Economic Indicators and GDP Quiz

Macroeconomics Lecture 1

• Macroeconomics studies the aggregate behavior and performance of an economy.
• It looks at the economic performance of countries and regions.
• Most macroeconomic theories have microeconomic foundations.
• Economic agents include consumers, producers, government, banks, and foreign countries.
• Markets include goods markets, labor markets, money markets, and financial markets.

Objectives

• Learn macroeconomic terminology (e.g., GDP, government deficit, monetary policy).
• Analyze macroeconomic questions using models (e.g., how does an increase in the interest rate affect output?).
• Interpret economic data (e.g., yearly GDP data across the world).
• Understand current macroeconomic issues.

Practical Information: Course Material

• All practical course information (grading, exams, schedules) is available on Canvas.
• Textbook: Burda & Wyplosz, Macroeconomics, 7th or 8th edition, Oxford University Press (2012).
• Lecture slides are posted weekly on Canvas under "Modules/Week."

Practical Information: Exams

• Midterm exam (30% of final grade): open questions (fill in blanks, definitions, simple calculations).
• Final exam (70% of final grade): multiple-choice questions (4 possible answers each).
• Resit exam is available in July (midterm result still valid).

Roadmap

• What is Macroeconomics?
• Macroeconomic Accounts

What is Macroeconomics?

• Microeconomics studies individual behavior.
• Macroeconomics (Greek makro = "big") studies the aggregate behavior and performance of an economy.

Questions Addressed by Macroeconomics

• Why do some countries grow faster than others? (economic growth, long-run)
• Why do economic activities expand in some years and contract in others? (business cycle, short-run)
• What causes unemployment?
• What causes prices to change? (inflation)
• What can the government do to promote rapid growth in income, stable prices, and high employment? (monetary and fiscal policies)
• How does being part of a global economic system affect production, employment, and prices?

How to Measure Aggregate Economic Performance

• Gross Domestic Product (GDP) is a key indicator of aggregate economic activity.
• GDP Definition: The total value of all final goods and services produced within a specific period (per year/quarter) in a specific area (country/region).

GDP = Well-being?

• GDP measures a country's economic activity, but it's not a perfect measure of well-being.
• GDP doesn't capture income inequality, gender equality, human rights, environmental protection, and other factors.
• Although GDP is often highly correlated with well-being, it is readily available and comparable across countries and time

GDP Variations Across Countries and Time

• Real GDP per capita, adjusted for inflation (2011 prices), allows for cross-country comparisons.
• Historical GDP data shows significant variation across countries and time.

Long Run vs. Short Run Economic Performance

• Long run (trend) refers to the economy's behavior over decades.
• Economic growth measures the rate of increase in real output over time.
• Short run (business cycles) involves shorter-term fluctuations around the long-run trend.
• Business cycles include booms and recessions.

Business Cycles: Deviations From Trend

• Recessions are periods of decline from peak to trough.
• Booms are periods of expansion from trough to peak.

Economic Growth

• GDP growth rate: represents the change in GDP between two periods, using the formula (Yt / Yt-1) - 1
• GDP growth can be calculated using logarithmic scale, giving a more accurate approximation for small changes( In Yt - ln Yt-1 = ln (1+ gr. ratet ) ≈ gr. rate)

Long-run Output Growth

• Average growth rate over a period of time (In YT - In Yt) / (T - t) * 100

Short-Run Output Gap

• Short-run output deviation from the trend.
• % difference between current and trend output ( (In Yt - In Y trend,t) * 100)

Flow vs. Stock Variables

• Flow: quantity measured over a time unit.
• Stock: quantity measured at a point in time.
• GDP is a flow variable (measured over time).

Three Definitions of GDP

• Expenditure approach: Sum of all final sales within a defined geographical area (country or region).
• Production approach: Sum of value added in each stage of production within a specific location (country or region).
• Income approach: Sum of all incomes earned in a country (by residents and non-residents).

Definitions of GDP (1/3)

• Expenditure approach: GDP is the sum of final spending within a specified region (country, region, EU etc).
• Excludes intermediate sales and used goods to avoid double counting

Definitions of GDP (2/3)

• Production approach: GDP is the sum of value added at each production stage within a specified region

Definitions of GDP (3/3)

• Income approach: GDP is the sum of all incomes earned within a specified region

Which Economic Activities are Not Included in GDP?

• GDP excludes home production (leisure, childcare, cooking) and the shadow/underground economy (activities not reported to avoid taxes or for illegal reasons).

Missing in GDP: The "Shadow" Economy

• Data on hidden/shadow economy as a percentage of GDP for various countries.

The Nuances of Different GDPs

• Total GDP: captures both per-person growth and population growth.
• Real GDP: captures growth in output volume, adjusting for price changes over time.
• Nominal GDP: captures growth in output volume, but doesn't adjust for price changes.
• GDP per capita: captures growth in output per person.

GDP: Prices & Quantities

• GDP considers both output quantities and prices.
• Important to separate quantity and price effects when analyzing GDP changes.

Nominal vs. Real GDP

• Nominal GDP uses current market prices.
• Real GDP uses constant base year prices to remove the effect of price changes.

Nominal vs. Real GDP: An Example

• Illustrates calculation of real GDP and nominal GDP using respective formulas

Nominal vs. Real GDP: US (2000Q1-2010Q1)

• Graphical representation of nominal vs real GDP

Measurements of Price Changes

• GDP deflator
• Consumer Price Index (CPI)

GDP Deflator

• A measure of the price level for an economy's output of goods and services.
• GDP Deflator _t = ( NominalGDP_t ) / ( RealGDP_t )
• Average prices of final goods weighted by their share in GDP.

GDP Deflator: An Example

• Demonstrates the calculation of inflation, nominal and real GDP growth.

Consumer Price Index (CPI)

• Measures a weighted average of prices of goods and services that consumers buy.
• Reflects spending of a typical household, weighted according to their share in household spending.

CPI vs GDP Deflator

• CPI measures prices of goods and services consumed by consumers (includes imported goods but not exports) .
• GDP deflator measures prices of goods and services produced domestically (includes exports, but not imports).

CPI vs GDP deflator: The Netherlands (1960 - 2022)

• Comparison of CPI and GDP deflator for the Netherlands over time

Gross National Income (GNI)

• Considers an economy's economic activity attributable to its residents, regardless of where the activity occurs.
• GNI = GDP + balance on primary international income

Gross Disposable National Income (GDNI)

• GNI + balance on secondary international income.

A Key Accounting Identity

• (S - I) + (T - G) = (X - Z)
• Equation for the accounting identity that relates various macroeconomic indicators. (T - G) represents the government budget surplus or deficit; (X - Z) represents the balance of trade or net exports; (S - I) represents the balance of saving and investment in the private sector.

Interpreting the Key Accounting Identity

• Implications of the identity on the relationships between private sector savings and investment, government surpluses and deficits, and the balance of trade or net exports.

The Accounting Identity in 2010

• Table of the key accounting identity in 2010 for several countries.

Taking Stock

• Summary of the key concepts covered in this lecture.

Test your knowledge on economic indicators, focusing on GDP, output gaps, and long-run growth trends. Explore various concepts related to GDP measurement and subjective well-being in this comprehensive quiz designed for economics students.