Macroeconomics: General Concepts & Topics

Study Notes

Macroeconomics is a branch of economics studying the overall economy. It encompasses markets, businesses, consumers, and governments.
Macroeconomics examines wide-ranging economic phenomena. This includes inflation, price levels, economic growth rates, national income, Gross Domestic Product (GDP), and unemployment changes.

Gross Domestic Product (GDP): Measures the total income of everyone within an economy. It also measures the total expenditure on goods and services (G&S) produced.
Income equals expenditure: For an economy as a whole, income and expenditure are equal. Every dollar spent by a buyer represents a dollar of income for a seller.

A simple depiction of the macroeconomy. It illustrates GDP as spending, revenue, factor payments, and income.
Preliminaries: Factors of production are inputs like labor, land, capital, and natural resources. Factor payments are the wages, rent, and profit paid to these factors of production.
Households: Own the factors of production and sell/rent them to firms for income. They also buy and consume goods and services.
Firms: Buy/hire factors of production. They use these factors to produce and sell goods and services.
The diagram also show the markets for goods and services, and the market for factors of production.

The government: Collects taxes and buys goods and services.
The financial system: Matches savers' funds with borrowers' demands for loans.
The foreign sector: Trades goods, financial assets, and currencies with the country's residents.

GDP is defined as the market value of all final goods and services produced within a country in a given period of time (usually a year or a quarter).
Goods are valued at market prices, so goods are all measured using the same units (like dollars in the US).
Things without market values are excluded (e.g., housework).
Final goods: Intended for final use.
Intermediate goods: Used as components or ingredients in the production of other goods. GDP only includes final goods because their value includes the value of the intermediate goods used in their production.
GDP includes tangible goods (like DVDs, mountain bikes, beer) and intangible services (like dry cleaning, concerts, cell phone service).
GDP only includes currently produced goods, not goods made in the past.
GDP measures the value of production within a country's borders, whether by domestic citizens or foreigners.

GDP is calculated as the total of consumption (C), investment (I), government spending (G), and net exports (NX). This formula is: Y=C+I+G+NX
Consumption (C): Total spending by households on goods and services. Includes the imputed rental value of the home for homeowners.
Investment (I): Total spending on goods used in the future to produce more goods. This includes capital equipment, structures, and inventories. Note: Investment does NOT mean the purchase of financial assets.
Government Purchases (G): Total spending on goods and services by federal, state, and local governments. Transfer payments (like social security or unemployment insurance) are not included in G because they are not purchases of goods and services.
Net Exports (NX): Exports minus imports. Exports represent foreign spending on the economy's goods and services. Imports are the portions of consumption, investment, and government purchases that are spent on goods and services produced abroad.

Nominal GDP: Values output using current prices. Not adjusted for inflation.
Real GDP: Values output using the prices of a base year. Corrected for inflation.

The GDP deflator is a measure of the overall level of prices.
GDP deflator formula: (100 x Nominal GDP)/Real GDP
One way to measure inflation is using the changes in the GDP deflator from one year to the next.

Real GDP per capita is the main indicator of a country's average person's standard of living.
GDP is not a perfect measure of well-being, as Robert Kennedy noted. It doesn't measure things like: quality of the environment, leisure time, non-market activity, and equitable income distribution. It also doesn't capture things like health, education, overall happiness, etc.