MacroEconomics 16/11/2021

SAC 303/STA 307 - PRINCIPLES OF ECONOMICS II

3RD YEAR ACTUARIAL SCIENCE

Presented by:
Margaret Amondi
Tuesday, 16 November 2021 1

Course Outline

Lesson Topic
1 ➢Introduction to Macroeconomics
2-4 ➢Macroeconomic Variables
5 ➢ AD – AS Model
6 ➢ International Trade
7 ➢ Exchange Rates
8 ➢ Balance of Payments
9 ➢ Fiscal Policy
10 ➢ Monetary Policy
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Course Outline

Macroeconomic Variables: National Output

2 ➢ Measurement of GDP
➢ Applications of GDP

Circular Flow of Income: A Complete Version

Transfers Taxes
Government Gvt.
Purchases
Borrowing
Disposable From Gvt.
Income

Financial
Households Firms
Institutions Investments
Savings
Borrowing
Consumption From Abroad

Rest of the
World
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Measurement of GDP
GDP refers to the total value of good and services produced within an economy.

Methods of Calculating GDP

➢ Expenditure Approach
➢ Income Approach
➢ Output Approach/Gross Value-Added Approach

Measurement of GDP
The Expenditure Approach
The Firm Sector
The total flow of income into the firm sector equals total expenditures
on GDP, which we divide up into four categories
➢ Consumption - total expenditures by households on final
goods and services.
➢ Government Purchases - all the purchases of goods and
services by the government.
➢ Investment - the purchase of goods and services that, in one
way or another, help to produce more output in the future
➢ Net Exports - the difference between exports and imports
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MacroEconomics 16/11/2021

Measurement of GDP
The Expenditure Approach

Here, GDP is Measured using the Components of Demand

The national accounts classify this final expenditure into five main categories:
Consumption, investment, government expenditure, exports, and
imports.

GDP = Consumption + Investment + Government Purchases + Trade Balance

=C + I + G + (X – M)

Measurement of GDP
The Expenditure Approach
Example 1
You have been given the following information about the various cashflows from
and economy. Calculate the GDP of this country.

➢ Consumer spending = Sh. 200 Billion

➢ Investment spending = Sh. 55 Billion
➢ County government spending = Sh. 120 Billion
➢ Central government spending = Sh. 80 Billion
➢ Imports = Sh. 50 Billion
➢ Exports = Sh. 45 Billion
➢ Income taxes = Sh. 100 Billion
Solution: 450 Billion
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MacroEconomics 16/11/2021

Measurement of GDP
The Income Approach
Income based GDP measures total cost of production by adding up the
factor costs of production of all goods and services plus the net indirect
taxes included in market price.

It assumes that there are four major factors of production in an

economy and that all revenues must go to one of these sources.

Only factor incomes which are earned by rendering productive services

are included.

Measurement of GDP
Factors of Production and Their Cost
➢ Land – Rent (R)
➢ Labour – Wages (W)
➢ Capital – Interest (I) GDP at Factor Cost
➢ Entrepreneurship – Profits (P)
Leakage in Consumer’s Income
➢ Taxes GDP at Market Price
The Income Approach
GDP = Total National Income + Taxes
where:
Total National Income=Sum of all wages, rent, interest, and profits.
Taxes = Indirect taxes imposed by the government the sales of goods and services
e.g. excise duty. 10

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Measurement of GDP
The Output Approach
Output based GDP measures the value added at every stage of
production.
Factors of Production and Their Cost
➢ Raw Materials
➢ Intermediate Products
➢ Final Products

GDP at Factor Cost

➢ Total Value of Sale – Cost of Intermediate Product
GDP at Market Price
➢ GDP at Factor Cost + Taxes 11

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Measurement of GDP
Types of GDP
Nominal GDP
➢ The total value of all goods and services produced
at current market prices.

Real GDP
➢ The sum of all goods and services produced at
constant prices.
➢ Also called GDP at Constant Prices

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Measurement of GDP
GDP Deflator
Refers to an index of current final output prices relative to
base year prices
GDP Deflator =

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Measurement of GDP
Gross National Product (GNP)
GDP includes only what country produces within its borders.

GNP adds what domestic businesses and labor abroad produces, and
subtracts any payments that foreign labor and businesses located
withing the country send home to other countries
GNP is based more on what a country's citizens and firms produce,
wherever they are located.

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Applications of GDP
Per capita real GDP
This refers to real GDP per person.

Per Capita GDP=

Other Applications
➢ Real GDP over time
➢ Comparing GDP among countries
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Weaknesses of GDP

Excludes valuable goods and services which are not marketed (and
therefore are hard to measure).
Home cleaning, maintenance, and improvements
households carry out for themselves, and any unreported jobs and
incomes in the economy.
High GDP and High per capita GDP are not necessarily good measures
of economic well-being. The composition of that output also affects
standards of living. E.g. Health care Vs military expenditures.

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MacroEconomics 16/11/2021

Course Outline

Lesson Topic
1 ➢Introduction to Macroeconomics
2-4 ➢Macroeconomic Variables
5 ➢ AD – AS Model
6 ➢ International Trade
7 ➢ Exchange Rates
8 ➢ Balance of Payments
9 ➢ Fiscal Policy
10 ➢ Monetary Policy
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THANK YOU

CONTACT: [email protected]
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