A First Look at Macroeconomics
Definition: the expansion of the economy’s PPF (outward shift) •
Measured by the increase in real domestic product (also called real GDP) Costs
Forgone current consumption
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
Real GDP > Potential GDP Inflationary Gap
Real 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?
Excludes discouraged workers
Measures unemployed individuals rather than unemployed labour hours
Why is unemployment a problem?
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 o
Usually measured by the Consumer Price Index
Inflation rate: annual percentage change in the price level
Why is inflation a problem?
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) o
Leaves individuals free to pursue their own self interests o
Any 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
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) o
Sum 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
Expenditure approach: GDP = C + I + G + NX
GDP = C + I + G + (X – IM)
C: consumption spending
Private Spending and Government spending
Excludes investment and transfer payments
I: investment spending
Fixed capital formation
Does not include sale of an existing capital good (e.g. house) o
NET I = GROSS I – REPLACEMENT I
(X – IM): net exports
Negative value occurs where imports > exports
Income approach: GDP = incomes paid to households for factors of production hired a.
capital = 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 o
Constant prices taken from the base year
Nominal GDP: value of final goods and services produced in...
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