Introduction to Macroeconomics

Introduction to Macroeconomics

• Economics has two branches: macroeconomics and microeconomics.
• Microeconomics focuses on individual markets, firms, and households.
• Macroeconomics focuses on the aggregation of all markets and economic agents to make up entire economies at a national and international level.
• Macroeconomics studies factors determining national output, the general price level, and unemployment.
• Macroeconomic indicators like GDP, inflation, unemployment, and income levels help assess a country's economic health and quality of life for its citizens.

Standard of Living (SOL)

• Standard of living means the well-being of an average person in the economy in terms of material and non-material aspects of welfare.

Material (Quantitative) Aspects of SOL

• The material aspect of welfare relates to the quantity of goods and services available for consumption.
• National Income Statistics

National Income Statistics

• Macroeconomic indicators providing insight into a macroeconomy's performance and standard of living changes an average person experiences.
• Nominal Gross Domestic Product (GDP) quantifies aggregate monetary worth of end-stage commodities manufactured within geographical confines of a nation across specific duration usually one year.
• Nominal GDP and material standard of living are positively related; a higher GDP means more available goods and services.
• Higher GDP means higher national income, translating to higher disposable incomes and purchasing power for households.
• Increased satisfaction occurs, resulting in improved material living standards.
• Increased disposable income leads to greater tax revenue collections, which can be spent on public goods and services.
• Real Gross Domestic Product (GDP) per capita constitutes GDP fluctuations adjusted considering both inflation rate as captured under the phrase "real", complemented by demographics via incorporation using denoting descriptor known as"per capita.
• Real GDP considers inflation's effects.
• Real GDP measures the actual purchasing power of money income more accurately.
• It also measures amount of consumed products better, which will lead to living standard measurement
• Real GDP Per Capita divides real GDP by population size.
• Real GDP per capita reflects the amount of goods/services that can be consumed for the average citizen.
• Economic Analysis: Higher real GDP per capita leads to higher average disposable income for citizens, increasing their ability to purchase goods and services.
• Gross National Product (GNP) / Gross National Income (GNI) aggregates monetary assessments pertaining strictly toward finished deliverables generated courtesy both countrymen alongside irrespective their situating amongst national versus foreign locales during given temporal dimension typically one year.
• GNP reflects national income of citizens, regardless of location.
• Higher GNP indicates higher production by citizens, both domestically and abroad.
• Positive correlation exists linking GNP with respect to a populace's material existing benchmark.

Differences between GDP and GNI

• GNI takes into account the nationality of the owners of the factors of production.
• GDP focuses on economic activity within borders.
• Net Factor Income from Abroad is the difference between the outflows and inflows of incomes.
• Formula: GNI = GDP + Net Factor Income from Abroad

Unemployment Rate

• The unemployment rate is the percentage of the labor force that is jobless but actively seeking employment.
• This rate shows the proportion of the work force that is jobless.
• The labor force comprises the employed and the unemployed individuals within a given population.
• It shows population size
• Unemployment rate and material standard of living are inversely related.
• A high unemployment rate correlates to lower resource utilization and less production of goods and services reducing the satisfaction of wants.

Inflation Rate

• Inflation Rate (derived from consumer price index) sustained and inordinate increase in the general price level of a country.
• It can be measured by the annual rate of change of the Consumer Price Index (CPI).
• The CPI measures the average change in prices over time for a fixed basket of goods/services commonly purchased by resident households.
• Calculate inflation rate by comparing CPI values at different points in time, reflecting the increase (or decrease) in general price levels.
• Inflation rate and material standard of living are negatively/inversely related.
• A sustained positive inflation rate means increased price level and cost of living.
• Consumers afford fewer goods and services with the same income, lowering the material standard of living.

Gini Coefficient

• Quantifies income inequality within a populace, quantified across range extending from 0 approximating complete parity until 1 standing representing maximal imbalance depending upon selected measure as relative proportion amongst constituent segments relative their population size.
• Material standard of living linked inversely with Gini figure.
• Generally, more equal income distribution leads to more equal access to goods and services.
• Individuals gain greater parity when savoring resources and amenity consumption prospects
• On the other hand, a higher value implies majority cannot pay for accommodation, education or health.

Balance of Trade (BoT)

• It constitutes difference between an economy's exports less imports regarding commodities offerings
• It constitutes essential facet characterizing prevailing account existing inside equilibrium across installments.
• Though not direct metric, BoT serves as signal relating affluence caliber.
• This trade plus mirrors economic abundance
• This deficit means the trade suffers

Non-material (qualitative) aspect of standard of living

• The non-material (qualitative) aspect standard of living, examines the quality of life of an average person in the country.
• Involves leisure, quality of environment, life expectancy, standard of education and other social factors.

Leisure hours

• An increase in leisure hours denotes a higher non-material standard of living.
• Increased leisure hours can be used to pursue activities that they enjoy.
• This enables one to re-energize and recharge.
• Able to enjoy and activity

Quality of environment

• Environmental degradation worsens the non-material standards of living.
• Global warming causes rising temperatures, melting ice, flood, etc.
• Deterioration could lead to health problems, incurring healthcare cost.
• Quality lowers living standards

Quality of health, e.g. life expectancy, infant mortality rate

• Higher life expectancy: Provides an indication of better-quality healthcare.
• With a longer life expectancy: Average person will be able to earn more income
• Have self actualization

Quality of education, e.g. literacy rate

• Standard of living is generally higher in countries where the literacy rate is higher.
• Higher skills set allows one to demand for higher income therefore better able to meet their physiological needs
• Potential for improvement

Composite indicators of standard of living

• A composite indicator is formed when individual indicators are compiled into a single index
• Both quantitative and quality aspects are considered.

Human Development Index (HDI)

• The Human Development Index (HDI) is a summary measure of human development published by the United Nations Development Programme (UNDP).
• It measures the average achievements in a country in three basic dimensions (Long and healthy life, Knowledge, and a decent standard of living.

Measure of Economic Welfare (MEW)

• Another approach to measure standard of living is to refine the use of national income statistics by making adjustment for other economic and social indicators.
• It is obtained by adjusting Gross National Product (GNP) through adding the value of leisure, adding the value of non-marketed activities and discounting for externalities.
• Leisure and pollution aren't easy

Comparing standard of living over time (of one country)

• In order to see how a single country's standard of living changes over time, we can compare the changes in the various indicators for material and/or non-material standard of living explained in Sections using population, quality etc.
• Changes in population size over time Using population changes over time. If the population size increases without an increase in the economy's output,
• Represents lowered potential

Comparing standard of living over space (across two or more countries)

• Compare statistics (GDP) with a common currency rather than using the local currencies. In addition, they should be of the same time period ceteris paribus.

Limitations of using indicators to compare standard of living over time and space

• Despite use of indicators like real GDP per capita there are some limitations which need accounting.

Macroeconomic Objectives

• Macroeconomic objectives for improving SOL:
  • Sustainable and inclusive economic growth
  • Price stability
  • Full employment
  • Favourable Balance of Trade Position

Sustainable & Inclusive Economic Growth

• Economic growth means growth of the real national income or real national output measured in terms of an increase in real GNI or GDP.
• Sustained economic growth means high rates of economic growth over the long term.
• Actual growth is the increase in actual national output increase in national output

Economic indicators for economic growth

• Gross Domestic Product (GDP) measures total money value of all final goods produced within a country, during a given amount of time. GDP= total money value of all goods produced within a specific area.