Macro 1 - Intro to Macro - Macro objectives, GDP, Business Cycle w_o circ flow PDF

Intro to Macroeconomics Macro Topic 1 FIS Grade 12 What are the 5 Macroeconomic objectives? What indicator is used to measure them? 1. 2. 3. 4. 5. What statistics can be used to measure each indicator? Price stability (low inflation) Low Unemployment Economic growth Income equity Favorable...

Intro to Macroeconomics Macro Topic 1 FIS Grade 12 What are the 5 Macroeconomic objectives? What indicator is used to measure them? 1. 2. 3. 4. 5. What statistics can be used to measure each indicator? Price stability (low inflation) Low Unemployment Economic growth Income equity Favorable BOP Note - favourable BOP is sometimes interpreted as sustainable level of debt Choose 5 countries to look at at least 1 developed (MDC) at least 1 developing (LDC) at least 2 regions of world Resources for research CIA World Factbook Gap Minder Eurostat esp Govt spending esp BOP World Mapper stats Atlas at MIT Statista Trading Economics Economist’s Economic data, Nation Master commodities and markets Look at the statistics in turn for each country 1. Most recent inflation rate and past 10 years trend 2. Most recent unemployment rates and past 10 years trend. What types of unemployment do you notice? 3. GDP growth rates (most recent and past 10 years) Other research areas: 4. Identify components of AD if possible -- where does GDP growth come from? What percentage of GDP is used for government spending? 5. What is the structure of the economy by sectors? 6. Do a bit of research about income equality Discussion Questions 1. Which of the countries you researched appear to be doing the BEST job of meeting their macroeconomic objectives of low unemployment, low inflation and economic growth? 2. Which countries appear to be doing the WORST at meeting the objectives? 3. Which countries have the highest growth rates? (Whole class?) 4. Which countries have the lowest unemployment rates? What do these countries have in common? 5. Is there an observable relationship between the economic growth rate of a country and the unemployment rate? Discuss the possible relationship between economic growth and unemployment. Measuring National Income: GDP Gross Domestic Product - the total value of all goods and services produced within the borders of a country within a given period of time (usually one year) Three methods of calculating it: 1. Output method - sum of all value added by all firms grouped by sectors of society 2. Income method - sum of all incomes earned in economy (rent, wages, interest, profit, etc) 3. Expenditure method - sum of all spending on goods and services National output = national income = national expenditure Questions (The same image is pasted twice for easier viewing). Right: https://www.visualcapita list.com/cou ntries-by-sh are-of-globa l-economy/ Left: https://www.visualcapita list.com/100 -trillion-glob al-economy / GDP The formula for GDP (Expenditure method) is GDP = C + I + G + ( X - M ) Practice exercise: Using the expenditure approach, calculate the C is consumption GDP of Canada in 2009 using the data below. In million CAD $ I is investment Consumer expenditure on goods and services 1527258 G is government spending Business investment 269394 Government expenditure 333942 Exports 438553 X-M is net exports Imports 464722 GDP vs GNI/GNP Gross National Income (also known as Gross National Product) is a measure of national income that takes into consideration net property income from abroad GNI/GNP = GDP + income earned from assets abroad - income paid to foreign assets operating domestically This statistic GNP is still used by some international economic bodies and countries, but the term more often used is GNI, Gross National Income since the 1993 United Nations System of National Accounts (UNSNA). Exceptions who don’t use it: France, USA GNI vs NNP/NNI Net National Product / Net National Income NNP/NNI = GNI - depreciation Depreciation is the deterioration or loss of value of items over time. It is very difficult to measure and account for. **Note - this is not a formula you will need to calculate in the exam. Nominal GDP vs. Real GDP Nominal GDP is GDP’s value at current prices whereas Real GDP is adjusted for inflation (measures the value of current output valued at constant/base year prices). We almost always use Real GDP as it allows for comparison over time. Note: you can also have Nominal GDP per capita and real GDP per capita Nominal GNP/GNI and real GNP/GNI See this slide for more info. Both HL/SL - you will calculate the difference between the nominal and real values using a price deflator x100 GDP per capita GDP per capita is used to compare average income in a country and allows us to see income averages per family, but there are many weaknesses to this statistic. It should not be used to measure economic growth, but it is sometimes used for a quick look at economic development. GDP per capita = total GDP/population We will look at this statistic more during Development Economics. You can also look at GNP/GNI per capita GDP growth E.g. Calculate the rate of growth from a set of data. Usually this uses a formula similar to new-old/old or final-initial/initial you have seen before. Why gather national income data? Who uses the data? Governments: policies, laws, balance the budget, growth over time, economic health Business and Investors: future demand, business confidence, investment potential, security International organisations and other countries: living standards, trade potential, comparing countries Economists: predictions, analysis, research IB recognizes these: comparisons over time, comparisons between countries, and use in making conclusions about standards of living Limitations of the data 1. Inaccuracies - who is collecting the data? Source of numbers? How do you put a value? 