Macroeconomics: GDP, Employment & Economic Growth

Macroeconomics

• Studies a country's behavior and the impact of its policies on the overall economy.
• Analyzes entire industries and economies, not specific individuals or companies.
• Key topics: Gross Domestic Product (GDP), unemployment, inflation, and economic growth.
• Helps governments develop economic policies for sustainable growth, stable prices, and full employment.

Goals of Macroeconomics

• High employment means minimizing unemployment to efficiently utilize the workforce.
• Stable prices entail controlling inflation to maintain the purchasing power of money.
• Economic growth involves increasing the production of goods and services in the economy.
• Sustainable growth refers to increasing the production of goods without compromising future economic growth.

Gross Domestic Product (GDP)

• GDP represents the total monetary or market value of all finished goods and services produced within a country’s borders in a specific time period.
• It serves as a comprehensive scorecard of a country’s economic health.
• GDP is calculated using the expenditure, production, or income approach.

Expenditure Approach to GDP

• GDP equals the total spending on final goods and services in the economy.
• GDP = C + I + G + (X – M)
  • C = consumer spending
  • I = investment by businesses
  • G = government spending
  • X = exports
  • M = imports

Production Approach to GDP

• GDP equals the sum of the values added at each stage of production.
• Calculation is the final value of goods less the cost of intermediate goods.
• This approach avoids double-counting intermediate goods.
• GDP = Σ Value Added

Income Approach to GDP

• GDP equals the total income earned in the economy.
• Includes wages, profits, and rents.
• Reflects the distribution of income to the factors of production.
• GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

Nominal vs. Real GDP

• Nominal GDP is measured in current prices.
• Real GDP is adjusted for inflation, reflecting the actual quantity of goods and services produced.
• Real GDP provides a more accurate measure of economic growth.

GDP Deflator

• GDP deflator measures the price level as the ratio of nominal GDP to real GDP.
• GDP Deflator = (Nominal GDP / Real GDP) * 100
• This reflects the average price change for all goods and services in the economy.

Inflation

• Inflation is the rate at which the general level of prices for goods and services rises.
• Purchasing power subsequently falls.
• Inflation erodes the value of money over time and it's expressed as a percentage.

Consumer Price Index (CPI)

• CPI measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• CPI is used to track inflation and adjust for the cost of living.
• CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) * 100.

Types of Inflation

• Demand-pull inflation occurs when aggregate demand exceeds aggregate supply.
• Cost-push inflation results from increased production costs, leading to higher prices.
• Built-in inflation occurs when wages and prices increase in response to past inflation.

Unemployment

• Unemployment: being jobless, actively seeking employment, and available to work.
• It is a key indicator of economic health and labor market conditions.
• The unemployment rate: percentage of the labor force that is unemployed.

Types of Unemployment

• Frictional unemployment: workers temporarily between jobs.
• Structural unemployment: mismatch between workers' skills and available job requirements.
• Cyclical unemployment: fluctuations in the business cycle cause this.
• Seasonal unemployment: job is only available at a particular time of the year.

Natural Rate of Unemployment

• Sum of frictional and structural unemployment.
• Represents the unemployment rate when the economy is at full employment.
• The rate of unemployment to which the economy tends to return in the long run.

Business Cycle

• Recurring expansions and contractions in economic activity.
• Stages: expansion, peak, contraction, and trough.
• Economic indicators are used to monitor and forecast it.

Fiscal Policy

• The use of government spending and taxation to influence the economy.
• Can stimulate economic growth or cool down an overheating economy.
• Tools include government purchases, tax cuts, and transfer payments.

Expansionary Fiscal Policy

• Involves increasing government spending or decreasing taxes.
• Aims to increase aggregate demand and stimulate economic growth.
• Often used during recessions or slow growth.

Contractionary Fiscal Policy

• Involves decreasing government spending or increasing taxes.
• Aims to decrease aggregate demand and cool down an overheating economy.
• Often used to combat inflation.

Monetary Policy

• Uses interest rates and credit conditions to influence the economy.
• Implemented by a central bank.
• Central bank controls the money supply and credit conditions to influence economic activity.
• Tools include open market operations, the reserve requirement, and the discount rate.

Expansionary Monetary Policy

• Involves lowering interest rates or increasing the money supply.
• Aims to stimulate economic growth by encouraging borrowing and investment.
• Often used during recessions or periods of slow growth.

Contractionary Monetary Policy

• Involves raising interest rates or decreasing the money supply.
• Aims to cool down an overheating economy and combat inflation.
• Often used when inflation is above the target level.

Exchange Rates

• The value of one currency expressed in terms of another currency.
• Appreciation: increase in the value of a currency relative to another currency.
• Depreciation: a decrease in the value of a currency relative to another currency.

Factors Affecting Exchange Rates

• Interest rates: higher rates attract foreign investment and increase currency demand.
• Inflation rates: higher inflation rates tend to decrease the value of a currency.
• Economic growth: stronger economic growth tends to increase the value of a currency.
• Political stability: tends to increase the value of a currency.

Aggregate Supply and Demand

• Aggregate supply (AS): total quantity of goods and services that firms are willing to supply at various price levels.
• Aggregate demand (AD): total quantity of goods and services that households, firms, the government, and foreigners will buy at various price levels.
• The intersection of the AS and AD curves determines equilibrium price and output.

Economic Growth

• The increase in the production of an economy's good and services over time.
• Measured by the percentage increase in real GDP.
• Influenced by capital accumulation, technological progress, and labor force growth.

Productivity

• The amount of goods and services produced per unit of input.
• It is a key driver of economic growth.
• Increased through investments in education, technology, and infrastructure.

Saving and Investment

• Saving: the portion of income not spent on consumption.
• Investment: the purchase of new capital goods (factories and equipment).
• Saving and investment are essential for economic growth.

National Debt

• The total amount of money that a country's government has borrowed.
• The accumulation of past budget deficits.
• It can have positive and negative effects on the economy.

Budget Deficit

• Occurs when a government spends more than it collects in revenue.
• Financed by borrowing, which increases the national debt.
• Can stimulate economic growth during recessions.
• Can lead to higher interest rates and inflation.

Explores a country's economic behavior and the impact of policies. Covers key topics like GDP, unemployment, inflation, and economic growth. Governments use macroeconomics to develop policies for sustainable growth, stable prices, and full employment.