Macroeconomics Notes

Topics: Inflation, Macroeconomics, Gross domestic product Pages: 6 (1208 words) Published: April 20, 2014
A First Look at Macroeconomics
Economic Growth
Definition: the expansion of the economy’s PPF (outward shift) •Measured by the increase in real domestic product (also called real GDP) CostsBenefits
Forgone current consumptionTechnological progress
Slow growth rates = real costs (e.g. compromised health care, worse roads, less housing etc.)Greener environment (questionable)

Fluctuations of Real GDP around Potential GDP: the Business Cycle The Okun Gap
Actual GDP: how much the economy actually produces
Potential GDP: what the economy would produce if all resources were fully employed at sustainable levels of utilisation

Output Gap = Real GDP minus potential GDP
oReal GDP > Potential GDP  Inflationary Gap
oReal GDP < Potential GDP  Recessionary/Okun Gap
Unemployment rate: number of unemployed people expressed as a percentage of all the people who have jobs or are looking for one

Why is this not a perfect measure?
1.Excludes discouraged workers
2.Measures unemployed individuals rather than unemployed labour hours

Why is unemployment a problem?
1.Lost production and income (underutilisation of resources) 2.Lost human capital (reduces individual’s job prospects) Inflation
Price level: average of the prices that people pay for the goods and services they buy oUsually measured by the Consumer Price Index

Inflation rate: annual percentage change in the price level

Why is inflation a problem?
1.Redistributes income and wealth: some people gain and others lose depending on the real value of wealth (which is affected by inflation) 2.Diverts resources from production: becomes more profitable to forecast the inflation rate correctly than to invent a new product Surpluses, Deficits and Debts

Government budget surplus: T > G
Government budget deficit: G > T
The Classical and Keynesian Views
Classical view: the only economic role for govt is to enforce property rights (Smith) oLeaves individuals free to pursue their own self interests oAny attempt by govt to improve macroeconomic performance will not succeed. •Keynesian view: economy behaves poorly if left alone thus govt action is needed to achieve and maintain full employment Types of Policy Available

1)Fiscal policy: changes in tax rates and government spending programmes 2)Monetary policy: changing interest rates and changing the amount of money in the economy Controlled by SARB whose principal aim is to control inflation Chapter 18: Measuring GDP and Economic Growth

The Value Added Concept
Value added measures the amount contributed by each firm in the production process. •We distinguish between the gross (total) value of a firm’s output and the net value of its output (value added) oSum of all value added in the economy = total output (also termed gross value added) Note: End price must equal gross value added.

Ways to Measure GDP
1)Expenditure approach: GDP = C + I + G + NX
GDP: Spending-based
GDP = C + I + G + (X – IM)
-C: consumption spending
oPrivate Spending and Government spending
oExcludes investment and transfer payments

-I: investment spending
oInventory accumulation
oFixed capital formation
Does not include sale of an existing capital good (e.g. house) oNET I = GROSS I – REPLACEMENT I
-(X – IM): net exports
oNegative value occurs where imports > exports

2)Income approach: GDP = incomes paid to households for factors of production hired = interest; ; entrepreneurship = profit; land = rent; labour = wages; b.National Income and Production Accounts divides income into 5 categories: compensation of employees; net interest; rental income; dividends; operating surplus Real v Nominal GDP

Real GDP: value of final goods and services produced in a given year when valued at constant prices oConstant prices taken from the base year
Nominal GDP: value of final goods and services produced in...
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