2. Under-recorded/unrecorded economic activity a. “Hidden/Shadow Economy”/ Informal economy: b. Informal sector - economic activity that is unrecorded/illegal/not taxed by the government authorities and is therefore not in the national accounts. Sometimes this is known as parallel markets or black markets. c. Examples: DIY, subsistence farming, personal gardens, tribal groups d. Examples: illegal/migrant workers, tax avoidance 3. Externalities 4. Quality of life - hospitals, unis, schools, public goods and its long term effect 5. Composition of output - not all benefits all consumers 6. Distribution of income not shown It measure the market value not the welfare. Hidden/Shadow Economy Green GDP Green GDP a popular term which monetizes the loss of biodiversity, and accounts for costs caused by climate change. It is a measure for GDP that accounts for environmental destruction. Green GDP = GDP - environmental costs of production **Note - this is not a formula you will need to calculate in the exam. Alternative measures of well-being We will look at these measures much more during our Global Economics unit on Development, but these are also measures of growth. OECD Better Life index Happiness Index Happy Planet Index https://www.visualcapit alist.com/worlds-happie st-countries-2023/ https://ww w.visualca pitalist.co m/relation ship-betw een-wealt h-and-hap piness-by- country/ Apply these statistics to real world examples Gross Domestic Product Gross National Income (or Gross National Product) [Net National Income (or Net National Product)] Nominal GDP Real GDP GDP per capita Green GDP  More practice exercises Calculations - both SL and HL FROM THE SYLLABUS: 1. Calculate nominal GDP from sets of national income data, using the expenditure approach. 2. Calculate nominal GNI from data. 3. Calculate real GDP and real GNI, using a price deflator. 4. Calculate real GDP per capita and real GNI per capita 5. Calculate the rate of growth from a set of data.  *Not a formula used for calculations #1/#2 Formulas: *Not a formula used for calculations *Not a formula used for calculations The ‘C’ in both of these cases is More practice Consumer Expenditure questions can be found in Kognity #2 or InThinking. #3 Haven’t learned this one yet #4 #5 (new-old)/old *Not a formula used for calculations  NOTE - Question b is awkwardly worded - I interpreted it as follows: In Country G, the nominal GDP per capita in 2020 is $24,000. Calculate the nominal GDP per capita real GDP per capita (see real GDP per capita annotations in red). Resources What is GDP? (Video) Why GDP? Nominal vs Real GDP (video) Is it time to abandon GDP? Macro Objectives Economic Growth: an introduction A song about GDP GDP growth statistics GDP data by country Countries with the highest GDP growth Business Cycle Economies typically tend to go through a cyclical pattern characterised by the phases of the Business Cycle. The business cycle is periodic but irregular fluctuations in economic activity that occur over time. (Note: fluctuations are irregular but often drawn regular). It is measured by fluctuations in real GDP and other macro variables. Changes are cyclical. (Note: usually, the second recovery is at a higher level as each boom is higher than the last). The Business Cycle phases Boom: High prices, high profits Recession/Downturn: Prices and profits decline. A recession is two consecutive quarters of negative GDP growth (falling GDP). Depression/Slump/Trough/Bust: Prices and profits are at their lowest levels. Contraction ends. Upturn/Recovery: Prices and profits on the rise. Normal Times: Static prices and profits. Shows a flattening of the curve. Either with a recovery or after a boom. Recovery is... Economic expansion Increase in consumer confidence Output increases Consumption and investment rise GDP rises Firms take on more workers Unemployment falls Leads to a BOOM. A boom is... Newly employed spend new incomes Demand for money and investment increases → pushes up interest rates Inflationary pressure → Price levels are driven up (high inflation) Economic growth A recession is... Fall in consumption and investment Unemployment rises → further consumption falls Low demand → deflation Real incomes fall Firms cut output and increase unemployment Leads to a depression More about the business cycle The contraction (period when the economy is in a downturn) lasts on average for 11 months. The expansion (period when the economy is in upturn) lasts on average 44.8 months. Why can output not fall forever? ○ There are always some people with jobs to maintain a given level of consumption/production. Demand for exports exists. The government is still spending. People are using their savings. How long is a ‘typical’ business cycle? ○ No simple answer. It is linked to and exacerbated by the electoral cycle. Since WWII most are 3-5 years peak to peak. To compare, the Great Depression (1923-33) was in decline for 43 months. What are the positives and negatives of each phase? Positive Negative Boom High firm revenue High investment Inflation Increased spending Incomes rise Real income falls Low unemployment Increased productivity High costs/prices Cannot last Normal Times Sustained economy - normal spending No growth Stable/static prices Opportunity to save Recession Cheaper products/lower prices Deflation Firms with savings (rich/dominant firms can expand) Low investment Unemployment rises Depression Cheaper products/prices High unemployment No growth Lower investments No profits Upturn Increased employment, earnings and profits Prices begin to rise Long term growth trends tend to be considered as the potential output of the economy, rather than the actual growth. What is the difference between a decrease in GDP and a decrease in GDP growth? https://www.visualcapitalist.c om/mapped-gdp-growth-fore casts-by-country-in-2023/  Exam questions Repeated questions Assessment - choose 2x 10 point questions