, and economic cycles including recessions and expansions. It is distinct from microeconomics, which focuses on specific sectors like the automobile sector in Germany, while macroeconomics evaluates the impact of such a sector on the entire economy. For example, altering income through government grants of 100€ to 50 students results in an increase of 5000€ in total income. General spending habits are also polled, under the assumption that general behavior aids in streamlining analysis.

Assumptions and Simplifications in Economics

One significant question in macroeconomic analysis is how much of the increased income will be spent. Assuming a 50% spending rate leads to a total spending of 2500€, although actual spending may deviate from this assumption as shown by comparing real versus assumed data. Simplicity sometimes enhances model utility, much like how readable maps function in various contexts.

National Accounting

Measuring Economic Activity

The Gross Domestic Product (GDP) is the best indicator of economic performance, viewed through three perspectives: total income, total expenditure, and total production. Transactions among buyers, sellers, and producers create equivalency across these views.

Stock vs Flow

A key distinction is between income and wealth, where GDP measures the flow of income rather than the stock of wealth. Individual cases can illustrate this, as savings and incomes can vary significantly among people.

Rules for Computing GDP

GDP is defined as the market value of all final goods and services produced within a specific time period. Intermediate goods are excluded to prevent double counting, highlighting their non-inclusion in GDP calculations.

Additional Rules for GDP Calculation

Production-related measures exclude second-hand goods since they do not signify new economic activity. GDP calculations are based on production conducted within a country’s territory, emphasizing location over nationality. Depreciation metrics illustrate the difference between Gross and Net Domestic Product, revealing capital loss over time.

Demand Side of GDP

The demand side includes four economic agents: consumers, producers, government, and the external sector. The demand-side equation is represented as GDP = C + I + G + NX, where C denotes consumption, I stands for investment, G represents government consumption, and NX indicates net exports.

Detailed Components of GDP

Consumption (C)

Consumption encompasses categories such as nondurable and durable goods as well as services.

Investment (I)

Investment types are categorized into Gross Fixed Capital Formation, residential investment, and variations in inventories.

Government Consumption (G)

This category includes military spending and services, while excluding transfer payments such as Social Security.

Net Exports (NX)

Net exports signify the trade balance, where X > M indicates a surplus and X < M indicates a deficit.

Trends in GDP Shares

Observations regarding investment trends and consumption shares within GDP reflect stability in spending patterns alongside the impacts derived from housing market crises.

Government Spending vs Expenditure

Expenditure accounting differentiates between government consumption and total expenditures, which encompass social transfers.

Supply Side of GDP

GDP can also be calculated from the supply perspective, which breaks down economic activity into three sectors: Primary (agriculture), Secondary (industry), and Tertiary (services). Value added is a crucial measurement, exemplified by VAT tax effects on final product pricing.