Introduction to Macroeconomics

• Macroeconomics examines economic processes concerning aggregates, which are groups of economic subjects sharing features.
• Microeconomics, in contrast, deals with economic processes concerning individuals.
• A firm buying an office chair is not a macroeconomic issue, whereas German households reacting to increased capital taxation is a macroeconomic problem.
• Macroeconomics simplifies by assuming identical firms producing the same good to study aggregate behavior, with models including a story, a mathematical model, and a graphical representation.
• National economies show a tendency for output levels of goods and services to move together, such as growth in food grain output correlating with growth in industrial goods.
• Production, distribution, and consumption are three main problem areas in macroeconomics, involving how goods and services are created and made accessible.
• These processes operate on local, national, and global levels, with changes influenced by technology and historical factors.
• Economic sectors are areas where businesses share activities, products, or services; dividing an economy helps economists analyze activity and contraction within sectors.

Primary Sector

• This sector extracts and harvests natural products, utilizing Earth's resources for consumers or businesses.
• Activities include mining, fishing, agriculture, and forestry.
• Emerging economies often have more activity and employment in this sector, while developed nations use technology, reducing its employment share.

Secondary Sector

• This sector processes, manufactures, and constructs goods from primary sector products.
• It includes automobile production, textiles, chemical engineering, aerospace, shipbuilding, and energy utilities.

Tertiary Sector

• This sector provides services like retail, entertainment, and finance.
• It offers services to businesses and consumers by selling goods from the secondary sector, including retail sales, transportation, restaurants, tourism, banking, healthcare, and legal services.
• A country's economic wealth depends on how resources generate production, income, and wealth, not just on possessing natural resources.
• Modern production involves goods and services from numerous enterprises, ranging from corporations to single-person operations.
• Producers aim to sell their output to consumers who may use it for final use or further production.
• Goods used in further production are transformed into new goods.
• Cotton is sold to a spinning mill and transformed to yarn, the yarn to cloth, the cloth to clothing.

Final Goods

• An item that is meant for final use
• It does not pass through any more stages of production or transformations

Consumption goods

• These are goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers

Capital Goods

• Durable goods like tools, implements, and machines used in production that are not transformed but enable production.
• These are part of a productive enterprise's capital and are gradually repaired or replaced due to wear and tear.

Intermediate Goods

• Products that don't end up in final consumption or as capital goods, instead used by other producers as material inputs.
• Sheets of steel, or copper are examples

Gross Domestic Product (GDP)

• It is a summary of economic activities within a country over a time range.
• The values of goods and services are determined at market prices.
• GDP may be calculated via the income method, product method, or expenditure method.

Income Method

• The income method measures GDP by adding together:
• Gross Profit of companies
• Earnings of self-employed
• Wages of employees
• Taxes on products like Value Added Tax (VAT)
• Subsidies on products subtracted

Output Method

• Measures GDP using value of output minus value of the inputs.
• All taxes are added and subsidies are subtracted

Expenditure Method

• This method calculates GDP by looking at products' demand side
• Total Expenditure = Consumption + Investment + Government Expenditure + Net Exports where NX = Exports - Imports
• Y (GDP) = C + I + G + NX

Nominal GDP

• GDP implicit assumption is the prices of goods and services are static, compare GDPs considering price changes
• If prices of all goods and services have doubled between the two years whereas the production has remained constant, be aware

Real GDP

• Comparing GDP figures with a constant set of prices; changes indicate volume of production changes.

Nominal GDP

• Nominal GDP is the value of GDP at current prevailing prices
• GDP at current price was QAR 1,000, country produced 100 units of bread, price was QAR 10 PER unit
• in 2001: Nominal GDP in 2001 was QAR 1,650 (=110 x QAR 15), country produced 110 units of bread at price QAR 15 PER unit
• GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be 110 x QAR 10 - QAR 1,100

GDP Deflator

• Ratio of nominal to real GDP is a well known known index of prices
• GDP Deflator = Nominal GDP / Real GDP
• Calculate deflator if needed: [Nominal GDP / Real GDP]*100

Consumer Price Index (CPI)

• It measures price changes in an economy using the prices of a basket of goods bought by a representative consumer.
• Expressed in percentage terms, comparing purchase costs in a current year versus a base year.
• Example: calculation involves a base year basket and current year basket with CPI (1950/1400)*100 = 139.29 (approximately)

GDP and Welfare

• Treating GDP as a person's income level seems reasonable, as they improve in material well being
• There are 3 reasons taking GDP as an index of welfare might not be correct:

Distribution of GDP

• GDP may rise, but welfare may not, because the rise in GDP may be concentrated in the hands of very few individuals or firms

Non-monetary Exchanges

• Many activities in an economy are not evaluated in monetary terms, the exchanges which take place in the informal sector without the help of money are called barter exchanges, for example

Externalities

• Negative externalities can cause the GDP to inaccurately reflect higher welfare whereas positive externalities can cause GDP to underestimate the actual welfare

Goods Market

• Consumption, Investment and Government Expenditure
• National income Y (or GDP) Y = C + I + G + NX:
• C= Consumption
• I= Investment
• G = Government Expenditure
• NX = Net Exports

Goods Market, Closed Economy

• Calculating in a closed economy: Y = C + I + G

Consumption

• Consumer spending is their disposable income: C = f(YD), and rewritten as C = c0 + c1YD, where both C0 and C1 are > 0, where:
• Keynes consumption function that contrains two parameters
• Autonomous consumption of the economy is:
• the sum of all expenditures of all necessary for their survival, if they do not receive any income.
• The:
• Marginal propensity to consume
• It describes how much consumption rises, Increase consumption by C1 QAR if one euro is received

Average Propensity to Consume

• APC is not a constant but falls as income rises

Formula

• Aggregate demand in a closed economy: C + I + G
• Formula to note: = c0 + c1 (Y − T) + I + G
• Fiscal multiplier: value of 1/1−𝑐 as 1 is a called the fiscal multiplier, as it multiplies the increase of an exogenous input in the aggregate output
• Aggregate demand Z is satisfied by the firms immediately
• Y is increased as income equals production

Saving propensity

• Households are saving SH, and with calculating marginal saving is important to remember
• The bigger the saving propensity the smaller the propensity to consume
• Formula: SH = 1+G-T
• Balanced budget: SH = 1
• Government runs a budget surplus: T > G and therefore
• Government consumes more: SH+SP= 1