Intermediate Macroeconomics Chapter 1

Intermediate Macroeconomics

• This is a course on intermediate macroeconomics.
• Chapter 1 is an introduction to macroeconomics.

What is Macroeconomics?

• Macroeconomics studies the overall behavior of an economy.
• It aims to understand the general structure of the economy and the connections between its main components.
• Macroeconomics analyzes important issues such as current output, long-term economic growth, inflation, unemployment, and the effects of globalisation on domestic economies.

Measurement of Total Output (GDP)

• Gross Domestic Product (GDP) is a measure of a country's overall output.
• Methods to calculate GDP include:
  • Output method: measures the market value of all final goods and services produced within a country in a set period of time.
  • Expenditure method: calculates GDP based on total spending on domestically produced final goods and services.
  • Income method: calculates GDP by summing all incomes earned by factors of production within the country in a given time period.

Measurement of GDP by Output Method

• GDP is calculated as the total market value of final goods and services produced in a country.
• Intermediate goods are not included to avoid double-counting.
• Value added is used to calculate GDP to avoid double-counting. It's the market value of a firm's output minus the value of intermediate goods used in production.

Measurement of GDP by Expenditure Method

• GDP equals Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX).
• Consumption (C): spending by households on goods and services.
  • Durable goods (last long) - cars, appliances.
  • Non-durable goods (short-term) - food, clothes.
  • Services (work done) - cleaning, entertainment
• Investment (I): spending on goods for future use.
  • Business fixed investment: spending by firms on factories and equipment.
  • Residential fixed investment: spending by consumers and landlords on housing.
  • Change in inventories: change in the total value of unsold goods.
• Government spending (G): government purchases of goods and services.
• Net Exports (NX): exports (X) minus imports (M).

Measurement of GDP by Income Method

• GDP equals the total income earned by factors of production (domestically located).
• Includes employee compensation, rents, interest, proprietors' income, corporate profits, indirect business taxes, depreciation, factor income received from overseas, and factor income paid to foreigners.

Real vs. Nominal GDP

• Nominal GDP uses current prices.
• Real GDP uses base-year prices to account for inflation.

GDP, GNP and GNI

• Gross Domestic Product (GDP): measures output produced within a country.
• Gross National Product (GNP): measures output from a country's residents (regardless of location).
• Gross National Income (GNI): measures total income earned by a nation's residents.

GDP per Capita

• GDP per capita is a metric showing the average GDP per person in a country.

Inflation

• Inflation is a sustained increase in the overall price level.
• Inflation rate is the percentage change in the price level from the previous period.

Measuring the Price Level

• Price level refers to the overall price of goods and services.
• CPI (Consumer Price Index) measures the cost of a specific basket of goods and services.
• GDP Deflator is an index of price changes for goods and services included in GDP.

Unemployment

• The population is divided into children and adults.
• Adults are categorized as either in the labor force or not in the labor force.
• Labor force includes those who are able and willing to work (actively seeking jobs).
• Unemployment rate is the percentage of the labor force that is unemployed.

Types of Unemployment

• Frictional unemployment: normal job searching time for workers.
• Structural unemployment: mismatch of skills and jobs.
• Cyclical unemployment: lack of jobs during a recession.

Labor Force Participation Rate & Unemployment Rate

These are statistics about employment and joblessness, measured over time.

Different Views on Macroeconomics

• Classical economics: economy is self-regulating and always at full employment.
• Keynesian economics: aggregate demand influences the economy, and the economy can experience periods of unemployment.

Long Run vs Short Run

• Long run (classical): wages and prices flexible, economy self-regulating, full employment.
• Short run (Keynesian): wages and prices sticky, aggregate demand is important.

Plan of the Course

• The course covers long-run and short-run economies, concepts and models.