An Introduction to

Macroeconomics
(Ch.23)

Gross Domestic Product

(GDP)
GDP, or gross domestic product , measures the value of
final goods and services produced within the borders of a
given country during a given period of time, typically a year.
Real vs Nominal GDP
Nominal GDP totals the rupee value of all goods and
services produced within the borders of a given country
using their current prices during the year that they were
produced .
Real GDP corrects for price changes. As a result, we can
compare real GDP numbers from one year to the next and
really know if there is a change in output (rather than
prices).

Inflation and
Unemployment
Unemployment is the state a person is in if he or
she cannot get a job despite being willing to work
and actively seeking work.
Inflation is an increase in the overall level of
prices.
Measuring inflation and unemployment.

Importance of
Macroeconomics
Macroeconomic models also clarify many
important questions about the powers and limits
of government economic policy.
These include :
Can governments promote long-run economic
growth?
Can they reduce the severity of recessions by
smoothing out short-run fluctuations?

Importance of
Macroeconomics
Are certain government policy tools like
manipulating interest rates (monetary policy)
more effective at mitigating short-run fluctuations
than other government policy tools such as
changes in tax rates or levels of government
spending (fiscal policy)?
Is there a trade-off between lower rates of
unemployment and higher rates of inflation?
Does government policy work best when it is
announced in advance or when it is a surprise?

Savings, Investment, and Choosing

between Present and Future
Consumption

Investment vs financial investment

Financial securities
What determines investment
The relationship between investment and output
Why do we save?
Current vs future consumption
Autonomous versus induced consumption

Measuring Domestic
Output
and
National
Income
The primary
measure of the economys
performance is its annual total output of goods
and services or, as it is called, its aggregate
output.
Monetary measure
Avoiding Multiple Counting
To measure aggregate output accurately, all
goods and services produced in a particular year
must be counted once and only once.

Measuring Domestic
Output
and
National
Income
To avoid
counting those components each time,
GDP includes only the market value of final goods
and ignores intermediate goods altogether.
Intermediate goods are goods and services that
are purchased for resale or for further processing
or manufacturing.
Final goods are consumption goods, capital goods,
and services that are purchased by their final
users, rather than for resale or for further
processing or manufacturing.

Value Added

GDP Excludes
Nonproduction
Transactions
Nonproduction transactions are of two types: purely
financial transactions and secondhand sales.
Financial Transactions Purely financial transactions
include the following:
Public transfer payments. These are the social
security payments, welfare payments, and veterans
payments that the government makes directly to
households.
Private transfer payments Such payments include,
for example, the money that parents give children or
the cash gifts given at Eid time.

GDP Excludes
Nonproduction
Transactions
Stock market transactions The buying and selling
of stocks (and bonds) is just a matter of swapping bits
of paper. Stock market transactions create nothing in
the way of current production and are not included in
GDP.
Payments for the services provided by a stockbroker
are included, however, because their services are
currently provided and are thus a part of the economys
current output of goods and services.
Secondhand Sales. Secondhand sales contribute
nothing to current production and for that reason are
excluded from GDP.

Two Ways of Looking at

GDP:
Spending
Income
The Expendituresand
Approach:
To determine GDP using the expenditures approach,
we add up all the spending on final goods and services
that has taken place throughout the year.
Personal Consumption Expenditures (C)
durable consumer goods (automobiles,
refrigerators, video recorders), nondurable
consumer goods (bread, milk, vitamins, pencils,
toothpaste), and consumer expenditures for services
(of lawyers, doctors, mechanics, barbers).

The Expenditures
Approach
Gross Private Domestic Investment (I g)
Under the heading gross private domestic
investment, the accountants include the following
items:
All final purchases of machinery, equipment, and
tools by business enterprises.
All construction.
Changes in inventories.

The Expenditures
Approach
Government Purchases (G)
These expenditures have two components:
(1) expenditures for goods and services that
government consumes in providing public
services and
(2) expenditures for publicly owned capital such as
schools and highways, which have long
lifetimes.

The Expenditures
Approach
Net Exports (X n )
Net exports (Xn) = exports (X ) - imports (M )

The Income Approach

Compensation of Employees
-Rents
-Interests
-Proprietor's income
-Corporate profit
-Tax on production and imports
The sum of all these is equal to National Income
(NI)

From National Income to

GDP
National income is the total of all sources of private
income (employee compensation, rents, interest,
proprietors income, and corporate profits) plus
government revenue from taxes on production and
imports.
National income includes the total income of
Pakistanis, whether it was earned in Pakistan or
abroad.
But GDP is a measure of domestic output total
output produced within the United States regardless
of the nationality of those who provide the
resources.

From National Income to

GDP
Net Foreign Factor Income?

Domestic Income or net domestic product

(NDP)
= National Income net foreign factor
income
GDP = NDP + Consumption of Fixed Capital
Therefore,

Expenditures vs Income
Approach

Nominal vs Real GDP

Nominal vs Real GDP

Business Cycle,
Unemployment and
Inflation
Business cycles are alternating rises and declines in the level of economic
activities over several years.

Unemployment

1.
2.
3.

Frictional Unemployment
Structural Unemployment
Cyclical Unemployment

Full employment and natural rate of unemployment

GDP Gap and Okuns Law

GDP Gap = actual GDP potential GDP
The law okun explains the relationship between the
GDP gap and the unemployment rate.
If GDP gap > 0, then unemployment would be ---?
If GDP gap < 0, then unemployment would be ---?

Measurement of Inflation
What is inflation?
How can one measure it?

Types of Inflation
Demand-pull Inflation
- Definition
- Causes

Cost-push inflation
- Definition
- Causes

How is hurt or helped by

inflation?

Fixed-income receivers
Flexible-income receivers
Savers
Creditors
Debtors

Basic Macroeconomic
Relationship
Income and consumption
The interest rate and investment
Changes in spending and changes in output
The concept of multiplier

The aggregate
expenditure model
Equilibrium GDP = C + I
Changes in consumption
Changes in investment

Full employment and

Equilibrium GDP