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Macro - Lecture 1

This document discusses key concepts in macroeconomics including: 1) Macroeconomics analyzes the economy as a whole by looking at aggregate outputs and outcomes like GDP, unemployment, and inflation. 2) GDP measures the total market value of all final goods and services produced within an economy in a given period of time. It has components of consumption, investment, government spending, and net exports. 3) Inflation and unemployment are two important macroeconomic indicators used to measure the health of the economy.

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Arkan Khan
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9 views

Macro - Lecture 1

This document discusses key concepts in macroeconomics including: 1) Macroeconomics analyzes the economy as a whole by looking at aggregate outputs and outcomes like GDP, unemployment, and inflation. 2) GDP measures the total market value of all final goods and services produced within an economy in a given period of time. It has components of consumption, investment, government spending, and net exports. 3) Inflation and unemployment are two important macroeconomic indicators used to measure the health of the economy.

Uploaded by

Arkan Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Macroeconomics

Topic - 1
Contacts

Room 327, Department of Economics, Faculty of Social Sciences

Or

Email: [email protected]
Marks Distribution
• Class participation 10%

• In-class coursework 20%


- Pop quiz
- Problem sets
- Group assignments
• Midterm 30%

• Final 40%
What is Macroeconomics?
What is microeconomics

How a singular household or firm makes decisions, and how these


decision-makers interact in the marketplace.
So what is macroeconomics?
Measurements in Macroeconomics
Value of Economic Activity
Gross Domestic Product

GDP summarizes the total income of everyone in the economy


=
GDP summarizes the total expenditure on the economy’s output
Rule for Computing GDP

GDP is the market value of all final goods and services produced within
an economy in a given period of time
GDP is the Market Value….

- How do you compare apples and computers?


- Market prices measure the amount people are willing to pay for
different goods
… of All…

- GDP includes all items produced in the economy and sold legally in
markets
…Final…

- To exclude double counting


- What about intermediate goods that are not used?
… Good and Services…

- Includes all tangible and intangible goods


… Produced …

- GDP includes goods and services currently produced


… Within a Country …

- GDP measures the value of production within the geographic confines


of a country
… In a given period of time.

- GDP measures the value of production that takes place within a


specific interval of time
GDP is the market value of all final goods and services produced within
an economy in a given period of time
Components of GDP

𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
Real vs Nominal GDP

Why the Nominal GDP might increase


- The economy is producing a larger output of goods and services
- Or the goods and services are being sold at a higher price

Real GDP is a price-level-adjusted measure of all the goods and services


produced by an economy in a given period.
GDP Deflator

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = × 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
Numerical Example
Prices and Quantities
Year P of Hot dogs Q of Hot dogs P of Burgers Q of Burgers
2013 $1 100 $2 50
2014 $2 150 $3 100
2015 $3 200 $4 150
The Big Debate
Is GDP a good measure of Economic Well-being?

[GDP] does not allow for the health of our children, the quality of their
education, or the joy of their play. It does not include the beauty of our
poetry or the strength of our marriages, the intelligence of our public
debate or the integrity of our public officials. It measures neither our
courage, nor our wisdom, nor our devotion to out country. It measures
everything, in short, except that which makes life worthwhile, and it
can tell us everything about America except why we are proud that we
are Americans. – Robert Kennedy
Measuring cost of Living
Consumer price index
Steps to measure Consumer Price index
- Fix the basket
- Find the prices
- Compute the basket’s cost
- Choose a base year and compute the index
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑎𝑠𝑘𝑒𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
- 𝐶𝑃𝐼 = × 100
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
Inflation

𝐶𝑃𝐼 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝐶𝑃𝐼 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟


𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = × 100
𝐶𝑃𝐼 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
Problems with measuring inflation with CPI

- Substitution bias

- Introduction of new goods

- Unmeasured quality change


Measuring unemployment
Types of Unemployment
• Natural Unemployment
• Natural Unemployment rate = Frictional Unemployment rate + Structural Unemployment rate

• Cyclical Unemployment

𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒
= 𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 + 𝐶𝑦𝑐𝑙𝑖𝑐𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
Unemployment rate
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 =
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒

𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 =
𝐴𝑑𝑢𝑙𝑡 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝐴𝑑𝑢𝑙𝑡 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

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